The digital advertising cost is an important element of the overall cost of sales within your business. In this article, I break down the cost of digital advertising, explain how to calculate and forecast it, and finally, how to improve it.
First things first, let’s go over the various metrics and ways to measure performance and cost in digital advertising.
For starters, the most basic metric is what’s called CPM (Cost per Thousand Impressions). CPM allows you to understand how much you’re paying for impressions an ad or a post has received. People often mix this up with how many people have seen the ad. Depending on what advertising platform you’re looking at, you’ll often see two metrics, Impressions and unique impressions. So, it’s always good to understand what’s your CPM and unique CPM. For example, there is a Facebook Ad campaign I am currently running for a client where the CPM is $1.9. The average CPM on Facebook is currently around $7 but can be a lot higher depending on multiple factors including the audience size and demographics targeting.
But the CPM only tells a fraction of the story. What’s more important, especially if you are running lead or online sales campaigns, is the cost per click (CPC)
Unless you are purely running a campaign for brand awareness (and even then), you want to convert impressions into clicks. Clicks mean that your target audience has decided that what you said and demonstrated on the ad, was relevant and worthy of their time and consideration. Clicks often mean that people visit your website, mobile app or landing page. It’s a crucial step in your advertising campaign which allows you to capitalise on the ad spend and attention and bring traffic to your site. Measuring the CPC allows you to understand the effectiveness of your ads. If your ad is not performing well and not grabbing people’s attention, it will waste your advertising budget. A high CPC often means you need to improve your ads messaging and creativity.
So, how do you calculate CPC (Cost per click)? CPC = Cost / Clicks
Let’s say your Ad has cost $20 and generate 10 clicks. Your CPC is equal to $2 ($20 / 10).
But again, the CPC doesn’t provide the full picture. The next step is to measure the CPL and CPA.
At the end of the day, your business can’t grow if you can’t turn digital advertising into sales. Measuring your CPA (Cost per Acquisition) is the most important part of measuring your cost of advertising. So many people get caught up looking and measuring their CPM and CPC. Surely these are important metrics, but they mean nothing if your CPA is not at the level you need them to be.
So, how do you calculate the CPA? CPA = Cost / New Customers
Let’s say you spent $10,000 on digital ads and received 50 new customers. Your CPA = $200 ($10,000/50).
If you’d like to learn more about all the various digital marketing metrics, check out this blog post that goes through that.
How can you forecast the cost of digital advertising?
If you have been running ad campaigns already, you most likely have a great idea of the KPIs and metrics I mentioned in this post. Forecasting the cost of advertising becomes a matter of projecting how these metrics will change over time.
So, what can lead to changes to your cost of advertising?
Well, there are a few factors.
First and foremost, there is gradual increase over time regardless of what platform you are on because year over year, more businesses are advertising online. This means that more businesses are competing for people’s attention which increases the cost of advertising. It’s a simple supply and demand equation.
However, there are other factors that can result in significant spikes in your cost of advertising. These are:
- Ineffective bidding strategy
- Using the wrong platform/channel
If you are starting out or are considering running advertising on a platform you haven’t run ads on before, here is how you can run forecasts on the cost of your ads.
- Use a forecasting tool
There are many forecast tools you can use especially for Google Ads – starting with the Google Ads Keyword tool. However, there are some really good external tools you can use like the SEMRush Magic Keyword tool which not only gives you an estimate on the CPC but also search volume.
- Do some research
If you want to forecast the cost of advertising on social media and other display channels, you can do online research to get an indication of the average CPM, CPC and CPA. There are a few credible sources that publish these metrics for various advertising channels, and they even segment them by industry. WordStream has a couple of insightful blog articles that highlight the cost of advertising on Facebook.
- Start with a small ad budget
Nothing beats your own personal experiment and findings. TO get a strong grip on the cost of advertising in a particular channel, you can create a campaign with a small ad budget and find out what your CPM, CPC and CPA can look like. The good news is these metrics almost always tend to be lower and better later on when you make improvements in your campaign. Nevertheless, a small test like that will help you prepare your budget and future forecast.
Now that we’ve covered a fair bit on how to understand and measure your cost of digital advertising, let’s look at how to improve it.
How do you improve the cost of advertising?
There are many ways to improve your cost of advertising and get more bang for your buck.
Improve Your Creative
Attention is the most important currency in marketing and especially advertising. In platforms that bill you for impressions, having an outstanding creative (whether still images or video) is very important. If people scroll past your ads, you are getting charged for impressions and not realising anything in return. In platforms or bidding strategies that charge you per click, yes you are not wasting money if people scroll past your ad but you are wasting an opportunity for more sales.
Here is an example of smart and effective Ad creative by Airtable.
The reason it works is that they found an eye-catching simple visual that makes most people stop scrolling and found a way to link it to their product. Who wouldn’t stop scrolling when they see a cute dog looking bored?
Develop Better Ad Copy
When it comes to Ad copy, there is no right or wrong. You’ll hear people saying long ad copy works best but there are ads with short copy that were highly effective.
The rule of thumb is to test and find out.
The most important factor, however, is writing copy that’s creative, non-salesy, clear and articulates your value proposition.
Focus on Landing Page CRO (Conversion Rate Optimisation)
Assuming your Ads are doing a great job and driving qualified traffic to your website/landing page, you’ll want to ensure your landing pages are also performing well and converting traffic to leads and sales.
As mentioned with Ad Copy, there is no right or wrong when it comes to page length. Some landing pages are quite concise and only have a video of someone pitching the product or service. And some landing pages are long and have an extensive copy with multiple calls to action buttons.
It’s important to experiment and find out what works best with your audience.
Explore new advertising channels
Exploring and testing new advertising channels is a great way to mitigate the rise in the cost of advertising and open up new ways of generating sales. As a business owner, you should be on the lookout and remain open to new advertising channels. A good strategy is to allocate 70% to 80% of your ad budget to proven channels and 20% to 30% to new channels.
Spectrio has created an extensive list of the channels you can consider to drive traffic to your business.
The majority of brands (59%) have a standalone budget for content marketing, and 75% of them intend to dedicate a budget to influencer marketing in 2021.
Influencers are everywhere. From podcast hosts, Vloggers to Instagram influencers, there are hundreds of thousands of influencers to work with. Finding, hiring and working with the right influencers can have a massive upside for your business.
Generally speaking, the cost of advertising is a challenge facing any business. However, there are many ways to improve your return on advertising and marketing investment. It all starts with knowing what metrics you need to measure, improve. From there, you need to focus on improving your ads performance through the tips and strategies shared in this post.