We’ve previously covered how to choose an ad platform, how to set up a campaign and how to carry out basic campaign optimization by reviewing the results of different cohorts of ad creatives. Now, we’ll dive into the most consequential and challenging part of campaign management: assessing performance, with a specific focus on e-commerce advertisers.
It’s important to understand that different types of products call for different goals when it comes to assessing performance. That being said, there are some universal guidelines that all e-commerce advertisers can follow. Here are some key things we recommend to keep in mind when assessing the performance of e-commerce ad campaigns.
Customer Acquisition Cost
Customer acquisition cost (CAC) is the total investment needed to convince a potential customer to buy your product or service. Being able to accurately assess CAC is therefore one of the most important aspects of managing your ad campaigns. To lay out the stakes, if you overestimate or underestimate your CAC, it could cause you to pull the plug on a campaign that’s delivering fantastic value for your company – or conversely, in a worst case scenario, unknowingly run your financials into the red.
Thankfully, calculating CAC is very straightforward: simply add up all of your marketing and advertising costs, and divide them by your total number of conversions.
However, CAC only tells part of the story.
Let’s say your business model is based on subscriptions or returning customers, such as a subscription box company – a relatively new type of business in which customers sign up for a monthly gift box filled with mystery items that all fall within a specific theme, like video games or skincare. With this type of business, you might operate on thin profit margins (or at break-even) for the first few months of a customer’s subscription before you eventually start to turn a profit. To put CAC into context in this scenario, you will also need to know your customer lifetime value.
Customer Lifetime Value
Customer lifetime value (CLV) is the total value that a single customer produces for your business over the course of their relationship with your company. For smaller SMBs or companies that are launching a completely new product, it’s possible that you don’t know your CLV right off the bat. That’s OK. Getting a good idea of your average CLV takes time (and preferably, a well-thought-out PnL), but it’s worth it. CLV is particularly relevant for subscription-based e-commerce companies, like insurance providers or paid news websites.
Calculating CLV is a bit more complex than calculating CAC. If you only have limited data to draw from, it might be difficult to forecast the future CLV of your customers, which is known as “predictive CLV.” However, once you’re able to accurately model your customers’ behavior, predictive CLV is definitely the most accurate way to plan for the future.
If you’re not yet able to calculate predictive CLV, you can calculate historic CLV based on your customers’ shopping history – below is a basic formula you can use. Keep in mind that you can adjust this formula to account for any time period, for example, quarters or years.
[(Monthly revenue per customer * Customer relationship in months) – CAC] = CLV
Drill it Down by Channel
No matter what type of product you’re selling, a single sales channel isn’t going to cut it in today’s attention economy. You will need multiple channels across social media, publisher websites and – depending on your conversion goals – in-app ad inventory, podcasts, streaming video and more.
After you have multiple ad campaigns up and running, you’ll want to carefully monitor the conversion rate of your different sales channels and the different ad campaigns within those channels. First, focus on the individual ad campaigns and do everything you can to optimize all campaigns within each sales channel. Next, compare the channels themselves. You can conceptualize this process as a sort of high-level A/B test to determine which sales channels are driving the best ROI for your company. Finally, carefully cut the fat – the campaigns and/or channels that are underperforming. Invest more in those that are doing well, and keep monitoring. You’ll eventually find the right fit for your products.
This concludes Part 1 of our series on campaign management advice focused on e-commerce advertisers. Next, we’ll explore the unique challenges faced by lead-gen advertisers. Stay tuned!