The world of Internet Marketing is pivoted around traffic - Free Traffic or Paid Traffic. While Free Traffic is a long term goal for any marketer, it’s mostly Paid Traffic which brings in revenue expeditiously.
Paid Traffic revolves around Ads. The paid ads concept, which was elusive to big brands in the past, is now within reach of the average Joe, thanks to Social media platforms such as Facebook, Instagram and Pinterest. Social media platforms and Google Ads are among the best sources to promote marketing products because of their large customer database and easy user interface. Further, creating an Ad which required considerable effort and technical expertise in the past can now be done with a few clicks. All you need is a Product, some writing skills and a credit card (or payment gateway).
However Ads are expensive. Placing an Ad can burn a huge hole through the pocket and is often the most expensive part of promoting a product. Hence it’s important to measure Ad performance on a timely basis to determine if it’s worth burning through more money or if it’s time to kill it. The performance of the Ad can be tracked through parameters called “Ad metrics or Advertisement Metrics”.
What are Advertising Metrics and How do they work?
Ad metrics measure the performance of your ads and provide clues of how to better your advertisement campaign. Ad metrics also help you decide the sustainability of Ads based on data.
Some of the Top Advertising Metrics for Paid Ads are as below:
- CTR or Click Through rate
- CPC or Cost per Click
- PPC or Pay per Click
- EPC or Earnings per Click
- CPM or Cost per Mille
- CPA or Cost per Acquisition
- ECPA or Effective Cost per Acquisition
- CR or Conversion Rate
- ROI or Return on Investment
Let’s review these 1 by 1. By the end of this post, you should have gained enough knowledge to compare your Ad's performance against these metrics to determine how your ads are performing.
Click Through Rate (CTR)
Click through rate measures how many times your ad was clicked against the number of times it was shown.
The formula for CTR is = (Total Clicks on Ad) / (Total Impressions).
An impression refers to a situation where your ad was shown to a person. For example, if a person is scrolling on his feed on Facebook and saw your ad, that is an impression. He has the option to click or not to click it. The same thing goes on YouTube and other Ad platforms.
Let us say that your ad was shown 100 different times. If your ad was clicked only two times, your click through rate is:
- 2 / 100 = 0.02
- To get the percentage value, just multiply 0.02 by 100
- You get 2% which is your CTR
What does a low CTR mean?
A low CTR means people are not clicking your ads. If people are not clicking then you are paying for the cost of an ad, that is not generating interest. This could be due to many factors such as:
- The Ad is unappealing
- It is targeted to the wrong population
- The method of display is ineffective. Widget Vs banner or vice versa
- Your budget is low and hence it only shows up a handful of times
For low CTR ads, it is always better to scale back and analyze the reason for low clicks. Many times fixing a moderate issue puts your Ad back on track.
How does CTR work in Split Test?
CTR is an important measure in a split test when it comes to decide what ad style or design works better. In a split test, you launch two versions of an advertisement and then you see which one gets more clicks. The ad version that has a higher CTR is what you need to scale. Spend more money on this ad because it is generating interest and hence carries more chances of conversion.
Cost per Click (CPC)
CPC refers to the amount of money you are paying for a click. When you bid for ad spaces online, you pay the advertising supplier if your ad is shown, but you pay another amount if your ad was clicked.
Before you launch an ad, you have to place a bid on the platform. This bid represents how much you are willing to pay for each click. Your CPC is either equal to or lower to your bid.
In the simplest terms, your cost per click is the amount of money you are paying every time a person clicks on your ad. If you are paying $3 per click, and you are selling a product that retails for $100, then it means that you are possibly spending $3 to acquire a customer, which leaves you $97.
CPC in terms of Competition - In terms of competition, the computation formula for CPC gets a bit complicated.
The formula is: (Competitor Ad Rank(/ (Your Quality Score) + 0.1.
The Quality Score is a number expressed from 1 to 10, and this is determined by Google. The Ad Rank is the placement of your competitor below you.
- If your competitor is ranked 16, and your Quality score is 10, your CPC is 16/10 = $1.6.
- Now, we add $0.01 and then we get the final CPC
- This CPC is equal to $1.61.
This formula is used by Google, but not all advertising platforms measure the same way.
Finally Average CPC is the average amount that you’re charged for a click on your ad. Average cost-per-click is computed by dividing the total cost of your clicks by the total number of clicks. Hence if you spent $100 on Facebook Ads and 50 people clicked it - then your Average CPC is $2.
How does CPC work in Split Test?
CPC is considered a strong advertising metric to measure Split Tests. When you do a split test, you will see that there is a variation between your cost per click. Let us say that one ad is set to show only to men, and the other to women. If your CPC for men is $1, and CPC for women is $0.50, then it makes sense that it costs less to advertise to women than men. As such, you know that for this type of ad, you have to scale on the version that is shown to women.
CPC is further refined to calculate eCPC or Effective Cost per Click.
eCPC is mostly used to determine the cost of an ad campaign. It is equal to the number of sales divided by clicks. If you made $1,000 out of an ad, but you paid $100 for the ad cost, then your eCPC is $1,000/$100 = $10.
What does this mean? It means that each successful sale costs about $10 to acquire. The lower your eCPC, the better it is for your business.
Pay per Click or PPC
The term pay per click is an advertising model where you pay for each click. This is an agreement between you and the advertising platform (mostly Google) where the platform is going to show your ad, and will only charge you if your ad was clicked. PPC costs more because you pay for action, not impression.
Pay per click is a straightforward cost. It is a bid that you place for a specific keyword as you launch your ad. Let us say that your target keyword is “Solar Panels for Home” and you bid $3 per click for keyword "Solar Panels".
If a person types Solar Panels on the search engine, Google will show your ad on top of the search results. If the user clicked your ad, you will pay $3 for that click.
PPC is important in advertising because it tells you how much you are spending to get someone to your website. It does not tell you how much money you earned from the ads, but it gives you a perspective of how much it takes to get someone to your door.
What is the relation between PPC and CPC?
PPC and CPC are two sides of the same coin and often used interchangeably. CPC is an advertising metric—it is a measurement of performance. PPC, on the other hand, is an advertising model and not a metric that you measure. It is a strategy you undertake when you are advertising.
CPC is used to refer to PPC advertising as a whole and measures the overall cost per click of your PPC ads. Example : If you spent $200 for your PPC ad and it received 50 clicks, your CPC of the entire Ad campaign was $4 per ad click.
Earnings per Click or EPC
Whenever we advertise, we advertise for only one reason: to make a sale and earn money.
The Question is: How much does it cost to make this sale?
This is where EPC comes in. It is a measurement of how much money you are making per click. It is an average, and not a measurement per click.
The formula is: sales in $ / number of clicks.
- Let us say that your ad received 1,000 clicks
- On that campaign, you sold a total of $100.
- Your EPC is $100 / 1,000 = $0.1
What does this mean? On average, you are earning only $0.1 per click.
So, how is EPC related to CPC?
If your CPC is $3, and your EPC is $0.01, it means that you are losing money. You are only making $0.01 per click for every $3 spent to make the sale.
EPC is one of the most effective advertising metrics in online marketing because it tells you how much you are earning per person who took action. If your ad resulted in a total sale of $1,000, and your total click is 20, it means that for each time your ad was clicked, you earned $50.
What if your CPC for that ad is also $3? It means that your customer acquisition cost is $3 against a price that he paid, which is $50. This tells you that for each dollar of gross sales, the cost of customer acquisition is 6% ($3/$50).
Please do not confuse PPC with EPC and CPC.
PPC is an advertising approach or method. EPC is the amount you earn each time a person clicks your ad, and this can be negative sometimes. CPC is the average amount of money for each time a person clicks your ad.
Cost per Mille/ Cost per thousand impression
This is also called CPM.
In advertising, sometimes in order to raise your brand awareness, you can structure your Ads where you not only pay for a click, but also for impression. What does this mean?
If your ad was shown on the Google search results or on someone’s Facebook feed, and that person did not click it, you still pay for that ad impression, but you pay a lower price.
The CPM is equal to the price you pay per 1,000 impressions. Here is an example:
- You paid a total of $100 for the ad
- Your ad was shown 2,000 times
- Your cost per mille or CPM is $100 / (2,000/1,000)
In this example, there are two 1,000 impressions that make a total of 2,000 impressions. Divide $100 by 2 and you get $50 as your CPM. The lower your CPM, the better it is. You can also calculate it as: total campaign cost / impressions x 1,000.
What is CPA - (Cost Per Action / Acquisition)
CPA is the average cost that you pay for each action or acquisition. Action is a subjective word because advertisers are aiming for different types of results—it could be a page like, a click, a follow, a purchase, and so on.
The formula to get CPA is = Amount spent / Number of actions.
Let us say that you paid $150 for a Facebook campaign to get page likes. If only 10 people liked your page, then you spend $150/10 = $15 per person who liked your page.
Like the other advertisment metrics, this one has what is called eCPA, or Effective Cost per Action. This value is merely a representation of how much the CPA would have been if the advertiser bought his model instead of another advertising model.
The calculation of eCPA is based on algorithmic assumptions. It is not the same with the actual CPA calculation because real CPA can only be calculated once the ad campaign is over.
What is CR (Conversion rate)?
Conversion rate is a percentage that tells you how many people performed the action you wanted against the number of people who saw your ad.
In sales, it refers to the number of people who bought the item divided the number of visitors.
Here is an example:
- People who visited our site: 10
- People who made a purchase: 3
- Conversion rate = 3/10= 0.3 x 100 = 30%
The higher the conversion rate, the better. In online marketing, the average conversion rate is 3%, but it really varies between industries.
What is ROI (Return on Investment)?
Return on investment is the amount of money you earn against what you spend.
This is the formula for ROI: (Revenues earned – Cost of Investment)/ Cost of Investment.
- If you spent $100 on an ad, and that ad made $1,000. Your ROI is:
- $1000 - $100 = $900
- $900 / $100 on ad expense = 9 x 100 = 900%.
Why is ROI Important ?
ROI is an important advertising metric because it tells you whether your advertising efforts returned money to you or not.
If your ROI is low or negative, it means that you lost that investment—you spent money and perhaps you just had a breakeven. Worse, you did not make a sale at all, in which case, you need to review your other ad metrics such as CPM and CPC to see where you need to improve.
Summary
There are many advertisement metrics to measure, and this can be confusing at times. To avoid getting lost, focus on the metrics that apply to your campaign goals. Use a spread sheet to list down each advertising metric, and then see how your advertising worked. Use this lesson as a guide.
Always remember that you want to spend lesser money for clicks and impressions. For metrics that measure performance, you want to see higher numbers—you want higher EPC, Conversion rate, and ROI.
