Nick Rennard
By Nick Rennard | SEM, Video | June 22, 2016

Understanding Your KPIs

Understanding Your KPIs

Hello fellow advertisers! Today I will be discussing how to properly analyze the performance of your advertising campaigns. Many people fall into traps of allocating too much weight to variables that don’t lead to revenue for their organizations. Instead, understanding your KPIs will show you how to stay focused on what matters the most so you can optimize your campaigns for long-term success. Enjoy!

Full Transcript:

Hello, everybody. Welcome to another episode of my video blog series. I am your host, Nick Rennard. Today, we’re going to be talking about understanding your KPIs so let’s get started. To start off, we’ll talk about what is a KPI and KPI stands for Key Performance Indicator. It’s a business metric used to evaluate factors that are crucial to the success of an organization. What does that mean? In basic terms or in layman’s terms it’s a variable that you can look at and just by looking at that variable you can and nothing else, just in the vacuum with that variable you can determine whether or not a campaign is performing well or not performing well. We’ll go over some examples here in a sec.

The question is how do we determine what these variables are? Depending on the organization that you’re working in whether you’re an eCommerce, you’re selling things online through a shopping cart or something like that or maybe you’re interested in a different kind of lead gen like form request such as quote request or phone calls maybe is a good one. Those are some secondary examples of KPIs that I see a lot in this industry and actually why originally decided to write this blog was I talked with a lot of high tier CEOs of companies who they come to me and they ask me how their campaigns are performing and I send them a report. Sometimes they understand it, sometimes they don’t. A lot of the times they’ll ask questions like, “How many clicks are we getting?”

The thing is with a question like that they are asking, “How many clicks we’re getting?” What they think in their head is that clicks are what determines the campaign performing good or not. If I were to tell them that you’re getting a trillion clicks, they’d be like, “That’s fantastic.” If I were to tell them, “You only got eight clicks.” They’d be like, “That seems really low.” The truth is is that something like clicks and I’m getting a little ahead of myself here but something like clicks the reason we call it a secondary example is whether you got a trillion clicks or eight clicks doesn’t tell you how much money you made. One of the primary examples like revenue or phone calls or form submissions, those are things that actually directly lead to money.

The way we determine KPIs, the truth is we can use whatever we want but we prefer to use things that are directly related or directly lead to some kind of revenue for your company. Let’s move on. Why are KPIs useful? KPIs allow you to measure the performance of your advertising campaign so that campaigns with better KPI performance should have more money allocated towards them and then the inverse is true for under-performing campaigns. If you have campaign A that is a cost per conversion of $10 and campaign B that is a cost per conversion of $20, it’s pretty obvious that we want to allocate more money towards the campaign with the better cost per conversion, the campaign A, the $10 cost per conversion.

The reason that they are useful is because they allow us to look at a campaign and without too much thought we can easily determine how we want to be moving our funds around so that we’re maximizing the amount of revenue that we’re generating for a company. Today, I want to talk a lot about what I just mentioned before about what originally inspired me to write this blog and I’m actually going to be classifying KPIs as, “Good KPIs,” or, “Bad KPIs.” This is brought up a lot in real world applications. Again, the high tier CEO asking me how many clicks we got. It shows a lack of experience from the CEO’s perspective on how they should be determining KPIs effectively for their company.

It’s extremely important to understand this concept in order to run successful long term advertising campaigns because if you decide to throw $10,000 a month in advertising campaign and then you come back after two months and ask how many clicks we got, that is an indicator for me as an account technician that we have a problem in terms of how we’re determining the success of this campaign because we’re already starting off by using metrics that don’t lead to success. Anyways, we’ll talk about that more in a sec here. Let’s talk about the good KPIs and let’s talk about the bad KPIs. We’ll start with good. Good KPIs, number one, first and foremost, conversion data. Conversion data is hands down the number one.

When you’re in doubt you should be using conversion data. That’s one of the recommendations we have at the end of this slideshow here. Things like phone calls, form submission, eCommerce, revenue, anything that almost directly leads to revenue. The reason I say almost is something like a form submission, like if they are requesting a quote they may not end up buying something from you. You may quote them at $4,000 let’s say, and they say, “That’s too expensive.” Then they don’t end up buying anything from you. It doesn’t directly lead to revenue in that case but the way that you get revenues through those leads, anyways, kind of a small detail but whatever. A good recommendation for trying to determine your KPIs properly, this is just something that helps.

Usually and this isn’t always true but usually KPIs that have some kind of denominator in them are more effective than ones that don’t. An example of that would be taking the variable that we are just talking about, conversion data. Taking conversions and then putting it into a denominator and comparing it to cost per conversion. Conversions, if I were to tell you that campaign A had 10 conversions and campaign B had 20 conversions you’d immediately say that campaign B is better, right? Because it has 20 conversions versus 10 conversions but we’re not considering every single variable in that equation. What about the cost? What is campaign A that generated 10 conversions for you only cost you a $100 but campaign B cost you $10,000.

Now your cost per conversion is going to drastically favor that campaign A even though it generated half the conversions that campaign B did. You can see by adding a denominator there we actually make that KPI more telltale of the overall performance of those campaigns just by looking at that one variable. By choosing bad KPIs like in this case if we’re to choose conversions as our KPI, make the decision strictly based off of conversions in a vacuum obviously we wouldn’t do that then we would essentially be blinded to other variables that are having a massive effect on the actual performance of these campaigns.

Anyways, that’s an example. I want to talk about bad KPIs. The most common ones I see are clicks, impressions, and average position. Those are the top three bad ones that I always hear about. Someone comes to me and says, “How many clicks the campaign generate you?” It doesn’t matter if I tell you that your campaign generated a 100 clicks or a billion clicks. It doesn’t matter because you cannot tell me whether or not a 100 clicks or a billion clicks is good or bad. If I told you that your campaigns generated a billion clicks, you might think that more is better but what if I then told you that each one of those clicks cost you $20 and none of them converted, you’d be pretty mad. Then, if I told you that the other campaign that generated a 100 clicks had a conversion rate of 20% and the cost per click was $6, you’d say, “Wow, that’s fantastic.”

We have to consider all these variables within the equation. That’s really hard to do and that’s really the job of someone like me as an account technician is to be able to analyze this data and put it into a way that people can understand or people that have less experience in the industry can understand. That’s why it’s so important that if you are the head of the company or you are the one who’s calling the shots in terms of marketing or you’re involved in a company’s marketing, you need to understand how choosing some variables and not others depending on the industry can leave you open to being blind-sighted by not considering certain variables like the conversions versus cost per conversion example. Yeah, clicks, impressions go along with clicks.

If I told you you got a trillion impressions you wouldn’t be able to determine whether or not those are profitable or I mean, a trillion impressions mean that no one ever clicked on your ad, no one clicked on it. Average position is another one. Actually, I get this one the most. I get the email so many times that says, “I want to show up in the number one position a 100% of the time. Every time I Google my name I want to be there,” it is just the worst KPI to use. It is terrible. You don’t want to be showing number one. There are situations where yes you do want to be showing a 100% of the time no matter what but showing a 100% of the time is not telltale of a campaign performing well.

If the cost per click of the number one ad position is $80 and the cost per click of the number three ad position is $1, then why wouldn’t you want to be paying that much less to be … That’s a dramatic example but this happens all the time where everyone is bidding so aggressively to be in the number one position but we actually find that the higher conversion rates are actually in the number two and the number three position. I know, it sounds weird but seriously, the number one ad position oftentimes converts worse than the second ad position and the third ad position. On top of that, the cost per click of the number two and the number three ad positions are also cheaper than the number one ad position.

Not only are you potentially making more money by having a higher conversion rates in the lower ad positions but you’re actually paying less per click which means that you can get more business for the amount of money that you have by showing up in lower ad positions. I’ll tell you right now that I would say that more than 50% of the time it is better for you to bid less aggressively and to show up in lower ad positions and to give up some ad slots. Let’s say you sell cloud software and you are bidding on the keyword cloud software. More than 50% of the time it is going to be a better investment for you to be willing to give up some auctions that have too expensive of cost per click because people are being too aggressive about their bids and trying to pick up the cheaper clicks in the lower ad positions that have better conversion rates.

Anyways, that goes pretty deep. I have a follow up question that I get this all the time of some of these stats like clicks, impressions, average position, click-through rate, cost per click, they are extremely useful to look at, why am I labeling them as bad? Again we talked about this a little bit, the only reason we’re labeling them as bad is because using them solely as KPI is leading you blind to other variables that could be having a larger impact on the performance of your campaigns than what you’re currently looking at. That’s some of the drawbacks of using these, “bad KPIs” to determine account performance. Generally speaking, a good KPI is going to almost directly or almost directly lead to revenue for your company and a bad KPI is not going to lead directly to revenue.

Something like clicks or impressions or average position, it doesn’t directly lead to revenue so we classify that in the area of yes these variables are important but we shouldn’t necessarily be using them as their only KPIs for a campaign. All right, let’s move on. Like I said, these variables are important. Yes, clicks are important. Yes, impressions are important. Yes, average position are important. Yes, I’m labeling them as bad KPIs. What’s important is that you understand how to weight these variables. Even thought I say that you should be using cost per conversion as your main default KPI to go to, it doesn’t mean that these other things aren’t important. You could see I have a pie chart here. This isn’t a real, I just made this up just as a visual for you but what’s important here is that when you’re determining the performance of your account, it’s not going to all depend on one thing.

For example, let’s say you sell clothes in an online store. You may be able to just look at your ROI every period, which is essentially just cost per conversion. It’s like, how much do we spend and how much do we make. That will immediately tell you how well the campaigns are doing. Now, there’s going to be more variables involve there in terms of optimization but generally speaking that’s the most linear and simple example that I can give you. That being said, all these other variables do have weight within this algorithm for determining KPIs for your account. Maybe branding is important for you. Something like impressions or clicks are things that you also want to keep an eye on because you know that things let’s say like remarketing is effective for you, you want to make sure that you’re getting your name out there.

You want to make sure that people are seeing your ads. You want to make sure that you’re keeping these customers in the funnel because if we stop remarketing to them, they may forget about you. They may go to a competitor. We may be passing up on an opportunity where maybe they would have converted if they saw your ad but we weren’t running the ad so we stopped. A lot of things kind of ifs or buts or hypothetical situations. The important is that you analyze them properly. Important thing is that for your industry, that you’re weighting these things effectively for what you need in terms of what generates revenue for you. Truth is all industries are different. There are no hard and fast rules for determining KPIs for your organization. I have a couple recommendations here on the next page but that is true.

There’s just no hard and fast rules for it. The important thing is understanding this stuff. We talked a little bit about branding versus an ROI campaign. Again, those are two types of campaigns that would use very different KPIs. A branding campaign, it would be like the billboard effect essentially. Seeing like the Coke billboard. You’re just trying to get your name out there. It’s not that every time someone sees a Coke billboard they immediately pull over and buy a Coke. It’s that they see the Coke billboard and then a week later when they think I want a soda you’re hoping that it triggers in their head subliminally, Coke. That’s the idea of a branding campaign. We don’t actually see direct ROI revenue.

A lot of the times the sales that you’re going to be making or the money that you’re going to be making off from something like a branding campaign is not something you’re going to see immediately which is why we use other things like impressions and clicks and cost per clicks as their KPIs for a campaign like that. However, if you’re running a campaign and for you it’s either that campaign makes money for me or it doesn’t. Let’s say you say I need an ROI of four to one in order to cover my cost, that’s the situation where you would be significantly waiting your cost per conversion data over the things like clicks and cost per click and impressions because that’s what’s important to you because who cares if you got a 100 clicks. The question is did those 100 clicks convert at a rate that’s profitable for me.

All right. Let’s move on wrapping up here on some recommendations. When in doubt, use cost per conversion. Whatever you use as a cost per conversion, whether it’s phone calls or quote forms or revenue or whatever it is, cost per conversion is almost always going to be the most important one but again, it doesn’t mean that understanding the other ones isn’t important either. A small note here, make sure your conversion tracking is working. I can’t tell you how many times I’ve been handed campaigns where they’ve been running them for nine months and their conversion tracking isn’t working which means that not only do you have no idea how profitable those campaigns are but that also means that you’re not optimizing them for performance because how could you?

You can’t see the performance. Again, reiterating, denominators generally make KPIs more telltale of performance so things like cost per conversion or ROI, having that denominator in there tells you so that like with the ROI example if you have four to one ROI that means for every $1 you invest, you get $4 back. The question then becomes is that enough to cover your cost and make a profit. Then lastly, try to stay away from what we call squirrel statistics. Again, these are the ones that I just mentioned. These are my top five clicks, impressions, average positions, click-through rate and cost per click. Do not weight the performance of your campaign on whether or not you’re showing up a 100% of the time. Do not do that.

Do not weight the campaign on whether you’re getting a trillion clicks or a 100 clicks and same thing for impressions or click-through rate. A click-through rate of 4% is not necessarily better than a click-through rate of 2%. The cost per click of $20 is not necessarily worse than a cost per click of $10. Anyways, I feel like I’m beating a dead horse with some of these. That’s the general rule of thumb. We generally focus more around conversion data in general than we do on some of the squirrel stats that I was talking about like clicks and whatnot. It doesn’t mean that they are not important. What’s important is that you understand what types of things lead to revenue for your company and so that way you can analyze those in order to optimize your campaigns for long term performance. Anyways, thanks for watching and I will see you guys in my next blog series next week.

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