Out dated campaign management doesn t work! Time for new online marketing KPIs

Transcription

1 Out dated campaign management doesn t work! Time for new online marketing KPIs Shop2market Whitepaper August 2013 Author: Matthijs Jorissen

2 Time for new online marketing KPIs Most webshops use Performance Indicators such as the number of visitors, conversion rate, number of orders, and costs per order (CPO). They are supposed to contribute to profit growth and your webshop s success, but all of these indicators actually raise all sorts of questions: Is the number of visitors a good indicator of your webshop s success? We see many webshops clean up their online marketing channels in times of crisis, which can result in fewer visitors and more profit! The conversion rate is another indicator that doesn t say much about the webshop s success. You can quickly double your conversion rate by excluding traffic with a low conversion rate. However, that doesn t tell you anything about the webshop's profitability. And what about orders being placed? All orders are the result of 5 to 10 earlier touch-points (assists). The most misleading performance indicator is possibly when the order is allocated to the last visit, meaning the contribution from other touch-points is actually ignored. This also applies for the CPO, which is based on the costs of allocated orders. Campaign management that is based on these indicators doesn t tell you anything about its contribution to the webshop s profit growth. Even worse, it can restrict your growth. So what are the meaningful indicators for online profit growth? This whitepaper describes which KPIs every online retailer should use for the continuous improvement of online results. Why are Performance Indicators important? E-commerce management relies on choices being made on the basis of KPIs. Good KPIs lead to structured profit growth, which is the long-term objective of any webshop. The opposite also applies: wrong KPIs lead to wrong decisions. What happens for example if a webshop uses the CPO as the basis for making its decisions? All analytics systems allocate orders according to the last visitor; this principle is known as the last cookie counts. This makes it seem that publishers who focus on the last phase in the buying process are the most valuable. Examples of this include cashback sites, discount codes and retargeting. Time for new online marketing KPIs 2

3 If an e-commerce manager makes decisions based on CPO, more and more of these types of channels become connected. And this is at the expense of publishers who focus on the oh-so-important orientation phase, which results in a drop in profits! A drop in profits! Most e-commerce managers instinctively know that such decisions would be irresponsible. And because these types of KPIs conflict so much with gut feeling, they are only used for reporting purposes. This results in lots of important options being excluded, and decisions not being taken or postponed, because they are not substantiated. This is of course also harmful for profits. When is a KPI a successful KPI? There are many possible KPIs for every objective. To increase recognition and be able to give responsibility to teams and/or employees, the skill lies in limiting KPIs to a number that are: SMART (Specific, Measurable, Acceptable, Realistic, Time-related) Not financial Continuously measurable Actionable (i.e. able to take action when objectives are not achieved) Are you in control? Do the check! Do you control your e-business or does your business control you? Do the test: Do you have a planning with the goals per channel per month? Do you have CPO or ROI goals included in this plan? Can you provide a monthly report about your predicted annual results? Do you know what actions to take if your goals are not met? Can you estimate the effect of those actions? Do you regularly check the actual costs and orders to validate your analytics data Does your plan include return ratio s per channel?...these types of KPIs conflict so much with gut feeling. Time for new online marketing KPIs 3

4 Most webshops want to see their profits grow, particularly in the long term. Gross profit is formed of the amount of sold products multiplied by the contribution margin per product. In this whitepaper we will convert this profit objective into SMART, measurable and actionable KPIs for the Online Marketing department. The right KPIs: Return on Marketing Investment Good KPIs for online marketing departments are KPIs that determine the Return on Marketing Investment (ROMI): the profit percentage per order. To make this KPI actionable, we have to look at the choices a marketing department can make, such as: which advertising channels am I going to use? what costs per advert and per publisher are acceptable (bidding)? which adverts/products am I going to place on which advertising channels? which affiliates am I going to use? which pricing maximizes profits? In order to be able to make the right decisions, the Return on Marketing Investment (ROMI) for each ad needs to be clear to each publisher and each affiliate. How do you determine the Return on Marketing Investment? The ROMI consists of a number of elements, i.e.: 1. the contribution margin for each product 2. the advertising costs per product 3. the actual number of products sold (excluding returns) 4. the contribution that an advert makes to a successful order Contribution margin The contribution margin (CM) per product is the maximum amount that can be spent on marketing per product. If the amount increases, there is a possibility of making a loss. The order contribution margin is the sum of the contribution margin for the products in the basket. The advertising costs per product The advertising costs per product can depend on the keyword (Adwords), the bidding, or the category the product is included in. In affiliate networks, this is often a percentage of the order value. An API connection with the advertising networks is required for these costs to be made clear per product. Actual number of products sold The number of orders (conversions) must be known for the ROMI to be determined. All orders for which the advert is involved are applicable here, and so not just the orders placed according to Analytics. All returns and cancellations also need to be excluded. In the fashion industry, the returns percentage can be more than 30%. This percentage can also vary greatly per publisher, so a webshop s net orders (and order value) form a crucial part of the ROMI. Time for new online marketing KPIs 4

5 An advert s contribution An advert s contribution is a complex factor. An order is after all always the result of several touch-points (both online and offline). The contribution of each individual touch-point (also called an assist) to the making of an order is essential for determining the ROMI. The contribution of each advert can be determined by statistical analyses. Several factors have to be considered here: the relevance of the advert in relation to the order basket. the engagement of the advert (such as the duration of the visit) the visit frequency the type of visit (home page, category page, product page) Shop2market has patented an algorithm for determining the actual contribution of each advert based on the factors above. Determining the ROMI To determine the ROMI, we first need to calculate the costs per order (CPO). We then don t divide the costs by the allocated orders, but by all orders that the advert has contributed to. We can then determine the contributed CPO (ccpo) in combination with the advert's contribution: Contributed Orders = Assists * Contribution Naturally, we do not include cancelled orders. Disregarding these cancellations, we calculate the Contributed Net Orders using the following formula: This ccpo can already form an important and valuable KPI. Because the contribution margin per product can vary so much, the ccpo is also not a KPI for the profit growth. Based on the factors above, the ROMI is calculated using the following formula: ROMI = ccpo = Actual Ad costs Contributed net orders Contribution Margin - ccpo ccpo x 100% When the ROMI per product and per affiliate is known, the ROMI can also be determined per category and per advertising channel. The marketing department can easily make its choices based on this insight. Most analytics systems are not suitable for determining the ROMI. Good campaign management systems can do this, however. This type of campaign management system is therefore essential for a webshop s profit growth. More and more international webshops are starting to use ROMI (and ROI). These webshops can make decisions faster and see their profits increase spectacularly. FACEBOOK 15% ORGANIC 35% 11% RETARGETING MIN. 21% 18% SHOPPING.COM CASHBACK 0% Figure 1: This customer journey is composed of 6 assists. Based on the statistical algorithm, organic has the highest contribuiton Time for new online marketing KPIs 5

6 An alternative for ROMI If product or category margin does not vary, the Cost of Sale (COS) or the Return on Ad Spend (RoaS) is a good alternative. The ad costs of both COS and RoaS are related to the order value: COS = ROAS = Ad Costs Contributed Order Value Contributed Order Value - Ad Costs Contributed Order Value x 100% x 100% Again, the Contributed Order Value is used in stead of the Assigned Order Value. KPI of the future: Customer Lifetime Value The ROMI is a big step forwards. But there is still always more to be desired. We are receiving an increasing number of questions about ROMI based on the customer lifetime. In this case, we don t look at the contribution margin and ccpo per order, but at all orders in the customer lifetime. This new development offers interesting options: by looking at the ROMI per customer, you can recruit potentially high value customers with strong propositions. As soon as you can identify the high value customers, you can get them on board with attractive (loss-making) offers so that you can then develop them over their lifetime. But you have to be able take advantage of this potential value! This is the sum of the order value the advert contributed to: Contributed Order Value = (Order Value * Contribution) Assists Both COS and RoaS do not allow the product margin or pricing to be used as a variable for profit optimization.... most e-commerce managers instinctively know that such decisions would be irresponsible. Time for new online marketing KPIs 6

7 Conclusion Existing KPIs such as traffic, conversion rate, orders and costs per order are not suitable for online campaign management. The choices that a marketing department makes must be based on the Return on Marketing Investment (ROMI). A good alternative to ROMI is the COS or the RoaS. However, you need to take into consideration that only the contributed order value may be included and the product margin may not be used as a variable for profit optimization. The existing generation of analytics systems do not take the advertising costs, contribution margin, returns or the contribution that each advert makes to an order into account. These systems are therefore not suitable for online marketing departments. But the next generation of campaign management systems do provide this insight. Webshops that are making use of them are seeing their results improve dramatically. Would you also like to be able to make marketing decisions based on the Return on Marketing Investment? Matthijs Jorissen, CTO, Shop2market matthijs@shop2market.com Uriël Ballast, CEO, Shop2market uriel@shop2market.com Time for new online marketing KPIs 7

8 Utrechtseweg TK Hilversum The Netherlands Shop2market is market s leading online campaign optimization solution saving customers 30-50% marketing budget based on our patent pending algorithm. Shop2market serves over 800 webshops in more than 19 countries with offices in the Netherlands, Germany, UK and France, and tracking over one billion visits each month Shop2market