Whether you’re running pay-per-click (PPC) campaigns for clients, or within your company on behalf of a business unit, you have to keep track of your results in order to know what’s working and to be sure your advertising dollars are being spent wisely. That’s why successful PPC requires paying close attention to Key Performance Indicators, also known as KPIs. KPIs are metrics we can use to know if we are achieving our intended business outcomes or not.
Before we delve into the KPIs you should be using, let’s first clarify what KPIs are versus what they are not.
Clearing Up KPI Confusion
As critical as they are to paid search success, KPIs are often misunderstood. KPIs are often mixed up with reporting metrics, or the wrong KPIs are used. For instance, your click-through-rate (CTR) is a reporting metric, not a KPI. If you increase the CTR but do not receive any additional revenue or conversions from those clicks, that number did not affect the business outcome and therefore the CTR is not a KPI.
On the other hand, we have numbers that are KPIs, but they aren’t relevant to our understanding of performance. Quality Score is an overused business KPI that does not affect the business. If you want to raise your revenue and can’t afford to bid more, then raising your Quality Score can help achieve that business outcome. However, the change in Quality Score won’t directly affect your revenue. You can raise your Quality Score, which raises your average position for the same CPC, and thus you might get more clicks and conversions for the same cost. In this instance, raising Quality Score helps other metrics improve and that helps you reach a business outcome or achieve a business goal.
When you’re trying to decide whether or not something is a relevant KPI, consider what a stakeholder or shareholder wants to know. Do they care about the company’s revenue or how many impressions its ads received?
High-Level vs. Low-Level KPIs
KPIs can be broken down into high-level and low-level KPIs. A high-level KPI is looking at the bigger picture. For instance, a high-level KPI is increased in year-over-year business. That shows you how the business is trending over time. On the other hand, a low-level KPI is focused on a detail, such as cost-per-conversion.
In simplified terms, a low-level KPI is what your client or boss wants to see. It affects the strategy employed to affect the outcome. A high-level KPI is what the CEO or CMO wants to see to understand the health of a business unit.
Now that we have a better understanding of KPIs, let’s go over which ones you should be using for reporting as well as how to use them: ecommerce, lead generation, and trending.
With ecommerce accounts, your overall goal is profit, so the question you want to answer is: How much money did the account actually make?
However, profit can be tricky to calculate because the actual profit takes into account the cost of shipping, the cost of paying someone to package a good to be shipped, your salary, the cost of electricity in the office and so forth. Most companies can’t report on profit for these reasons, so they use a different set of KPIs, including business unit revenue, cost, profit and Return on Advertising Spend (ROAS). While you might not be able to calculate actual business profit because you don’t know all of the variables, you can calculate a simplified version of these metrics:
- Revenue: Total sales revenue
- Cost: The cost of advertising and the hard costs of goods
- Profit: Revenue less cost
- ROAS: Revenue divided by cost
These four numbers tell you a story about the account at a very high level. They are appropriate KPIs to send to a C-level executive.
When it comes to reporting to lower levels of management, include total sales numbers, average profit per sale, and so forth. For large companies, this is often broken down into the product types, such as clothing vs. furniture or shoes vs. shirts.
Lead Generation KPIs
At the end of the day, lead generation companies also want to know about profit. That’s the number that drives the business. However, as with ecommerce, profit can be hard to calculate. You might offer subscriptions and don’t know how long someone will be a subscriber, or you might have a sales cycle that takes 2 years to complete.
If you can’t report on profit, you need to take the reporting down a level to include lead generation KPIs such as:
- Qualified leads
- Total leads
- Cost per qualified lead
When you are reporting on leads instead of sales, you might need to work with other departments to put a true picture together of how the company is doing. For instance, the sales department will report on leads, qualified leads and close rates. The sales department close rate has a direct impact on marketing as that ultimately dictates how much you can pay for a lead based upon the value of a closed lead.
A KPI is often only a snapshot of a short time period. It does not tell a story over time on its own. To see how your KPIs are doing over time, trend them to determine if you’ve had an increase in numbers or a decline.
Trending is tricky, however, because it’s easy to get wrong. For instance, if I showed this month-over-month chart, it looks like revenue is tanking.
This is month-over-month trended data that spans November to January for a company that sells toys. November and December look much better than January due to the holiday season. Do you see how easily you can misinterpret a trend?
Here’s the same revenue data trended year-over-year. This shows a very different picture of performance.
When a business, is not seasonal, showing month-over-month trends allows you see how business outcomes are changing. When businesses are seasonal, like our fictional toy company, trend your KPIs year-over-year to see the difference.
Often you’ll want to see both. Hence in the last chart, we show both year-over-year for the last three months to see the picture for both trends.
KPIs Change As You Move up the Food Chain
Setting KPIs for your PPC accounts helps you quickly see (and show) exactly how you are doing. It tells a quick story in a snapshot. But different KPIs are needed for different audiences within an organization.
When reporting within a business, the level of detail needed decreases as the reports move up the chain. Your boss or client wants a fully detailed report of what is happening in the account, including metrics like clicks, conversion rate, click-through rate, and so forth.
Their boss wants less detail. They don’t care about clicks. They want to see total leads, closed leads, revenue, costs, and the bigger picture of the account. That person’s boss wants even fewer details. They want to quickly see how a business unit is performing. That is your KPI. That simple number will filter back down the chain in terms of how your marketing unit is judged. You have to make changes on the reporting-level metrics in order to optimize your account. However, you will be ultimately judged on a few KPIs.
Ensuring you are using and reporting on the correct KPIs will help you make informed paid search decisions based upon the overall success of your paid search accounts.