How to measure the success of online advertising

One of the hardest things about advertising is measuring the impact. It’s easy to get numbers on how many people see an ad or how many people click on it, but it’s not as easy to find out how many people buy. And even if you have access to this data, it still doesn’t tell the whole story. 

There are some clear measurements that you should be focusing on in addition to your standard objective goals (sales, leads, follows, etc). Some of them are related to the immediate success of your online advertising campaign and others are indicative of the long term success of your campaign. 

Think long term not short term. 

When looking at your advertising results, you might be able to see that your ad generated x amount of sales. This is great, but it also doesn’t tell the whole story.  A lot of the long-term impact of advertising comes long after ads have ceased running.  In fact, studies show that the long-term effects of advertising are 1.8 - 4.5 times greater than the instant impact.

This is because evaluating advertising based on one purchase ignores a lot of advertising’s benefits, including any future purchases made by that customer. If you’re a business owner reading this, I’d bet a lot of your customers buy from your business more than once.

As a result, evaluating your ads based on the value of the first purchase is kind of like deciding the result of a sporting match at half time. You might think you know what’s going to happen, but the result is still up in the air. That’s why it’s important to have a really strong grasp on your business numbers so that you can forecast into the future and attempt to determine how much one new customer is really worth to you.

So let’s dive into the numbers.

Know thy numbers.

“Know thy numbers, know thyself”

- Socrates, probaby

While it’s unclear if Socrates ever said this (hint: he didn’t), it is clear that knowing your numbers is extremely important in business. If you’ve ever watched Shark Tank, you’ll know that the Sharks will always quiz the business owner about their financials, and the way they handle those questions is one of the make or break points for whether or not they’ll get an investment.  

But you’re not looking for an investment, you just want to run some ads. 

Well, that’s the trick. Running ads is like an investment. You need to think long-term to fully understand the potential returns. For the Sharks it’s not about how much money they can make in 6 weeks, they’re thinking about the returns over months and years, and that’s exactly how we should look at advertising.

For long-term thinking, one of the most important metrics is something called ‘lifetime customer value’. This metric is just what it sounds like - it’s a number that will estimate how much a customer is worth to you over the lifetime of their relationship with your business. To find out this number, you need to have a handle on a lot of smaller numbers, which is what we’re going to run you through in this article.

In this article, we are going to explain profit margin, average order value and purchase frequency, which all work together to help us determine the short term and long term benefits of ads. If you haven’t heard of these terms before, it’s probably best that you postpone your Shark tank audition, at least until after you’ve read this article. 

Let’s break down the numbers.

Numbers can be intimidating, overwhelming or ‘scary’ for some business owners, but they don’t have to be. In fact, once you learn some of the basics, numbers become fun (at least we think so), because they start to tell you so much about your business and your customers that you might not have known. And when you know your numbers it’s much easier to set realistic goals and targets for your advertising, which is the first step to running successful ads.

So let's break down all of the numbers and metrics that you should be looking at that will turn your ad game around. Because when it comes to making sense of the numbers it really is just as simple as focusing on the right numbers and ignoring the rest.

Short Term Measurements for Ad Effectiveness

Average Order Value

Revenue / number of orders

Average order value (AOV) is the first of our important metrics. This metric can go by a range of different names, but they are all essentially an estimate of how much you expect a customer to spend per sale.

Different customers buy different items of different values and in different quantities which just means you need to take the total sales revenue and divide it by the total number of sales (so that you have a number based on a large sample). 

Calculation: AOV = Revenue / orders.

Example: In a month you’ve generated a revenue of $100 and 5 made sales.

$100 / 5 = $20.

This is really important information to know, because if each sale is worth only $20 on average, you don’t want to pay $50 on ads to get a single sale.

Pretty easy hey? To make sure this number is accurate, take it from a significant number of sales - depending on how many sales you make in a day or a week, you might need to take your total revenue from a month, three months or even twelve months.

Profit Margin (%)

Profit / sales price

I’m sure you’re well aware of what profit is. That’s how much money you take home, or to the bank, or wherever you keep your money because you’re an adult and that’s none of my business.

But while you might be aware of how much profit you’re making, having a clear picture of your margins is a slightly different story. 

Here’s an example of why it’s important to know your margins.

Consider which is better: Making $10,000 in sales at 50% profit or $15,000 in sales at 30% profit. 

$15,000 in sales always sounds better right? It’s $5,000 more in sales! But when you look at profit, the first scenario wins out.

Scenario 1: $10,000 at 50% = $,5000 profit

Scenario 2: $15,000 at 30% profit = $4,500 profit.

So you can see why understanding these numbers is important.

Calculation: Profit margin = profit /revenue

Example: $20 profit from a $60 product.

$20/$60 = 33.33% 

In the above example, there are two numbers that you could use to set your advertising targets. If you want your ads to bring in revenue then you’ll need to bring in new customers for less than $60. However, if you want to make a profit (highly advisable), then your target acquisition costs will be based on the $20 profit.

Long Term Measurements for Ad Effectiveness

Purchase Frequency

Total orders / number of customers

As you know, some customers are frequent purchasers, some buy occasionally, and others buy only once, or very rarely. 

As we mentioned before, the long-term effects of advertising are 1.8 - 4.5 times greater than the initial effects, which makes a lot of sense if you consider that the customer might come back 5 times and also tell 3 friends to try your product.

This means it’s important to understand how often customers buy on average. Knowing that, on average, a customer makes three purchases from you allows you to understand the long term investment of your ad, beyond the immediate purchase.

This is all about taking a long-term view of advertising and understanding that when you get a new customer they won’t just buy once, which means your ad should really be measured against all of the sales that customer will make. The benefit of understanding how many purchases the average customer makes allows you to estimate how much you should pay to acquire new customers through ads, which makes it easier to set realistic targets.

Calculation: Purchase frequency = Total orders / customer count.

Example: 200 orders from 50 customers

200/50 =  purchase frequency of 4.

Lifetime Customer Value (profit)

Average order x Purchase Frequency / profit

It’s been a common theme throughout this article that a customer is worth more than one sale, and that’s why a metric like ‘Lifetime Customer Value’ exists. This is a measurement that attempts to calculate how much a customer is worth to your business over the long term. It’s this measurement that gives you a true indication of the effectiveness of your ad campaign and the true revenue it’s generating for your business. 

Calculation: Lifetime value = (average order value * purchase frequency) / profit margin (%)

Example:  Average order value of $100. Purchase frequency of 5. Profit Margin of 20%

(100*5) / .20 = $100.

In the example above, the numbers show that every new customer gained actually earns the business $100. So if we apply this to an ad we’re running to determine if it’s effective, this is how it would look:

We’ve spent $1000 on running an ad on Facebook and Instagram that made 40 sales for $4,000 revenue and $800 profit. If we just look at the single sale, the ads were a disaster because we lost money.

However, if we know that our lifetime customer value is actually $100, this means that the new customers we’ve just added will be worth $20,000 in revenue and $4,000 in profit, meaning this ad campaign is actually effective in ultimately growing our business.

It’s all about growing your business over the long-term.

While it might seem like it’s taken a long time and a lot of math to get here, you can see why the lifetime customer value number above is really important. 

If you’re trying to acquire customers for a small amount and measuring the success of the initial sales result compared to the cost of the ads then it might look like they are failing miserably. This mindset is, in part, why a lot of businesses think ‘ads don’t work’.

The reality is it’s hard to see a huge return on advertising when you pay for new customers and look at how much they spend on their first purchase. But if you instead focus on keeping them and making sure they come back three, five, or ten times then it’s a lot easier to see the return on your investment. It then becomes a lot easier to set realistic targets for your advertising, so that you feel confident you’re achieving your goals with your ads.

So instead of setting targets based on the short-term results, we hope that this article will help you to figure out your lifetime customer value and start setting targets that allow you to grow your customer base and ultimately grow your business over the long-term.