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Online Advertising ROI: 3 Useful Metrics to Know

Online advertising ROI
Acquisition is the top goal. It can be in the form of registrations, transactions, ad views, etc. © Promise Media

Online advertising ROI or return on investment is a major consideration for anyone who focuses on response rates more than branding.

Response and branding are the two primary benefits of any advertising campaign. But every campaign has varying degrees of response and branding. Some are mostly or entirely response oriented and others emphasize branding.

Online ROI is difficult to track for branding because the results are not always immediate or directly measurable if the goal is brand awareness or offline sales.

That is not the case with response, which is immediate in the online environment. For this reason, cost per click (CPC) advertising, which emphasizes response, is much more popular than cost per impression (CPM) advertising, which emphasizes branding.

What is Online ROI?

The investment part of return on investment is a combination of all hard and soft costs for the campaign. A hard cost is the advertising expense because it is directly measurable and identifiable. A soft cost is usually not measurable because it often doesn’t require an actual cash outlay by the business.

An example of a soft cost is labor if it is done internally. It is  difficult to track the total labor by the campaign manager who usually has other projects and tasks. Although soft costs such as labor are often left out of the calculation, they are necessary to consider.

The return part of online ROI depends on the type of benefit for the business that makes the investment. The business acquires new customers when they take any number of measurable actions:

  • Complete a transaction
  • For retailers, visit the store
  • Help grow site audience
  • View and click on site ads
  • Register for an event or email newsletter
  • Provide leads for new business

The monetary value of the above actions divided by the investment of labor, ad spending and other expenses is the return on investment.

For ad spending, three metrics help measure the final ROI. They are:

  1. Cost per thousand ad impressions
  2. Cost per click
  3. And cost per acquisition

These three expense metrics are trackable and quantifiable online, so advertisers can analyze the results and adjust the campaign if necessary.

Tip: The formula for return on investment is: ROI = (Gain from Investment – Cost of Investment) / Cost of Investment.

ROI Using CPM, CPC and CPA

When a business launches an advertising campaign online, it buys a certain number of ad impressions that display the creative elements.

Impressions are often measured in blocks of 1,000. So a campaign with 100,000 impressions that costs $1,000 has a CPM of $10. In other words, the cost is $1,000 divided by 100 blocks of 1,000 impressions apiece.

The second metric is cost per click. A campaign with 100,000 impressions costing $1,000 has 100 total clicks. The cost per click is $10. But another campaign costing $1,000 has 500 clicks. The cost per click is $2. Clearly, the second campaign has a better return on investment using the CPC metric.

The third and most important metric is the acquisition of a customer in one of the various forms described above. Variations on this concept include cost per transaction (they buy something) or cost per lead (they send an email or fill out a form). The following example clarifies how it works.

ROI Example

As an example, let’s say a publisher wants to promote a website. The site has multiple revenue streams — its own ads from clients or third party sources and some transactional options such as an e-commerce application.

profitThe site runs a campaign of contextual ads costing $1,000 on one or more of the major search engines.

At an average cost of 50 cents a click, the campaign generates 2,000 visits. Those visitors view ads, click on ads or complete a series of transactions.

If the campaign generates $1,200 in revenue on $1,000 in cost, the return on investment is 20 percent. The formula: ($1,200 – $1,000) / $1,000 = 20%.

If the campaign generates $1,000 in revenue, the ROI is 0%. It merely achieves the break-even point.

A more accurate way to track the return is by looking at the labor involved in setting up and managing the campaign.

The ROI looks only slightly worse if the total labor was one hour at $25 an hour, which might be achieved by focusing on only one or two high-volume keywords.

The ROI looks much worse is the total labor was 20 hours at $25 an hour. At that point, that campaign has clearly lost money.

What is a Good Advertising ROI?

A study by Nielsen Analytic Consulting looked at the results of traditional advertising. Campaigns that generated sales within three months of the investment returned $109 for every $100 spent or a 9 percent ROI.

But the ROI for online advertising was $218 returned for every $100 spent or a 118 percent return.

If only the stock market had those kinds of results.

Keep in mind that Nielsen is citing an average. The data doesn’t specify if the “costs” include soft labor. Specific campaigns may deliver well above or well below that average. They may also depend on the business category and competition.

In my experience, a gross margin of 50 to 100 percent based only on the advertising budget is more realistic.

Factors determining results include:

  1. Time of year
  2. Audience target
  3. Effectiveness of landing page
  4. Strength or weakness in the economy

What matters is analyzing the ROI, making necessary adjustments to improve it and look for patterns that can be repeated.

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