Success in Paid Search relies on knowing your numbers.

Understanding how much you can afford to pay to acquire a new customer (your Cost Per Acquisiton or Cost per Sale), allows you to set your target cost per lead (how much you pay for someone who call, email or fill in a form) based on your current conversion rate - and then establish your target Cost Per Click.

All this to say, that when mastering ads you must first start by getting a grasp on what the metrics and numbers mean.

Below we explore some of the most common metrics, what they mean and how they ought to be used to help with measuring and assessing performance.

Cost Per Click (CPC)

Your CPC is how much you pay when someone clicks on your ad. Due to search engines using an auction system that dynamically sets CPC pricing, this number can go up and down depending on how many companies are bidding on a term.

Your CPC is a shorthand for how expensive a term, or group of terms is, and is often used to compare the competitiveness of topics.

Cost Per Mille

Your CPM is how much it costs for an ad to show 1000 times. Campaigns that focus on ad impressions are typically focused on being highly visible, and are less concerned about people clicking through and performing a desired action (e.g. buying an item, requesting a service or providing their details).

We very rarely run CPM based strategies as they are not typically lucrative enough for our clients, however CPM’s are essentially interchangeable with CPC’s - as a means of comparing how competitive two different verticals are.

Cost Per Lead

Your CPL is how much it costs for a target customer to perform an action that qualifies them into being a lead. It falls just short of being a sale, as leads are typically a request for more information or a request for a callback. At this stage, it’s fair to say the prospect is evaluating vendors, so we still expect a significant percentage to not necessarily turn into paying customers.

CPL is a good metric for determining how much it takes to get the phone ringing. If for example a solar company knows that spending £1k on ads will result in 20 leads, they can make decisions about how and when to begin filling the funnel.

Cost Per Acquisition

Your CPA is the average cost it takes to take a customer from search engine to transaction. Your CPA is ultimately your main indicator for how effective, profitable and worthwhile a campaign is - and it’s the job of the marketers, designers and engineers to work together to get your CPA down as low as possible.

If your CPL is vanity, your CPA is sanity! This metric tells you how profitable the work is, and ultimately is an indication of the viability of the investment.

Average Order Value

Your AOV is how much your average transaction is worth. This metric, especially when combined with lifetime value (see below), introduces a yardstick for measuring how we can improve the amount customers spend. This allows us to keep ontop of profitability, by establishing changes in how much people are spending.

Typically AOV is a metric we use to see if we can grow how much a target customer is paying. Growing AOV both improves the amount of money being made for your business and increases how much you can spend advertising and remaining profitable.

Return on Advertising Spend

ROAS is typically expressed as a ratio, for example 5:1, which essentially says if you spend £1 on ads you make £5 in revenue. Typically, ROAS is favoured for establishing the ads that are best at driving revenue - however it does have a blindspot in that it does not take into consideration the profit on the revenue.generated.

For example, you could spend £10 on a lead that purchases a service or product that has a 10% margin and a cost of £1,000. Overall, your £10 would’ve generated £90 profit (£100 profit - £10 to generate the lead) and £1,000 revenue. Conversely, spending £10 on a lead that purchases a service or product with a cost of £500 but a 50% margin, means your revenue is only £500 but your profit is £250. ROAS would favour the first scenario, but wouldn’t be telling you where the most place to spend on ads is.

Return on Investment

Your ROI is your estimated/actual profit once you have paid for your ads spend. This number is generally more dependable as a score of whether one campaign/ad-groups is better for your business than another, as it speaks to the value of the work to your bottom line.

Life Time Value

Lastly, your LTV is how much revenue you on average make from a customer. Businesses such as accountants, cleaners, dog groomers and more, often secure clients for several transactions - which means the amount they make from a single client can be significantly more than what is purchased directly from an ad.

LTV is part of the maths that go into how to determine how much you can spend on your CPA. If for example you know that an average client is worth £10k over 12 months, you can use the margin on the larger average number to determine how big the pot should be when advertising to clients. If for example an average client is 30% profit, at a monthly level that leaves £300 to carve our spend for advertising. Conversely, if over a year your average client profit is £3,000 - we can use as much as £1,000 per CPA - which significantly improves the liklihood the campaign will be a success.

That concludes this deep-dive into the numbers that matter for anyone thinking of investing in Paid Ads.

If you are feeling overwhelmed or confused by the meaning or how to use these numbers, please do not be offput. It’s our job to not only know your numbers for you, but also to coach and train you on how and where the numbers should be used.