1.5 Core Concepts in Marketing Analytics

When companies start to think seriously about their marketing analytics programs, it’s often because they have invested considerable resources in promotional campaigns without a clear sense of the investment’s ultimate impact on revenue. Calculating the return on investment (ROI) The percentage of return an organization sees from its investment in an activity, such as marketing. , of marketing is the focus of many companies’ efforts at measurement. As we have discussed, metrics can have a positive impact on all of the 4Ps, from pricing strategy to product development. Calculating marketing ROI, however, is seen by many companies as having the clearest impact on company revenues. United States companies alone spent $240.7 billion on advertising, so determining this large investment’s impact on income is vital. Marketers are seeking ever more sophisticated ways to determine the impact on their organizations’ bottom line of every dollar spent on advertising.

In this book, we will look at marketing analytics for all types of organizations. While the main focus is on for-profit companies, nonprofits in the U.S. account for more than a trillion dollars in economic activity annually. This means that nonprofits are a linchpin of the global economy, and as their importance remains steady, the sophistication of their marketing has grown. We will be looking at marketing for nonprofits as well in this book, examining how they measure success. Metrification of ROI for nonprofit marketing is no less critical than it is for for-profit companies. Indeed, it can be much more important, as charitable donors examine carefully the amounts spent on overhead activities such as fundraising promotions in contrast to funding provided directly to a charity’s beneficiaries. Measuring ROI for nonprofits often has the same goals as it does in the private sector: ensuring that every dollar spent on marketing drives impact. However, how “impact” is defined will, of course, vary, depending on an organization’s outcomes. Where the for-profit sector aims at profits, nonprofits aim for awareness of specific issues, aid to those in need, or addressing global challenges, and they often spend money on marketing to address those goals. Thus, while the goal of measuring results is often the same, the types of results measured vary. In this book, we will cover both for-profit and nonprofit measures of performance.

It can be said that all of marketing analytics is the measurement of marketing’s ROI. It is the foundational concept that you need to know to get started with marketing analytics.

Key performance indicators (KPIs) Any value that indicates the performance of an organization or activity. For instance, for most companies, sales are an important KPI. The volume of sales indicates the potential revenue of the business, the speed of its growth, and the size of its market. A KPI is not a number; it is the thing that the numbers will measure. are among the most critical tools in the marketing analyst’s toolbox. A KPI is any value that indicates the performance of an organization or activity. For instance, for most companies, sales are an important KPI. The volume of sales indicates the potential revenue of the business, the speed of its growth, and the size of its market. A KPI is not a number: it is the thing that the numbers will measure. Think about your height. It’s the key indicator of how tall you are. You could be 5 feet tall, 6 feet tall, or any height. That would be the measure of your height. But the indicator of how much vertical space you take up is called your “height.” It is the item that is being measured by a number, such as “5 feet.”

People often confuse the term KPI with the metrics that measure KPIs. Sales are a KPI—they are a performance indicator. For a nonprofit, the amount of donations or the number of volunteers attracted by a campaign may be the key performance indicators. They are activities that are important for the organization to measure, in order to gain information on how well the organization is doing. Those are key performance indicators.

Establishing KPIs is the first activity of a well-designed marketing analytics program. Companies need to agree on what types of things need to be measured. Some activities, though important, do not need to be measured as closely as more critical ones. For example, a team may decide they need to closely measure the volume of sales generated by marketing each quarter. That value, volume of sales created by marketing, becomes a KPI. On the other hand, they may decide it’s not that important to measure how much paper the sales department uses each week, or amount of time it takes to proofread the company newsletter. Those are not critical metrics right now. They do not become KPIs. Often, marketing works in close collaboration with executive management to determine the right KPIs to measure. 

It’s also common for different functions within an organization to measure different KPIs. A social media team may measure a range of KPIs related to social media’s performance, such as likes per post and the number of retweets. However, the CEO may not need to know this information. The KPIs used at different levels of the organization will be related to which employee or team needs to know what information.

Another key metric important to the majority of marketers is return on ad spend (ROAS)A calculation of the amount of revenue generated by sales that are attributable to advertising, divided by the cost of the advertising. . This is just what you might expect it to be: a calculation of the amount of revenue generated by sales that are attributable to advertising, divided by the cost of the advertising.

Return on ad spend is calculated as a multiplier, obtained with this formula:

For example, let’s say LuxeUnique spends $8,000 a month on shoppable Instagram ads. Purchases made from those ads total $56,000 in that same month. The ROAS can be calculated as follows:

meaning that the brand earned back their $8,000 shoppable ad investment sixfold.

Where return on ad spend (ROAS) gets complicated is in attributing sales to advertising campaigns. As we will see in Chapter 2 “Internal Data: Many Sources, One Goal”, it is often difficult for brands to connect any given sale to a specific ad. Think about your own exposure to advertising throughout the day. You may see a poster for an upcoming movie at the bus stop during your morning commute, then later, hear about the same movie on the radio. A friend might mention seeing an ad on Facebook for the film. Eventually, you decide to go check it out. Which ad can be given the credit for inspiring your purchase of a movie ticket? All of them? The last ad you saw? The one mentioned by a trusted friend? You can see that attribution of sales to ads can be complex. For this reason, ROAS doesn’t focus on the ROI of a specific ad or even a campaign. Instead, it broadly calculates a company’s spending on advertising over a given time period in comparison to revenue over that same time. Even so, it can be an inexact measure. Whatever time period marketers choose for calculating ROAS, sales occurring in that time period may have been at least partially inspired by advertisements seen by consumers before that period. Despite these limitations, ROAS is an extremely valuable metric. In fact, its value lies precisely in how general it is. It gives a big-picture overview of how effective advertising is, overall, in driving revenue growth. It’s meant to measure the value of a company’s total investment in advertising.

Companies are in business to create revenue; nonprofits are in business to further a mission. In both cases, to make profits or effectively support a mission, organizations have a target audience whom they must engage in performing critical activities. Companies need customers to buy from them in sufficient numbers to stay in business. Nonprofits need sufficient numbers of donors, volunteers, and supporters.

A conversion Any desired action by which a member of an organization’s target audience helps further the ultimate goal of the organization. is any desired action by which a member of an organization’s target audience helps further the ultimate goal of the organization. For a company, a conversion is a sale. On an e-commerce site, for instance, when a customer completes a purchase, that is called a conversion in the language of marketing analytics. On a nonprofit’s site, a conversion may be a donation, a request for aid by an intended recipient of the nonprofit’s services, or a signature on a critical petition. A conversion is when a company makes a sale or when a nonprofit receives a desired important action.

Many organizations also refer to important steps on the way to a sale as conversions. For instance, a software company may consider it a conversion when a prospective customer signs up to try the software free for a month. Customers may not have purchased at the time they sign up for their free month; however, they have clearly entered into a business relationship with the firm. That means that a sales opportunity is likely. This type of action, too, can be a conversion.

Let’s take a deeper look. Wingco is a seller of software for retail-store cash registers, also known as point-of-sale (POS) systems. Margery Smith, their CEO, recently spoke at a business conference. Her talk was on the importance of having up-to-date software for retail stores. After her speech, several retail store owners gave Margery their business cards, asking for her to come to their offices and demonstrate her software. Margery demonstrates her software to more than twenty retail store owners over the next month. Half of them sign up to try out the software in their stores. Wingco’s vice president of marketing, Chad Wynn, considers these trials to be conversions from Margery’s effort to market Wingco by promoting it at major business conferences. It takes some time to set up new POS software, so signing up for the free trial represents a significant commitment to consider Wingco. This qualifies these trials as conversions.

The marketing funnel The series of steps by which a member of the public becomes a brand’s customer. is the series of steps by which a member of the public becomes a brand’s customer. Consumers may start with micro-conversions, such as following a brand on Instagram. The brand then proceeds to nurture the relationship: providing interesting content, special offers, or personal outreach. Consumers then are said to move through the funnel, becoming increasingly engaged with the brand until they ultimately make a purchase.

A typical marketing funnel can look like the following.

Let’s go back to LuxeUnique. The company’s current marketing funnel is fairly straightforward. Marketing analytics provide data on every step of the funnel, as well:

Measuring the marketing funnel is a key activity for marketing analysts. It’s important for a firm to know how many consumers appear at the top of the funnel, in other words, expressing initial interest. How consumers are acquired into the funnel, and what they do once in the funnel, must be precisely measured if a firm is to remain profitable. 

It’s natural for consumers to drop off at every stage of the funnel from initial interest. Not every person who walks into a store will stay to buy. Similarly, not every consumer who goes online to shop will make a purchase. Indeed, research shows that 74% of all online shopping carts are abandoned before the consumer checks out. Brands thus also need to measure how many consumers are dropping out before they buy at every stage of the funnel. Measurement of different efforts to keep consumers in the funnel, comparing, for instance, discounts versus loyalty programs, is another key benefit of using analytics.

Marketing optimization The science of making marketing activities as effective as possible at driving conversions. is the science of making marketing activities as effective as possible at driving conversions. It relies on metrics to measure the effectiveness of different, closely related marketing efforts in order to determine which effort is most successful. Marketing optimization puts data to work in the short term to increase results from campaigns, digital media, and websites. It is typically used in conjunction with testing different creative treatments or offers. For instance, let’s say a barber shop wants to see whether it gets more web traffic if its social media ads have images of models with the latest styles, photos of the shop’s barbers at work, or a mix of both. It can test different images to determine which types get more clicks, deliver more traffic to the site, or get more interactions. It can even track which style of graphics leads to more signups on its email list or to their loyalty program. Using these metrics, it can thus optimize In marketing, producing more of the marketing that delivers results, often by using data. , or produce more of the marketing that delivers results.

For example, website optimization tests different website layouts, designs, or creative options, measuring which options encourage the most conversions. A web team may test different navigation on a website, different text, even different images. They will then look at the data on how many consumers clicked on one variation versus another. These tests are called A/B testing when a single variable, such as changing one picture, is tested. More complex tests that examine multiple variables, such as both colors and pictures, are called multivariate testing. Any optimization that aims specifically at increasing conversion rates is called—not surprisingly—conversion rate optimization. Typically, companies with e-commerce sites run many A/B and multivariate tests per year, testing factors they consider to be important in appealing to consumers. Any aspect of a website, ad, or other digital media can be tested. Companies often test content. They may test different layout options, such as using larger or smaller buttons for making a purchase. Often, they test offers. They may provide some web visitors with a “Buy One, Get One Free” offer, while others may get a 50% off coupon. The goal is always to see which factors, or combination of factors, lead to better sales. Many very large retailers test continuously. If you regularly visit major e-commerce sites, chances are that you sometimes see special versions of the pages you visit and your clicks, purchases, and other actions are compared to other consumers’ who were shown different designs, discounts, or products on the same page.

Any optimization that aims specifically at increasing conversion rates is called—not surprisingly—conversion rate optimization. Typically, companies with e-commerce sites run many A/B and multivariate tests per year, testing factors they consider to be important in appealing to consumers. Any aspect of a website, ad, or other digital media can be tested. Companies often test content. They may test different layout options, such as using larger or smaller buttons for making a purchase. Often, they test offers. They may provide some web visitors with a “Buy One, Get One Free” offer, while others may get a 50% off coupon. The goal is always to see which factors, or combination of factors, leads to better sales.

Many very large retailers test continuously. If you regularly visit major e-commerce sites, chances are that you sometimes see special versions of the pages you visit, and your clicks, purchases, and other actions are compared to other consumers’ who were shown different designs, discounts, or products on the same page.

Not all optimization is aimed at conversions. Micro-conversions, such as email opens, can also be optimized. Think back to our discussion of the marketing funnel. Customers engage with companies several times and in many ways before converting. They may click on an ad, see a blog post by the company, or scroll through their Instagram feed. At all these touchpoints, companies have opportunities to retain a customer’s initial interest. They need to keep that customer interest through the most effective images, text, offers, and experiences, all the way up until the customer buys. All of the micro-conversion opportunities presented to customers, to sign up for an email list or download an app, must be optimal if they are to lead to an ultimate sale. For this reason, successful companies use optimization for all digital activities, not just the point of conversion.

One metric you will see over and over in marketing is click-through rate The percentage of users exposed to a message who then choose to click on a message.  (sometimes spelled clickthrough rate) or CTR. The click-through rate is an important leading indicator of consumer behavior. Often, it’s the primary metric for determining whether a marketing effort is a success.

The CTR simply measures the percentage of users exposed to a message who then choose to click on a message. It can be applied to any digital materials where users have the option to click on a button, text, image, or interactive feature. For instance, let’s say our team at Wingco publishes an ad on LinkedIn, targeting the technology managers of retail stores. The ad emphasizes the benefits of Wingco software, offering retail store tech managers a sixty-day free trial of the software to see for themselves. Imagine that more than 1,000 people in the ad’s target audience of tech managers sees the ad. Of those 1,000 managers, 100 choose to click on the ad. This makes the CTR of the ad 10%. Ten percent of people who saw the ad opted to click on it.

CTR can measure clicks on an ad, on links in an email, or even on a website itself. Anywhere someone can click, marketers can measure it. CTR is a good metric of consumers’ initial interest in the materials on which they clicked. It tells us what ads they found appealing, for instance. However, it does not indicate whether materials were successful in creating sales. Many ads may have high CTR because they are funny or feature cute animals, for instance. They may result in poor sales, ultimately, because consumers attracted by a picture of a cute puppy sitting on a car may not be interested in purchasing the car itself. Amusing or dramatic ads often have high CTRs, yet result in average or below-average sales. That is because relevancy, attracting customers who find the product or service relevant to their needs, is more important than driving traffic.

For this reason, CTR alone is a limited measure of marketing success. It can tell marketers what images, text, videos, or offers consumers find appealing. That is important. It’s vital to place CTR in perspective by comparing it to KPIs. If a company’s KPI is sales growth, did the marketing effort with high CTR also lead to higher sales? Looking at CTR in context with KPIs makes it a valuable metric.

CTR is valuable, taken in context, because it measures immediate consumer reactions. It shows what promotions attract consumers to the top of the marketing funnel. It can help drive sales when used wisely. It is an often misunderstood metric. It is easy to measure, popular, and typically available to marketers on every digital channel. Understanding the effective use of CTR is thus vitally important.