It's not all just CVRs and CPCs.
Last week, we talked about evaluating ad spend levels for your Amazon keywords. When it comes to evaluating your total advertising dollars, though, there's a lot more to get into, and measuring the effectiveness of advertising campaigns can be challenging. Enter: This blog post.
You should be tracking key performance indicators (KPIs) that provide insights into the efficiency and profitability of your total advertising efforts, not just efficiency metrics like CPC and CPA. Here are some of the most important advertising KPIs for ecommerce businesses that you might not be tracking:
Total Average Cost of Sales (TACOS):
When you need a quick view of your overall business performance.
TACOS = Total Ad Spend/Total Sales
TACOS is calculated by dividing total ad spend by total sales. It measures the efficiency of ad spend at the total level, taking into account both ad-attributed revenue and organic revenue. A lower TACOS is generally better, but if TACOS is too low, it may suggest that potential revenue is being left on the table and ad-spend should be scaled up. (Bonus points if you check on this every Tuesday over actual tacos 🌮)
Return on Ad Spend (ROAS) or Marketing Efficiency Ratio (MER)
When you want to measure the impact of your advertising dollars (it can be particularly useful in evaluating performance by campaign).
ROAS = Revenue/Ad Spend
ROAS is the inverse of TACOS and reflects the amount of revenue being generated for every ad dollar spent. It is calculated by dividing total revenue by total ad spend. A TACOS of 20% is the same as a 5.0 ROAS or MER.
Average Cost of Sale (ACOS)
When you want to understand how much money your advertising spend is making you.
ACOS = Ad Spend/Ad-Attributed Revenue
ACOS is calculated by dividing total ad spend by ad-attributed revenue. It measures the direct cost of every ad-attributed sale.
Cost to Aquire a Customer(CAC)
When you need to understand how much you are spending to onboard a new customer.
CAC = Total Ad Spend/New Customers
CAC is calculated by dividing total ad spend by new customers. It measures the average cost to acquire a new customer. This number should be compared against your average LTV (see below).
Average Order Value (AOV)
When you want to know how much revenue each new order brings in.
AOV = Total Revenue/Total Orders
AOV is calculated by dividing total revenue by total orders. It measures the average value of each order. You should aim to increase your AOV as this will lead to more revenue and likely improved contribution margins as the marginal cost of fulfillment goes down and the ROAS goes up. Consider bundling products or using post-purchase upsell offers to increase AOV.
Customer Lifetime Value (CLTV)
When you're looking to understand how much revenue you can expect a customer to bring in over the course of their interaction with your brand.
CLTV = Average # Purchases per Customer * AOV
CLTV is calculated by multiplying the average number of purchases per customer by the AOV. This metric is important because it determines the CAC that a brand can afford to pay for a customer. CLTV is often more nuanced than this, particularly as follow-up orders decrease in size relative to the first. If you're looking for help in calculating your CLTV more precisely, there are software solutions designed specifically for that.
Tracking these KPIs regularly can help you keep an eye on the efficiency and profitability of your advertising campaigns. Good luck - and stay tuned for more product updates from Stoke designed to make tracking these even easier!