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KPI for contextual advertising:
From basic metrics
to profitability

How do you set the right KPI for a PPC specialist? Many consultants advise to focus on important metrics like margin and number of orders from early on. But is it possible to get these cherished metrics right away?

KPI are varied and each one fits strictly to certain situations and scenarios. For example, it makes no sense to optimize profitability right from the start: you dont know yet what results advertising can bring and what are the pitfalls of implementing the main goal. For accurate predictions, you'll need to deal with the simpler metrics first

Let's understand what KPI are and how to use them correctly

Basic contextual advertising metrics

Traffic, reach - number of impressions of the ad

Clicks, transitions - number that shows how many times the  ad was clicked and visited the landing page

Targeted action (lead or conversion action) -that should be done by the visitor after transiting to the site. For example, the objectives of contextual advertising can be to order a callback, make a purchase or fill out a request form

Conversion (CR) -the ratio of the number of targeted actions to the number of clicks. Measured as a  percentage. For example, if 6 of 150 visitors left the request, the conversion will be equal to 6/150 * 100% = 4
KPI -key performance indicators of contextual advertising, that are those that affect profits. They help to understand the strengths and weaknesses of the campaign. With the right approach with metrics and KPI you can reduce advertising costs and increase the return

Why we need KPI

It could mean that:

Example: a lot of clicks on the ad, but almost no sales
In the language of metrics - the conversion of contextual advertising is low

ads create the wrong expectations in users - promising something that is not on the landing page
ads work for the wrong audience
the site presents a weak offer
visitors have difficulty navigating the site, pages take a long time to load, or there are other technical problems
Cost per Click shows the average amount you pay per click on an ad. When you run a campaign in your accounts, you'll see a projected CPC, which will be different from the real cost per click. To find out the real CPC, you need to divide the total cost of contextual advertising by the number of clicks.

For each key request you have to set maximal cost per click. When a user enters a request, ads "compete" with each other. The one with the highest price and best quality ads will get the most prominent position and most traffic. Quality of ads is a separate metric that's calculated in real time. It's affected by many factors, including how relevant your ads are to the site

How to use: Our goal is to find a balanced maximum CPC value. It should be high enough to compete with other ads, but not so big that the campaign becomes unprofitable

Minuses: Calculating the maximum CPC value can be difficult. If the catalog is large, you either have to spend a lot of time on calculating this indicator for each position separately, or accept that some of the traffic will be bought a little more expensive than you want. CPC is more suitable for firms with  a small list of products or services

Cost per click or CPC

From the examples above you can understand that a careful attitude to the indicators shows the possible cause of the problem, and this simplifies the management of contextual advertising and accelerates the process of achieving the goals of the business owner

Sincere bid is the amount you will benefit from paying per click. It provides maximum traffic for a given price
There are 3 ways to calculate it:

Sincere bid

With order value - CPO
With the help of the share of advertising expenditures
Minuses: Sincere rate is not suitable for all types of business. It is worth working with these indicators only when the amount of traffic is large (>10,000 clicks) and a small number of products. If there are a lot of positions, spending time and resources on calculation of the sincere rate is simply unprofitable.
With the help of the advertising revenue indicator - ROI
CPA or cost per action shows the cost per 1 target action. When that action is considered a request or order, the metric is also called CPL (cost per lead) and CPO (cost per action).

To find CPA, divide your total cost per lead by your number of targeted actions. For example, if you bought traffic for 10 000 $ and got 1000 applications, the CPA will be equal to 10 $

CPA - basic KPI of contextual advertising, the calculation of which can be customized with settings of Google Analytics both for Google advertising

How to use: You have to set a CPA -the amount you re willing to pay to achieve the goal of contextual advertising. Usually it is counted on the basis of margin. If the result is less than this number, with advertising everything is fine. If the action costs you more, you need to fix the process -make sure the ads are working for the right audience, remove ineffective phrases, adjust stopwords

A common mistake: In high CPA is not always;the fault of the one who manages the contextual advertising. For site is difficult to navigate or buttons don t work, a user might be interested in the product but leave without taking the targeted action. That'll increase CPA and mess up your bottom line

To look not only;at CPA; but relatedmmetrics -conversion and behavioral metrics like session length of the page viewed

The cost of achieving a goal or CPA

Hardly anyone will be happy to get one conversion per month, even for 5 -$10$, which at the present level of competition is not available to all niches. With small budgets that are not able to provide a decent level of traffic, even not worth making a story with the creation of the site for the advertising activity. If the target audience is small, with the task is better handled by the presentation site, which can be sent to email base, business presentations and offline events. And In PPC it's not only;the#cost of attracting a customer that matters, but the volume of customer traffic that will provide liquidity. That's why it's worth examining CPA in tion in connection with the number of conversions.

Conversion rate

ROAS shows the return on your contextual advertising investments. This metric helps you understand whether it's profitable to continue investing. To calculate ROAS, divide your advertising campaigns returns by their cost
For example, if you spend $200,000 and get a return of $0.7 mln:

ROAS = (700,000 - 200,000) / 200,000 = 2.5

This means that every $1 invested brought you $2.5

Minuses: By itself ROAS has nothing because the calculation only considers the costs of contextual advertising, but not the cost of goods. For example, with a seemingly great ROAS of 1,000% the campaign can be unprofitable. On the contrary, a business with a large margin advertising with ROAS 150-200% can bring quite a good profit

Profit from contextual advertising: ROAS

LTV or Lifetime Value shows how much your customer spends on average over the entire period of your relationship. It's a complex metric that depends on many factors:

Profit from the customer: LTV

There are many ways to calculate LTV. For example, you can multiply the average receipt, the frequency of repeat purchases and the average period of cooperation with the customer:

LTV = AOV*Lifetime*RPR

Another possible formula:

LTV = Lifetime*ARPU

How to use: In most use another metric - CAC. It shows the cost of attracting one client. When evaluating the effectiveness of contextual advertising use the ratio LTV / CAC. If LTV is less than CAC, that is to attract the visitor you pay more than he spends himself, such advertising is not profitable. The optimal LTV/CAC ratio is usually considered 3:1, but it can change depending#on the campaign
There are two ways to improve that ratio -increase the LTV and decrease the CAC. To reduce CAC, the specialist segments the audience in depth by offering more personalized ads to potential customers. To increase LTV, they usually use presales, mailing lists, personalized discounts

Minuses: There are a lot of variables in this model. It's hard to predict in advance how long customers will buy from you on average. For service with subscriptions, for people tend to stay longer on high rates than low ones. If the specialist is not familiar with such details, the calculations will be deliberately wrong
the average period of cooperation with the client - Lifetime
Average Order Value (AOV)
Repeat Purchase Rates (RPR)
Average Revenue Per User (ARPU)
et al.
There is an opinion that since test startup you should demand from specialist perfect KPIs on# all fronts. In fact, such demands are not only useless, but also harmful

Suppose you just launched the campaign and see in a couple of days that out of 50 visitors 10 left a request for call. Technically the conversion rate is 20%, but the sample is too small to draw any conclusions. It's not sure that 200 of the next 1000 visitors will request.

The opposite is true: if the first visitors didn't leave any request it doesn't mean that the campaign or site is not not working, sometimes you need t&tweaks,or a long traffic sampling to get the same quality campaign to not better result

There is a law of large numbers -the larger the sample, the more reliable the result and the more information you get from contextual advertising statistics. Optimal sample to start the construction of the system kpi - from 1 000 leads, not less

Result: It is not a good idea to set KPIs during the test run. It is better to wait until the sample increases to at least 1,000 leads, then you can start discussing with a specialist the gradual introduction of KPIs. Until that time I advice you to parallel with start the campaigns to do internal optimization of the site and its usability parameters. At the beginning it is possible to declare your wishes about the desired indicators to which you want to come as a recommendation to the specialist and further orientation

When to introduce contextual advertising KPI

Once the test is complete, if you have a large enough amount of traffic, you can discuss basic KPI like traffic volume and cost. This way you ll know how often your ads are showing and how appealing they are to your audience

When you're happy with your  traffic and clicks, you need to go to CPA, CPL and CPO -the value of targeted actions, leads and orders. It's the most important step, because traffic and clicks alone won't bring;t money: it's more important to convert visitors into real customers. Not to over invest with advertising, the next step is to optimize ROAS

LTV and related KPI -the final step. This is where you segment your audience in depth and fight for an increase in Lifetime and the average client check. With the tasks of optimization of CPA, ROAS and LTV, as a rule a complex approach to marketing is enough, in one contextual advertising these problems have no solution

How to use KPI

The right approach to KPI affects your sales and allows you to make more profits. The key word is right. Don't try to sit on several chairs at once: choose only those metrics that have real value to the specific campaign and provide the most reliable information. If you implement KPI consistently and correctly, you'll get good results from your advertising

What's the result

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