by Hagan Major, president and chief operating officer of YellowHammer
When running a new startup, entrepreneurs have to wear countless hats, including (and especially) one for marketing. Understanding how to determine a campaign’s success isn’t a mystery, but it does require learning the nitty-gritty of the digital advertising world.
Facebook likes are great if all you’re using to advertise your business is Facebook, but when it comes to truly reaching your target audience and current customers, understanding how every effort translates to income is nearly impossible without clear metrics guiding the way.
Metrics You Didn’t Learn in School.
It’s important at the beginning stages of a business to see the big picture of where you’re going, but it’s also easy to get caught up in the details — particularly when it comes to building your customer base.
Using return on ad spend (ROAS) and lifetime value metrics will allow any entrepreneur to gain a comprehensive understanding of where the business is headed. Both of these metrics combine multiple pieces of data to show a full understanding of how much you’re spending and how valuable that spending is for your company.
To get started, every entrepreneur must establish a ROAS baseline. Without an accurate ROAS, it’s impossible to evaluate the success of ads across different channels and to determine how you stack up to competitors. A lot of businesses historically focus on cost per impressions, clicks, or conversions, but they lack the insight to tie those conversions back to money spent.
ROAS gets specific when measuring dollars received for dollars spent on each advertising channel. To calculate your ROAS, simply divide revenue by spend, and you’re on your way to understanding how much each conversion is actually worth.
When the ROAS metric is set, entrepreneurs should then calculate the lifetime value of each customer. This calculation is a bit more difficult, but it provides a clear picture of how much you can and should spend to acquire a new customer. If it takes $40 to acquire a user who spends $65 over six months, the campaign comes out ahead.
Calculating your loan-to-value ratio (LTV) requires clear data, including revenue collected from a customer in a given period, profit margin, churn rate, and retention costs. All of these factors rolled in to the LTV formula determine how much spend is needed for each customer.
Connecting ROAS and LTV.
Incorporating these measurements isn’t easy, but much like building a house, proper planning and careful construction can make the process a lot easier. If you’re an entrepreneur looking for a clearer picture of your marketing efforts, the following tips are for you:
Build the basement before the attic. Measurement has to be part of your original business plan or “SWOT” analysis (strengths, weaknesses, opportunities, and threats), or it simply won’t happen. Before turning anything on or opening your storefront, make sure all channels are in place. Tracking and measurement must be built in before starting construction on a new landing page.
Evaluate every potential channel’s tracking capabilities and relevant metrics. You won’t know your lifetime value right off the bat, but if you’re collecting the right kind of data, you’ll have a better guess of LTV down the road.
Use data as the foundation, or fall apart later. It’s surprising how many people don’t have the basic data systems in place to record and calculate LTV and ROAS properly. I’ve seen clients with gorgeous websites, carefully crafted customer funnels, and intuitive user design, but absolutely zero systems in place for tracking data.
While most entrepreneurs have a rough understanding of how much they’re spending and how much they’re bringing in, they lack this data information at a granular level. Correlating information from customer relationship managers to landing pages (and from 1-800 numbers to retail outlets) requires building every system with data as its foundation. When considering any new system of project, consider how data will play into its use.
Create your own insurance policy. Both entrepreneurs and large corporate giants fall into the trap of relying on a single insurance policy. Zynga, for example, put all of its efforts into building games on Facebook, which later turned around and asked Zynga to back off.
Many entrepreneurs struggle with diversifying marketing channels once they’ve found one that works. However, when measuring properly, you have the freedom to try digital trends and place safe bets on new channels. Instead of crossing your fingers and hoping your current ad buys hold steady, try out the new options hitting the market.
While I won’t discount the value of measuring cost per lead or cost per click, measuring data in relation to how it affects revenue and growth is the only way to make educated decisions on where to take your company. Have fun building your business, but don’t forget to start with the right materials.
Hagan Major is president and chief operating officer of YellowHammer, a New York City-based performance trading platform that provides programmatic buying solutions for advertisers and agencies. As COO, Hagan is responsible for YellowHammer’s corporate strategy, client performance, and distribution.
