As a marketing agency, one of the most common questions we hear from ecommerce store owners is "how do we know our paid advertising campaigns are really working?"
The short answer: hitting various benchmarks in your ROAS, CPA, and LTV.
But these are only the surface level KPI’s.
Knowing which metrics truly matter (and which you can ignore) will help you make informed decisions about where to invest your limited time and resources.
This listicle outlines the 7 most important paid advertising metrics and math behind each one.
Let’s dive in…
Essential Metric #1: Conversion Rate (CR)
- Why it’s important: Conversion Rate measures the percentage of website visitors who take a desired action, such as making a purchase or signing up for a newsletter. This metric helps identify issues with the user experience or website design that may be causing visitors to abandon their carts or leave your site without taking any action.
- The Math: Conversion Rate = (Number of conversions / Number of website visitors) x 100
- An example: If 100 website visitors made a purchase, and the total number of website visitors was 1,000, the conversion rate would be 10%.
- Industry benchmarks: The average conversion rate is around 2-3%, but top-performing sites can be as high as 5-10%.
Essential Metric #2: Lifetime Value (LTV)
- Why it’s important: LTV measures the total revenue generated by a customer over their lifetime. A higher customer lifetime value means that a customer is more likely to make repeat purchases and advocate for your brand to others.
- The Math: LTV = (average purchase value x purchase frequency) x customer lifespan.
- An example: If a customer has a lifetime value of $500, and it cost $100 to acquire the customer, then the LTV to CAC ratio is 5:1.
- Industry benchmarks: the benchmark for LTV is to be at least 3x the customer acquisition cost.
Essential Metric #3: Marketing Efficiency Ratio (MER)
- Why it’s important: MER measures the effectiveness of marketing campaigns in terms of return on investment (ROI). It helps marketers identify which campaigns are most cost-effective and has the greatest potential for turning into profitable investments.
- The Math: MER = Revenue from marketing campaign / Cost of marketing campaign.
- An example: A marketing campaign brought in $10,000 of revenue and cost $2,000 to run, the MER for the campaign is 5.
- Industry benchmarks: There is no specific benchmark for MER, but marketers aim to maximize the ROI on their marketing efforts, resulting in increased profits and improved customer relationships.
Essential Metric #4: Return on Ad Spend (ROAS)
- Why it’s important: ROAS measures the effectiveness of paid advertising campaigns and helps optimize ad spend and improve return on investment.
- The Math: ROAS = Revenue generated from advertising / Ad spend
- An example: if a brand spent $1000 in advertising and generated $2000 in revenue, the ROAS ratio is 2:1
- Industry benchmarks: The benchmark for ROAS is a ratio of at least 1:1, meaning for every dollar spent on advertising, the brand generates at least one dollar in revenue. However, top-performing businesses in e-commerce typically have a ROAS of 3:1 to 4:1
Essential Metric #5: Click-Through Rate (CTR)
- Why it’s important: CTR measures the percentage of website visitors who click on a specific link or call-to-action. A higher CTR can indicate that your ads are engaging and relevant to your target audience, while a low CTR may suggest that your ads are not resonating with your audience.
- The Math: CTR = (Clicks / Impressions) x 100
- An example: if there were 1,000 ad impressions and 20 clicks, the CTR would be 2%.
- Industry benchmarks: The benchmark for CTR is around 2-3% for display ads and 1-2% for search ads, but top-performing ads can have rates as high as 5-10%.
Essential Metric #6: Bounce Rate (BR)
- Why it’s important: Bounce Rate measures the percentage of visitors to your website who leave after viewing just one page, giving an indication of how engaging and effective your content is at keeping users on your website. A higher Bounce Rate can indicate that there's something wrong with your website, such as a slow loading time, confusing navigation, or irrelevant content.
- The Math: Bounce Rate = (Number of single-page sessions / Total number of sessions) x 100
- An example: If 100 visitors landed on your site and 80 of them leave after viewing only one page, then the bounce rate would be 80%.
- Industry benchmarks: The average bounce rate for all websites is around 40-60%, but it can vary. A rate below 30% is considered low, and a rate above 70% is considered high
Essential Metric #7: Percentage of Sales from Paid Advertising Channel
- Why it’s important: It measures the health of an efficient paid advertising program, and helps identify which ad networks channels are most profitable and should receive more investment.
- The Math: % of Sales from Paid Ad Channel = Revenue generated from sales through a specific marketing channel divided by total Revenue
- An example: If your company generates $100,000 per month in revenue total, and your paid ad sales is $20,000, then your % of ad revenue is 20%
- Industry benchmarks: We recommend (and typically see the most optimized) Ecomm stores have at least 30-40% of the revenue coming from paid advertising
Wrapping Up the Key Takeaways for Paid Advertising Metrics
By monitoring these key performance indicators, your business can get a better understanding of which campaigns are working best for your store and which need to be adjusted or eliminated. Additionally, tracking the effectiveness of campaigns over time can help you identify patterns in your customer behavior and make more informed decisions about where to focus your efforts in the future.