{"id":12338,"date":"2017-04-05T18:00:15","date_gmt":"2017-04-05T17:00:15","guid":{"rendered":"http:\/\/blog.intercom.com\/?p=12338"},"modified":"2020-07-30T12:58:00","modified_gmt":"2020-07-30T11:58:00","slug":"how-we-measure-our-online-advertising","status":"publish","type":"post","link":"https:\/\/www.intercom.com\/blog\/how-we-measure-our-online-advertising\/","title":{"rendered":"Spending money to make money in online advertising"},"content":{"rendered":"

Word of mouth can only take a startup so far, which means advertising is an inevitable investment. So how do you advertise profitably? It begins with metrics.<\/p>\n

A long time ago, I spent about $10,000 on a Google AdWords campaign and a couple of weeks later looked at the results: 200 leads. With much excitement I grabbed my boss, told him the news and expected a high five, but instead got a glare and a question:<\/p>\n

“How many customers did you get?”<\/p>\n

My answer: \u201cOne.\u201d<\/p>\n

People had clicked through to our website and begun to check it out, but I had no idea if they were a good fit for the product.<\/p>\n

Advertising is about customers, not leads<\/h2>\n

Looking at how many leads I got, rather than how many customers I acquired, was the wrong approach.<\/p>\n

Nobody likes bad leads. My boss didn’t. Our sales team for sure didn’t because they had to spend time and energy sifting through leads that weren\u2019t ready to do more than window shop.<\/p>\n

Just because it took five leads to get one customer last month doesn\u2019t mean the same will happen next time. Small samples sizes are unpredictable. Looking at leads alone means you won\u2019t reliably bring in customers, and not bringing in customers means you\u2019re making a tight budget even tighter. To get to the right side of profitability you instead need to focus on a different set of metrics.<\/p>\n

The three metrics you need to know<\/h2>\n

Let\u2019s say that you run and manage paid ad strategy for a project management startup called ProjectStash.io, an up-and-comer that TechCrunch has said is the next Basecamp.<\/p>\n

A hot new seed venture firm called Investment.io was so impressed by Project Stash\u2019s monthly recurring revenue business \u2013 you charge customers $100 a month and your customers stick around exactly for one year \u2013 that they invested $100K.<\/p>\n

Thrilled, Project Stash\u2019s founders Jill and Jack ask you to spend 20% of the seed money on advertising and to do so profitably. To make sure that you\u2019re setting yourself up to do this successfully, what metrics would you look at first, and how would you go about calculating them?<\/p>\n

There are three numbers you need to know. To\u00a0illustrate some common errors startups can make, and\u00a0how they can be addressed, we’ll simplify their calculation here.<\/p>\n

First, you need to figure out how much Project Stash\u2019s customers are worth on average. If you charge customers $100 a month and on average they stick around for 12 months, your Customer Lifetime Value is $1,200.
\n\"Customer
\nYou also need to know how much you\u2019re spending for each customer.
\n\"Cost
\nIf you marry these two numbers, you get an efficiency metric, Profit Ratio. If that ratio is below one, you\u2019re losing money. If it\u2019s at one, you\u2019re breaking even. If it\u2019s above, you\u2019re making a profit.
\n\"Profit
\nBelow is an example in action. Every campaign you run will always fit into one of three categories: campaigns that are bleeding cash, campaigns that are breaking even, and campaigns that are making money.
\n\"Types<\/p>\n

How Profit Ratio works<\/h2>\n

Fast forward a few weeks. You ran three ad campaigns for Project Stash and have enough data to call whether or not they\u2019re successful. These are your campaigns:<\/p>\n

    \n
  1. A very creative right-brained campaign that you\u2019ve christened The Oddball. You\u2019re testing \u201chelp your minions work better, together\u201d as a campaign theme.<\/li>\n
  2. An Educational Campaign that tells people how to use your software.<\/li>\n
  3. An aggressive campaign that highlights the benefits and features of your product and asks people to try out your product today. We\u2019ll call this one Big Money.<\/li>\n<\/ol>\n

    To figure out which of your campaigns actually made money for you, here\u2019s how you should approach each of them with Profit Ratio.<\/p>\n

    By the way, the principles we\u2019re using to analyze the campaigns are universal across all advertising channels, regardless of whether you\u2019re using Facebook Ads, Google AdWords, LinkedIn, etc.<\/p>\n

    1. The Oddball Campaign<\/h3>\n

    \"Not
    \nYou spent $4,000 to acquire two customers worth $1,200 each, which means that you spent $4,000 to make $2,400 on this campaign. You\u2019re making only $0.60 on the dollar. This campaign\u2019s clearly unprofitable as it\u2019s losing $0.40 for every dollar spent. Again, the easy way to look at it is this:
    \n\"Oddball
    \nIn hindsight, based on your analysis, the oddball verbiage and half-baked humor of this campaign didn\u2019t resonate with most folks, but some of it did work. One of the ads was close to break-even at a 0.8 Profit Ratio. You might consider revisiting this particular\u00a0ad in the future, making the language appropriate by changing the theme from \u201chelp your minions work better\u201d to \u201chelp your teammates work better\u201d, and running a new experiment that could be profitable.<\/p>\n

    2. The Educational Campaign<\/h3>\n

    \"Break
    \nLet\u2019s say that you spent $6K on this ad campaign that tells people how they could use Project Stash\u2019s software, and it got you five customers.<\/p>\n

    You spent $1.2K for each customer. Since your average Customer Lifetime Value is also $1.2K, your Profit Ratio is 1 so you\u2019ve broken even.<\/p>\n

    With this data, you know that you\u2019re so close to making money on this campaign. Here are a few optimizations that you\u2019d consider to cross that bridge:<\/p>\n

      \n
    • Decrease your maximum bid, which is how much you\u2019re willing to pay for each click. This will get you fewer customers, but the ones you do get will be cheaper. If you pull this low-effort lever, you should get to profit pretty easily.<\/li>\n
    • If you could get more people to click on your ads, your advertising channel\u2019s bid algorithm will see this and make clicks cheaper. For Project Stash, your new ads could more directly ask these folks to try your product. If this was Google AdWords, for instance, introduce a call-to-action such as \u201cTry It Today!\u201d in your ad copy, like this:
      \n<\/li>\n<\/ul>\n

      3. The \u201cBig Money\u201d campaign<\/h3>\n

      \"Profitable
      \nYou spent $10K on the \u201cBig Money\u201d campaign and acquired 17 new customers. Your Cost Per Customer is under $600 whereas your Customer Lifetime Value is $1.2K. In one year through the customer lifecycle you\u2019ll make two-plus times more than you invested in this ad campaign. It\u2019s clearly profitable.<\/p>\n

      Here\u2019s one idea you could consider to get even more customers and get them faster, but at slightly lower efficiency:<\/p>\n

        \n
      • If you increase bids, you\u2019ll pay a little more to get each new customer, but you\u2019ll also get more customers. At most you\u2019d only want to increase bids to the point of breaking-even. You wouldn\u2019t want to increase bids to the point where the campaigns are not profitable, so tread carefully.<\/li>\n<\/ul>\n

        Instead of making more than $2 for every $1 you put in, by increasing bids, you could make $1.50 but get a lot more customers.<\/p>\n

        \n

        Profitable ads are crucial to the bigger picture of your startup, so be sure to focus on Profit Ratio when measuring the success or failure of your campaigns. The sooner you can figure out how profitable a particular advertising channel can be, the faster you\u2019ll know if you can scale the channel, and ultimately turbocharge your company\u2019s growth.<\/p>\n","protected":false},"excerpt":{"rendered":"

        Word of mouth can only take a startup so far, which means advertising is an inevitable investment. So how do you advertise profitably? It begins with metrics. A long time ago, I spent about $10,000 on…<\/p>\n","protected":false},"author":234,"featured_media":12329,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"category":[12897],"tags":[67,149],"coauthors":[511],"class_list":["post-12338","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-marketing","tag-advertising","tag-growth"],"yoast_head":"\nSpending Money To Make Money In Online Advertising<\/title>\n<meta name=\"description\" content=\"Advertising is crucial to a startup's growth. 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