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Bigger Metrics Are Best June 12, 2006

Posted by Bill in Search Marketing.
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In the marketing world, there’s a tendency to assess campaign success in ways that look at individual conversions, rather than considering the big picture. I’m talking about assessing campaign success according to metrics like cost per acquisition (CPA), cost per order (CPO), or through an ROI figure defined as the cost of an individual conversion, compared with the returns that the conversion brings.

Now, scrutinizing every relevant metric–as carefully as possible–is absolutely crucial for developing campaigns. But it’s equally important to realize that there is also a big picture to consider. That means realizing that, sometimes, you can get more on volume than you do on margin; and that pumping a little more money into a campaign can sometimes yield incredible results. And analyzing your campaign at the micro-level won’t let you evaluate those big-picture opportunities. For understanding the big picture, you need to look at overall net profit.

Here’s one example. Let’s say you’re selling apples, at $10 an apple (a little pricey–but let’s say they’re really good). If you have a $2 CPO, you’ve made $8 on every apple; from the vantage point of the individual conversion, that’s a 5:1 ROI on revenue; 4:1 on net revenue. Which certainly isn’t bad. But maybe doubling your investment can increase your orders fivefold–so you’re spending $4 to sell every apple, and your ROI on each transaction is materially reduced; but you’re selling 50,000 apples, say, instead of 10,000. That means you’re bringing in a net profit of $300K instead of $80K. Your CPO went up; your ROI on each conversion went down; but your net profit grew by $220K.

Of course, managing your campaign to the big picture takes a certain amount of risk. That’s because, if you’re investing more on each transaction, you’re bound to hit a point of diminishing returns. And in something as big as an ad campaign, it can be hard to step back in advance and point to where, exactly, that point will be. To avoid that risk, you need to conduct elasticity testing before you push up those CPOs (or CPAs); and you need to be able to pull back your investment, quickly, if it turns out that you’ve miscalculated.

That need for testing and quick flexibility explains why the marketing world hasn’t caught on to the big picture just yet–at least, not as much as it could. The traditional ad world, after all, is almost entirely devoid of reliable metrics; and its ad cycles take place over weeks, months, or even quarters. So it’s very hard to conduct tests in advance–and, if you’ve made a mistake, it can be close to impossible to correct it once you’ve put things in motion.

But online marketing–which is accountable, testable, flexible, and fast–is an entirely different story. That’s especially so in the highly sophisticated arena of cutting-edge search, which offers extraordinarily granular metrics and rapid solutions (including real-time bidding at search’s most advanced levels). Testing capabilities means you can roll out new initiatives with a strong understanding of the landscape; and the ability to shift gears rapidly means you can backpedal on initiatives that turn out to have been miscalculated. And the more complex your solution is, the stronger testing capabilities you’ll have, and the more maneuverable your campaign will be.

Which means that traditional marketing and search are entirely different. In the traditional world, you can be tied down to evaluating your campaign at the micro-level, because seeing the big picture is just too risky. But in SEM, gearing your campaign exclusively around the micro-level means locking yourself into old modes of thinking that can mean a huge opportunity cost.

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