046. Measuring the Revenue Impact of Digital Advertising

Foreign. This is Emilio Garcia. Welcome to another episode of Demand Gen Studio. With me is Gabby Garcia. How are you, Gabby?

Hi Emilio. I'm fine, pure fine. How are you?

I'm doing great. Happy to be back. I worked for a few days out of the office and for those of you watching, I, I came a little bit, you know, like burned from the, from the sun. So. But it was a nice, a nice trip. So I'm really happy to be back at the Mangen Studio. And today we will be talking about a topic of, you know, it's a favorite of mine which is the impact that digital advertising has on revenue. So we have lined up here a little bit of a, of an outline. I think you will find it very valuable and yeah. Gabby, do you have any, any you know, like intro comments about the topic?

Yeah, I like you said something that is like, like your kind of your favorite topic to talk about. I remember one of our episodes that you talk about Roy in itself like something that we're going to cover on this matter and it was so interesting for me because I was not like into this topic until I was uh, and that was, I was reading some, some interesting things about, you know, like things that you discover through, through the information that you find on the Internet. And it is something that is I guess underestimated in some points along the, the way. We're gonna try to talk about why it's important and what has to do with digital advertising. And it's just because we as markers, like I'm going to talk about that position, we saw it in a different way that higher positions in a company see it. Right. So this is something that is going to be covered and this is for me the most important part that we're going to talk about and the way that we as markers can take advantage of the information that we're going to talk about today and how other higher positions in the company can actually see it as it is like why it is important to see it as. I'm gonna say like a calculation with like a long term type of thing and not just focused on the short term metrics that you have to cover along the way or the ad campaigns that you, that you see all time. So that's something that I think it's like a key point that we're going to cover today and something really important for me because it was like, you know, like I didn't say that way because all the time I am looking for the short term metrics and it's not, it's not that that doesn't matter, but it is like a link into the ultimate level that you're going to cover about return of investment that we're going to see today. So that's something I want to say.

Say there's you, you chose a great, you touch a great point. There's this big balance or challenge on, especially on advertising because you are doing that extra step of spending money on top of the time and resources that you usually invest anyway for any marketing endeavor. And the, the challenge or the balance is that you know, the more marketer oriented person will say if you want sales from this effort next month or next week or even this quarter, then you don't have a marketing problem, you have a sales problem, right? You, you need to have more opportunities, you need to have more salespeople, you need to be better at closing because marketing in the short term is not gonna solve your sales or revenue problem problem. So the, the and the very end of, of the spectrum, one side of the spectrum, I, I, when I have that position, I tell clients the role of marketing is earning and retaining the attention of your potential buyers, not to close revenue for tomorrow. That's that in the best of cases, the role of sales. And you need a strong, healthy pipeline to actually accomplish that on a, on a, you know, possible way in a short term. However, I do understand that at the end of the day, everything that we do within a company, not just marketing but other functions, have to impact somehow the ability of the company to generate revenue. So there are ways to attach some of the value that marketing is creating to sales, to revenue, to income. And that is especially important on advertising because again, I feel that it shouldn't be the case. But when you're doing efforts where you are not actually paying anyone for showing up on your platform, you consider that free. It's not technically free anyway because someone has to do something right? If you're gonna appear on search engines and do SEO, someone has to write a comp piece of co content, someone has to find the best way to get it indexed and maintain that position. Some link building and all that require resources either in house or you pay someone else to do it. The same goes for free social media. It's not truly, you know, truly free. If you want to really show up and bring value from that, you need to do, you know, a lot of learning, a lot of work. So it's not truly free. But still, if at least in the mind of some of the executives, it feels that you do kind of like investment and stay There and you're not spending more time or money especially to keep it the way it is. And it's not the same with advertising. With advertising you're spending every day you're very conscious that you're paying for that traffic because you have, you know, cost per click and cost on all that. So do you feel the need for measuring the impact that revenue is having on the advertising? And this is where you know the different ways that you can measure will impact how you see the investment. And that's what we are pretty much we're going to try to talk about today. What are the different models? And obviously also to understand why it's important to see which one do you want to use and in what situations. It does make sense.

Yeah. And something that you say like about is ways important, right. And we know that this metric or key metric that we'll see at the end of the day, some, like I said, some of the higher positions will just ask you about like yeah, whatever the short term metrics. Tell me what's the, the return of investment at the end of the day, right. And why is important? Well, that, that's because we can by knowing, right, the return of investment, we can reallocate or allocate better taking better decisions on how we allocate that advertising budget at the end of the day. We put our effort as marketers on every single initiative that we have and that we work every day. And the return of investment is just a way of measuring that and know which initiatives are working, which ones we have to. Let's just say that improve and which ones are have more value for the goals that our company has. And how can we actually reallocate that budget into the ones that are actually making success? Let's just say in a way, right, that I, that's the, my opinion about why it's important to actually measure that, that revenue and the impact that it has on digital advertising.

Correct. Now, the first model that we will explore, right will be the cost per acquisition or cpa. And the first thing that probably makes sense to clarify is that that acquisition can mean many things. You decide which, what does it mean? It can mean the cost of acquiring a customer. It can mean the cost of acquiring an opportunity where you have a quote or it can mean just the cost of acquiring a lead, someone that downloads a piece of content or that fills a form on your website. So depending on the meaning of acquisition, it will change the cost. Right. It is pretty straightforward in theory. What you do is that imagine for example that you Say I will consider CPA as the cost of acquiring leads. Then you take all the leads or contacts that have, fill a form or make a phone call or start a chat conversation at your website, for example, if you are sending traffic to your website over a certain period of time, it can be, for example, a month. And then you use that number to divide against the cost of the investment that you have done. Typically just the ad spend, but you can add on top of that more things. You can say, well, I will also add to the cost, not just the ad spend on the platform, but also the time of the company or the person or the team that is managing that channel for me. And so that way you will have the cost per lead or that, which usually is the way that you measure it when you say cost of acquisition of a lead and become cpl. So it will be the cost per lead or the cost per opportunity, or the cost per customer, right, of acquiring a customer, which is usually called cac. So that is pretty straightforward. I see CPA as a model that is quite popular on, especially in the B2B world. And the reason is because usually the revenue side of it varies largely, right? So for B2B, sometimes some clients will have a very large projects and some, some others will have very small projects. The time frame will also change a lot. Some will be, you know, one engagement, some of them will be months, some of them can be years. So to kind of normalize, especially to compare to auto channels, CPA is a great way to just say, well, am I spending maybe $500 per lead or $1,100 per lead on a paid channel? And I compare that to other channels that might be organic, other channels that are not digital. Where I compare between platforms, right, I can say, well, cost, cost per lead on Google is X amount, and a cost per lead on LinkedIn ads is a different amount. And then I compare the cost. The, the challenges with this model are that it varies, as we were saying, depending on the stage. So, for example, usually what can happen is that you have a channel that has a high cost per lead and you have another channel that has, you know, three or four times lower cost per lead. And you're like, well, this is the one that I should, that I should invest into. But you have to follow through because if you don't, what might happen or you might, you'll be discovered is that maybe the channel that is bringing you very cheap leads has terrible conversion rates for opportunities or even customers. And then you are spending very little but on leads that don't close into customers or that do not become opportunities and or they do it into so lower rates that now your SDRs and your sales team, your closing team is working on potential leads and opportunities that will not become business. So that is, that is something also important. If you are in your cost of acquisition, you are not considering the time and effort that sales is investing on working with those leads then because you are using a channel that is bringing people that is very early in the buying cycle and they need a lot of education still something that they can do on their own, they can do on their own instead of, you know, investing time with your sales rep when they are not ready. Well, and will end up happening is that your cost of acquisition at customer level will be too high for that channel. But it is a great start, again, a great way. Especially if you don't have the numbers for average revenue that a client will bring and for the average time that customers spend with you or even if you have those, when you don't have that information for the channel that you are testing, that's the other reason you might use cpa. And it's because maybe at the beginning you don't have a lot of clients from that channel because exactly that's what you're doing. You are launching this new initiative. So you have no idea how much revenue will bring for per client and you have no idea how long they're going to stay with you. And you don't want to use averages from other sources or this is the first time that you're truly measuring those KPIs and therefore you don't have a good reference. CPA will be a great way to start. So just again, be mindful that what you define as acquisition impacts that number. That's one big criteria. And the second one is that the cost component also is something that can vary. Right at the low end is just the ad spend. And then in the middle stage is the ad spend plus people and technology to get that acquisition from the marketing side. And the most sophisticated or the most complete definition of cost will be to also include the cost from the sales side. Right, Both people technology. So if you add up all that, then you will get the true cost of acquisition. Obviously you can get it to the point where you measure the cost of acquiring a customer, if that makes sense. Right. So that's one big model that you know, you might use. The second one, the return on ad spend model, it is also very popular, but I see these more more be used more widely on either B2B SaaS where the cost of the software itself is well understood as subscription model. For example, you have some established contract lent times and transactions values that are well understood like packages or primarily in D2C where you can measure all the revenue through transactions that happen on your e commerce website, right? So imagine you have a Shopify or any other kind of e commerce website and you can measure all transactions that happen and you have very good information on the value of the products, how many of them are purchased, even your profit margins, right? If you say, well I, I sell this widget at $50 and I know that the cost of that product is just 25 or $15, then I, my margin is the rest. So if you have those numbers, ROAS is a great model because in this one you introduce the concept of the revenue that you're getting and you compare that to the cost of acquisition. ROAS is typically used especially for Google search or for search pay search as a model to optimize the algorithm, which I find very helpful because that way you determine how much are you willing to pay based on the kind of transaction that you might get. If you have low, low cost products or low, you know, value products, then you will not be willing to spend a lot to acquire new customers. If you have higher value products or you have packages or you know, ongoing transactions, then your return on investment will be higher. And so D2C typically uses this model more and obviously requires a lot of data, right? It requires connections with the, with the revenue model itself. So typically E Commerce is the one that will take advantage of it. It can be done on the B2B side, but it will, requiring it will require feedback the revenue that you create from the businesses. And typically the biggest challenge is cycle length because on D2C your sales happens pretty quickly after that click, right? Rarely someone will not buy right away if they're willing to buy and if they wait, it will be less, you know, like a few days, maybe weeks, no more than a month. But in B2B the problem is that your sales cycle might be three months, six months, sometimes a year. So getting that feedback about the revenue takes a long time and that's why cost of acquisition makes more sense. So but if you have quick feedback on revenue and, and especially if you know your profit margins, then ROS becomes a very good, a very good way to measure cost and it's usually expressing percentages, right? So that's where you get the, you know, I, I'll get $3 of out of every dollar spent on advertising. And the same precautions apply here. Being on the cost side, what would you consider cost will be either just the ad spend, which is the simplest way to measure it, or you can say well will be the ad spend, ad spend plus the time or resources that I spend on the marketing side, plus any transactional cost from the sell side, right? Like you might have transaction fees. Typically if you are D2C you will not have sales rep, but you might have some support to, you know, provide help for the purchase before it happens. So you might include that on the cost side. And ideally if you have the margins of the products, then it means that for you the, the cost includes the cost of the product itself. So you can include that on the cost side or you can do it on the return on the, on the, the value that you're bringing as well. The easiest thing that you can do is just to count the cost of the product itself, right? How much people is paying price. But truly you shouldn't do that because a big chunk of that price is not your money. You, you have to buy the product itself or manage factory or you need to spend materials. So truly the, the return on the ad spend will be against the profit that the product can bring, right? So the next stage will be to discount the cost of raw materials. And if you can just count the net profit of it, the removing expenses, then what will be even better? But again that will depend on the sophistication of your measurements to, to use it. In both cases though, and this is on the area of, you know, when alternative method methods of measurement will be that at the end of the day you need to have a good idea of how long a client will be a client or how many times they will purchase from you after they become a client. I usually use this example from Starbucks, right. Which is if you think about the return on investment on a Starbucks Starbucks product or any other kind of restaurant or food provider like Coca Cola, similar brands, you can't measure on the first rank that they, that you know that you buy from them, right? Because that's only 5, $10 at most. You measure by the many, many times that the same person will continue to purchase the product once they're exposed to it, right? And so that average transaction that happens over one year multiplied by the, by the length of a usual client, the cycle of it, of it, which can be decades in some cases, that is the true return on the investment. And, and that's the life cycle value, right? So on, on those, when you have that data, when you are able to measure the life cycle of a client and therefore get as, as, as good as approximation that you can get of all the return or all the, the, the investment or the. Yeah. The payments that they will do over the lifetime. That is a return that you should compare to your cost of acquisition. And the tricky part though is that that's where marketing become more of a, a kindle to a fire, right? Because the only way that someone will continue to buy that cup of coffee or that beverage that you make is that they have a good experience with it. Right. And the Same goes for B2B. And that has nothing to do with marketing, right. So one of the reasons your marketing efforts will have poor return on investment is because compared to the potential revenue they are bringing, your cost is too high. But sometimes it's just that the channel is not good. Sometimes it's just that the product or the service doesn't have the level of experience that allows advertising channels to support it. So you need to change something there, right? Is to lower the transaction costs, increase the lifetime cycle value. And all of that has to do with customer success and nothing with advertising or marketing for that for that matter. So that's the part that is a little bit tricky. That marketing is a kindle to a fire. But you still need those fire logs, right? You need that dry wood that builds a good fire. You, if you don't have that, it doesn't matter how much kindle you throw to that fire, it will just die away. And you will be throwing money at a, at an effort that doesn't retain clients. And that's obviously the part where you can get a little bit frustrated with the return that you have. And it is relevant because when you, when you see advertising, what happens is that you are paying against competitors. They're willing to pay the amounts that you are seeing there. And you will say, well, why so expensive? Well, because someone else is successful at that price point, right? Their, their lifetime value justify the investment. And if you don't have a similar ratio, then for you the child will be very high. Obviously if that's the other way around, right. If you have gray ret, you know, great retain rates and very low churn of clients, then your investment will make a total sense and maybe you will be willing to pay a little bit more to get that extra client. And that's how you drive costs higher for the rest. Right. For your competitors either on search or social media. So those are some things to definitely consider and I hope that you find valuable. I don't know if. Gabby, do you have any comments here?

Yeah, sure. Something about. We were talking about other methods of measuring revenue and we mentioned both that are really important on the CPA and the Rose. And something that you say about Roy E. Rose is just that we, we should not see it as something that it goes against, right. Either while you're using one or you use the other one. It's just that if you want to, let's just say you use Roy for the long term, you use Rose for the short term. Just to see how impactful your ad, your ad spend is going through, right? Yeah. The whole time. And that's something I want to mention and something that I was thinking about and this actually into the topic of other methods of measuring revenue impact is that we should see this as something that happens to us all the time and it's because of the attribution, the type of models that we use, right. And the ones that we are not seeing. And it is because sometimes along, sometimes this happens all the time along the buyer's journey. And the way that people or customers, let's just say make purchases is because a purchase. It's because we see that sometimes we are not seeing the whole picture, right. We're just focused on those metrics that we are trying to, to reach as like I said, like a marketer or someone that has a valuable ticket and has to let's just say focus on that metric and we're not seeing the whole, the whole picture and that, that will give us a key, a glitch of what, what are the methods that we are going to use. The methods that are going to be more impactful at the end of the day. The ones that are going to help us to actually improve the way that we use it like we use those metrics into reallocate that budget that we are going to use, right. And. Or not use on, on those initiatives that we, that we have on. On our ads campaigns or, or on digital advertising campaigns. And something that I want to mention.

Yeah, yeah, I agree and I, I didn't dive a lot into attribution, but you are attribution model. But you're right, this is all being considered that you're using an attribution model that gives some recognition to your investment and depending on how you measure that impact, it will change tremendously the cost of acquisition and the return on investment. Right. If you're using last click or first click or you are using any other model where you attribute some impact to your advertising channel along the way, which usually should happen, especially for channels where there's no intent or maybe little intent like display and social media that will change dramatically the way that you measure. And obviously this is an ongoing, you know, like, evolution of the, of the medium because more and more things are tracked, but at the same time more and more things happen digitally that are not tracked. Right. So it's a, it's a race between the two ideas, obviously because of privacy concerns, but at the same time because we digitalize more and more of our interactions and engagement on social, you know, on, on the Internet as time goes by and we spend more and more time on digital channels and even traditional things are getting digitalized. Right. And measure in ways that we are not aware yet or necessarily all the time. So those data points are going to continue to improve attribution models, but there's gonna be always a part of it that will be out of our vision and where we will have more of a trust that the channel works because we are showing the right message to the right people in the right places, even if we cannot measure 100% of it all the time. Right? All the time.

And online. Because some, some things happen of like, like, like some of the, the things that I, I've seen. It's just like the way I bought things sometimes gives me an idea of how this works. And it's because I can, let's just say when you make multiple touch points, that's how it's, it's called on, on the website and you go to another place and then you return about three days later and then you decide to make the purchase and it's just like, how am I going as a marketer or someone that analyzes data, how am I, how am I going to attribute this, this purchase into the whole journey of this person's behavior? And how are we going to measure that? Like, what's the thing that, what's the key point on, on all that journey that I'm going to say, well, this was the one, this is the, the main impactful thing or metric that I should focus on because that was the way that that person make that purchase. And that's something that happens on either online or offline. And it's like a challenge all the time, right? And I think that's the way that we have to have. And, and this is something I want to mention too, like a good baseline on those metrics and, and knowing how it's going to work for us as markers and like I said, higher precisions to actually focus on the metrics that are going to be aligned with our goals as, as company or as a entrepreneur or whatever the reason is. And, and keep on that in track. Right. Keep that in mind and actually focused on how to improve those metrics and not just focus on either away the, the things that works online or offline or, or seeing other people in your like say competition, how it's working, like how stuff is working for them. That's another, another one that we should be seeing right now.

Yes. All righty. Well, I think we have covered most of the, of the areas that we wanted to share with you today. So again, kind of like a summary, explore what applies to you between cost of acquisition or return on ad spend. Be mindful of the attribution model that you're using and, and that that attribution model is consistent across all the platforms that you are measuring with. And always apply a little bit of common sense as Gavi is mentioning that if you examine your own buyer journey for most of the purchases that you do, it's not all black and white. Yes, I, I just did this one. This one channel was responsible for my behavior. Usually it's a combination of channels and influences from people and things that you cannot measure all the time. So that's the other thing right. At the end of the day, that's the part of the, of the spectrum that we were saying that marketing is in charge of bringing attention. And as long as you're doing that, while it's good to measure, to justify the mix and to also give insights to executives about what are your recommendations. We, we need to understand that we we have to be present in front of our potential buyers for them to learn about us. Right. That that is the initial stage that needs to happen. And the second one is that no amount of marketing will fix about product or service experience. Right. The return is impacted by the cost, but also by the value that you can bring from the customer. And that value comes from the, from the product itself, from service itself. And, and that has nothing to do with marketing. Put you just the foot on the door in a kind of way. So that's all that we have for today. As always, don't miss the next one. Get into the Mangen Studio at our website and get notified for our next event. We are in different social media channels and you can listen to this as a podcast. It has been fun to be back and talked about these topics. I look forward for the next one. And Gavi, as always, thank you so much for setting up this for us.

You too. Everyone have a great day. And until the next one. See you, Willio.

See ya.