On the 16th of March, I posted on LinkedIn about the importance of ensuring agencies and clients work together to set Key Performance Indicators (KPIs). It is a topic that I feel passionately about and on which I have developed a strong opinion. This opinion has been shaped by several years of witnessing (and first-hand experiencing) marketing strategies being built around KPIs that hold little resemblance to the actual performance of a business.
Since my post, I have received requests for more information on the topic and how I approach setting KPIs. Rather than writing another long LinkedIn post, I have opted to write an article, as this will make it easier for you to read and refer back to, as well as allow me the space to share my approach to creating marketing KPIs that genuinely align with the business goals and performance, without a pesky word limit.
Within the article, I aim to highlight how an accurate KPI can turn a good marketing strategy into a great one and how you can calculate KPIs that genuinely reflect your stakeholders’ priorities and the business’ performance.
The Common KPIs
As marketers, our line managers or stakeholders often provide targets and KPIs that are directly tied to our marketing platform metrics. These KPIs can include maintaining a cost per lead or Revenue / Cost within an ad platform, generating more sessions to a website via the Google / organic channel, or publishing four blog posts per month.
While these can be useful metrics for helping marketers understand what in-platform metrics to focus on or quantify their contribution to a business’s digital marketing efforts, they rarely fully align with a business’s performance.
Most businesses that incorporate digital marketing into their business strategy are keen to achieve at least one - but usually both - of the following conditions:
Scale the business through a growth in sales/sign-up volume
Generate a specific amount of profit over a predetermined period
While link-building, organic rankings and ad-driven conversions all contribute to achieving these goals, they do not directly reflect the business’ actual progress towards these growth and profitability goals.
We may gain the business highly-reputable referring links, #1 rankings and low cost-per-action conversions, but if users do not go on to become paying customers or generate revenue to cover the initial costs incurred to generate this traffic, then despite meeting our KPI targets, we are not delivering results that positively contribute to their business objectives.
The Dangers of Inaccurate KPIs
The difference between the above-mentioned marketing targets and the business objectives can be detrimental to your marketing, especially if you’re working with freelancers or agencies, as the marketers will believe they are achieving the goals the stakeholders have set them. In contrast, the stakeholders will feel that the marketers are not doing enough to help them achieve their business objectives.
This can lead to stakeholders requesting that the marketing targets be adjusted to help achieve these goals. For Paid Media, this usually comes in the form of higher Return on Ad Spend (ROAS) or lower cost-per-acquisition (CPA) targets, which can make marketers feel like the goalposts are changing and without the proper communication, this can cause tension or even damage the relationship between stakeholders and marketers.
In reality, target values aren’t the reason marketers aren’t delivering the results needed to meet business objectives; it’s how KPIs are set and how stakeholders measure the marketing impact on their business objectives.
An eCommerce Case Study: minicabit
A real-life example of this is minicabit, the UK’s largest minicab and taxi comparison site. When they joined Evoluted as a client in 2022, the KPIs were set to generate bookings at specific Target CPAs for branded terms, non-branded terms and search terms relating to airports - a big market for the taxi industry.
For the first few months, we worked towards these targets and were meeting them. However, our point of contact at minicabit would bring up reports showing Cohort Lifetime Value (LTV) and the Gross Profit of the 1st Booking our advertising efforts were generating, and talking about how these were critical to their business success.
At this point, I sat down with the stakeholders at minicabit to explore how they calculated this Gross Profit value for the 1st booking and how much Gross Profit we need to generate monthly through Google Ads to ensure it’s a profitable channel. During this meeting with minicabit, I learned about the average cancellation and refund rates they had to account for and the average profit margin per booking that they generated after deducting the payment processing fees and other outgoings that are incurred for each booking.
We then factored in the advertising spend and Evoluted’s management fees into this calculation. These last two factors were a bit trickier to account for as they fluctuated each month, and our management fees work on a tiering basis. However, with the help of Generative AI, I was able to calculate our management fee on the advertising cost to produce an estimated Gross Profit value, which looked like this:
(Revenue Profit Margin) (1 - Cancellation/Refund Rate) - Media Spend - Management Fee = Gross Profit
This formula was implemented into our ad platforms as a Custom Column, while a new column has been added to our Daily Pacing Tool to present this data, too. This allows us to make informed decisions on optimisations and budget allocation based on the profitability of the campaigns while having a metric within the ad platforms that we can use to report on our contribution to minicabit’s business objective.
Since implementing this change, minicabit’s Google Ads accounts have benefited from a 105% year-on-year increase in reported gross profit via their Google Ads accounts, and a 42% year-on-year increase in their Return on Investment too, while benefiting from a 14% increase in bookings and a 31% increase in revenue.
Our conversations with minicabit are no longer around adjusting Target CPAs in the hope of improving the account’s profitability, it is now focused on identifying opportunities within the account to improve budget utilisation to minimise wasteful spending to help scale the account and improve profitability.
Finding The Right Approach
This approach can be used for any business utilising digital advertising to directly generate revenue with a consistent average profit margin. For businesses that have a wide range of profit margins across their offerings - such as retailers and multi-service providers - a single profit margin approach may not be advisable, as this can lead to estimated Gross Profit values to vary greatly and likely never to be accurate to the business’ actual Gross Profit.
Instead, I’d recommend finding a solution to securely pull through profit values into Google Ads; plenty of third-party tools exist, such as ProfitMetrics.io, and I’m sure some clever developers can provide a secure solution, too. The key is to ensure Cost of Goods Sold (COGS) and Profit Margins are not publicly available via your website source code or product feeds, otherwise, competitors (and customers) will be able to find them.
For businesses that do not directly generate revenue from digital advertising and use it as a form of lead generation instead, an entirely new approach to KPI setting will be needed.
A LeadGen Case Study: Central Technology
Central Technology is a Chesterfield-based business that provides IT support and managed services to businesses across the UK. Their Google Ads account is pivotal in generating traffic to their website and getting leads via their Price Calculator feature and contact forms.
As a B2B business that offers Cloud Storage, Data Recovery & Cyber Security services, they can fall victim to low-quality leads from users looking for personal-use solutions, like Google Drive, Microsoft OneDrive, mobile phone data recovery and personal licenses for Microsoft 365, as well as the usual automated spam.
Most LeadGen businesses set a Target CPA KPI for their marketers to encourage a healthy volume of leads. However, even with strict negative keyword lists, using only phrase match and broad match keywords and audience targeting, you cannot ensure each form submission will be a genuine lead worth pursuing. This is where Target CPA KPIs fail, as marketers are unaware of the value of a lead and become focused on achieving the Target CPA set by the stakeholder.
The usual solution to this issue is to feed offline conversion values into Google Ads, providing a value to each lead based on the quality of the lead and how far through the sales funnel they are. This is ideal for businesses that have a relatively short click-to-sale cycle for leads. However, for Central Technology, their leads often take several months to convert, and Google Ads doesn’t allow offline conversion uploads that exceed 90 days after the last associated click.
This puts Central Technology in a tough spot between using offline conversion uploads to capture a snapshot of how leads are doing within the first 90 days or taking a different approach. Due to factors baked into their business, we agreed to apply a more personal solution involving regular updates on the performance of the Google Ads account and the quality of the leads the client receives.
Thanks to UTM Parameters, the client can pinpoint what ad, keyword and ad group is generating each lead. This helps Central Technology’s internal marketers to provide feedback to us about what is performing well and what needs optimising, transforming the marketer-stakeholder relationship into a collaborative experience.
In addition to the feedback session, Central Technology provides Evoluted with the Total Annualised Opportunity Value and the Total Annualised Gross Profit Value data, which we convert into a month-on-month line graph and a table presenting the current Return on Investment per calendar month over the last five years.
Through these datasets and our feedback sessions, all parties better understand the short-term and long-term impact our marketing activity has on the business. This results in less of a traditional KPI but more of an understanding of our contributions towards the business’ overall sales performance.
KPIs That Empower
Central Technology and minicabit are prime examples of how building KPIs that directly tie to the business objectives can encourage collaboration and empower all parties involved. Their decisions to disclose their financial information to Evoluted allowed us to establish new KPIs and implement new strategies within their advertising accounts.
For minicabit, we shifted away from a strict Target CPA bidding strategy and increased focus on Maximise Conversion Value, allowing us to influence the bidding strategy based on the Gross Profit values. For Central Technology, we have been able to adjust our focus to the long-term, identifying seasonal trends within the ROI data to ensure we invest the budget during these pique months when leads are generated, even if sales won’t appear for several months later.
The Conclusion
Targets and KPIs are crucial for marketers and stakeholders to understand their progress and performance within projects, whether it’s a one-off project or a long-term retainer. However, inaccurate KPIs or targets that do not reflect the business’ overarching objectives can cause misunderstanding, tension and confusion between stakeholders and marketers.
The power of accurate KPIs doesn’t just benefit the business’ digital advertising; it can be applied to Organic, Content and Digital PR, too, and I’d even go as far as saying this is where its full potential lies. By working with stakeholders to create accurate omnichannel key performance indicators, as a collective, you can better understand the marketing mix that is best suited to helping the business achieve its goals. This will also allow you to better factor in multi-channel customer journeys, assisted conversions and the power of top-funnel content and channel.
However, this is only possible with the commitment from both stakeholders and marketers to ensure business objectives are clearly communicated and the impact and contribution of marketing efforts are measured directly against these objectives.
If you ever find yourself struggling to create marketing KPIs that will truly empower your marketers, get in touch via LinkedIn or the Evoluted website, and I’ll be happy to help you get started.