Out dated campaign management
doesn’t work!
Time for new online marketing KPIs
Shop2market Whitepaper
August 2013
Author: Matthijs Jorissen
Out dated campaign management doesn’t work!
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.
Out dated campaign management doesn’t work!
Time for new online marketing KPIs
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.
2
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.”
Out dated campaign management doesn’t work!
Time for new online marketing KPIs
3
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
Out dated campaign management doesn’t work!
Time for new online marketing KPIs
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.
4
An advert’s contribution
Naturally, we do not include cancelled orders. Disregarding
An advert’s contribution is a complex factor. An order is after these cancellations, we calculate the ‘Contributed Net Orders’
all always the result of several touch-points (both online and using the following formula:
offline). The contribution of each individual touch-point (also
Actual Ad costs
called an assist) to the making of an order is essential for
cCPO = Contributed net orders
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)
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 =
Contribution Margin - cCPO
x 100%
cCPO
Shop2market has patented an algorithm for determining the
actual contribution of each advert based on the factors above. When the ROMI per product and per affiliate is known,
the ROMI can also be determined per category and per
Determining the ROMI
advertising channel. The marketing department can easily
To determine the ROMI, we first need to calculate the
make its choices based on this insight.
costs per order (CPO). We then don’t divide the costs by
the allocated orders, but by all orders that the advert has
Most analytics systems are not suitable for determining
contributed to. We can then determine the ‘contributed’ CPO
the ROMI. Good campaign management systems can do
(cCPO) in combination with the advert's contribution:
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
Contributed Orders = Assists * Contribution
ROI). These webshops can make decisions faster and see their
profits increase spectacularly.
15%
35%
FACEBOOK
-15
DAYS
11%
RETARGETING
ORGANIC
-12
DAYS
-7
DAYS
21%
E-MAIL
-5
DAYS
-2
DAYS
18%
SHOPPING.COM
-1
MIN.
0%
CASHBACK
Figure 1: This customer journey is composed of 6 assists. Based on the statistical algorithm, “organic” has the
highest contribuiton
Out dated campaign management doesn’t work!
Time for new online marketing KPIs
5
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
x 100%
Contributed Order Value - Ad Costs
x 100%
Contributed Order Value
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 =
∑
Assists
(Order Value * Contribution)
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.”
Out dated campaign management doesn’t work!
Time for new online marketing KPIs
6
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
[email protected]
Out dated campaign management doesn’t work!
Time for new online marketing KPIs
Uriël Ballast, CEO, Shop2market
[email protected]
7
Utrechtseweg 5
1213 TK Hilversum
The Netherlands
+31 35 737 0008
www.shop2market.com
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.
© 2013 Shop2market