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Paid Media Investments are Growing

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Most marketing teams wish they had more funds at their disposal.  

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Often, when budget cuts are necessary, marketing budgets are among the first to be reduced.

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Regardless of whether you’re facing cuts or not, maximizing the effectiveness of your marketing budget should be a top priority.

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B2B companies usually allocate 2 to 5% of their revenue towards marketing initiatives, while B2C companies usually allocate a higher percentage of their revenue, between 5 and 10%.  

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As discussed in our previous post on the key CMO trends, despite marketing budgets shrinking (on average) to just 7.7% of total company revenue, marketers are strategically directing their limited funds towards media initiatives.

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This trend was highlighted in Gartner’s annual “2024 CMO Spend Survey,” which provides insights into the current state of marketing budgets, spending, and strategic priorities.

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The report underscored the significance of paid media, with investments rising to 27.9% of marketing budgets in 2024.  

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Digital channels took up a larger share of paid media spend, growing to 57% of budgets in 2024, up from 55% in 2023.

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Marketers are heavily investing in online channels such as search, social advertising, and digital display advertising. Offline channels, including event marketing, sponsorships, and television, also remain key investment areas.

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But how is Paid Media effectiveness measured, given all the different online and offline channels available in media planning? First, let’s start by clarifying the difference between KPIs and metrics.

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The Key Differences between Metrics and KPIs

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KPIs (Key Performance Indicators) and metrics are often confused in paid media management because they are both used to track different aspects of performance.

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KPIs are strategic indicators that measure progress toward specific business goals, while metrics are tactical indicators that provide context for specific business activities. Here are some key points that highlight the differences:

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- Strategic Alignment: KPIs are directly tied to and aligned with your company's overarching strategic goals and objectives; metrics are more focused on monitoring specific business processes and outcomes rather than higher-level goals.

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- Actionability: KPIs are more actionable because they provide clear direction on what needs to be achieved to reach a specific outcome; metrics lack the same level of context and actionability unless they are tied to a specific KPI.

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- Relevance: KPIs are more relevant to top-level decision makers focused on overall marketing or campaign strategy; metrics are more relevant to media professionals monitoring performance and identifying areas for improvement in specific processes.

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- Scope: KPIs are high-level, focused measures that represent key business goals; metrics are lower-level, broad indicators that deal with day-to-day business processes.

In summary, all KPIs are metrics, but not all metrics are KPIs.

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For example, some common metrics used in digital paid media management include:

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- Impressions: The number of times an ad is displayed to users.

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- Frequency: The average number of times a user sees an ad.

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Both metrics offer insights into the performance of specific paid media tactics and campaigns, but do not directly reflect the overarching business goals.

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Let’s explore the most used KPIs involved in paid media evaluation from a strategic perspective leveraging the following MINT Academy Guide.

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Examples of KPIs in Paid Media Management

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Marketing and Media Leaders use various KPIs to assess the effectiveness of their paid media campaigns.

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According to the latest industry alignments, the most important KPIs are divided into four groups (Financial Metrics, Performance Metrics, Customer Metrics, Brand Metrics) as follows.

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Financial KPIs

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Return on Investment (ROI)

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• Definition: ROI measures the net profit generated from a marketing investment relative to its cost. It provides an overall view of the profitability of marketing initiatives.

• Formula: ROI = [(Revenue - Cost) / Cost] x 100

• Usage: ROI is a high-level metric that helps marketers understand the overall profitability and efficiency of their paid media investments. It considers all campaign costs, not just ad spending.

• Optimal Value: There is no single "optimal" ROI, as it depends on the industry, business goals, and risk tolerance. However, an ROI of 200% or higher is generally considered a strong, high-performing benchmark for paid media.

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Return on Ad Spend (ROAS)

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• Definition: ROAS measures the revenue generated for every dollar/euro/pound etc. spent on advertising. It provides a direct view of the impact of ad campaigns on sales.

• Formula: ROAS = [Revenue Generated by Ads / Ad Spend] x 100

• Usage: ROAS is a key metric for evaluating the performance of specific paid media channels, campaigns, or ad creatives. It helps marketers understand the direct revenue impact of their advertising investments.

• Optimal Value: Like ROI, there is no universal "optimal" ROAS, but industry benchmarks suggest a ROAS of 200% or higher is considered very strong. The optimal ROAS will depend on the business model and profit margins.

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Return on Marketing Investment (ROMI)

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• Definition: ROMI measures the incremental profit generated by marketing activities, focusing on the additional revenue and profit driven beyond what would have occurred naturally.

• Formula: ROMI = [(Incremental Profit - Marketing Investment) / Marketing Investment] x 100

• Usage: ROMI provides a more nuanced view of marketing effectiveness compared to ROI, as it isolates the true impact of marketing efforts on profitability.

• Optimal Value: There is no single optimal ROMI, as it depends on the business goals, industry, and marketing strategies. However, a ROMI of 150% or higher is generally considered a strong benchmark.

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Performance KPIs

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Conversion Rate (CR)

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• Definition: The percentage of ad clicks that result in a desired action, such as a purchase, lead submission, or sign-up.

• Formula: (Conversions / Total Ad Clicks) x 100 = Conversion Rate

• Usage: Conversion rate is a critical KPI for measuring the effectiveness of paid media campaigns in driving valuable customer actions. It provides insights into the relevance and appeal of ad creative, messaging, and targeting.

• Optimal Value: A higher conversion rate generally indicates better campaign performance. However, the optimal value depends on the industry, product, and target audience. For example, a 2-5% conversion rate might be considered good for e-commerce, while a 0.5-2% conversion rate might be acceptable for B2B software.

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Cost per Acquisition (CPA)

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• Definition: CPA measures the cost of acquiring a new customer or lead through paid media.

• Formula: CPA = Total Ad Spend / Number of Conversions

• Usage: CPA is a key metric for understanding the efficiency of customer acquisition efforts. It helps marketers optimize their campaigns to acquire customers at the lowest possible cost.

• Optimal Value: The optimal CPA will vary widely based on factors like industry, product margins, and customer lifetime value. As a general guideline, a CPA that is way lower than the customer's lifetime value is considered optimal.

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Click-Through Rate (CTR)

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• Definition: The percentage of ad impressions that result in a click.

• Formula: (Total Ad Clicks / Total Ad Impressions) x 100 = CTR

• Usage: CTR measures the relevance and appeal of ad creative and targeting. It helps determine which ads are most effective at driving engagement.

• Optimal Value: A good CTR depends on the ad platform and industry, but some benchmarks suggest: for Google Ads Search, a range of 1.91-3.17%, for Google Ads Display a range of 0.46-0.63%, for Facebook Ads a range of 0.9-2% .

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Cost per Click (CPC)

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• Definition: The average cost per click on a paid ad.

• Formula: Total Ad Spend / Total Ad Clicks = CPC

• Usage: CPC helps optimize bidding strategies and ad placements to reduce acquisition costs. It provides insights into the competitiveness of the ad auction.

• Optimal Value: The optimal CPC varies based on the ad platform, industry, targeting and campaign goals. As a general benchmark, a CPC under $2 for search ads, under $1 for social ads and under $ 0.50 for native ads is considered good.  

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Cost Per Mille (CPM)

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• Definition: The cost of reaching 1,000 ad impressions.

• Formula: CPM = Total ad spend / Total number of ad impressions

• Usage: Track CPM to evaluate the cost-effectiveness of ad campaigns and optimize ad placement, reach and targeting.

• Optimal Value: A lower CPM generally indicates better cost-effectiveness. For example, a CPM of $5 or less might be considered good for display ads, while a CPM of $10 might be acceptable for video ads.

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Engagement Rate (ER)

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• Definition: Engagement rate measures the level of interaction and involvement that users have with an advertisement (or a piece of content in case of organic actions).

• Formula: Engagement Rate = (Total Engagements / Total Impressions) x 100

• Usage: Engagement rate provides insights into how compelling and relevant the content or ad is to the target audience. It helps evaluate the effectiveness of creatives, messaging, and targeting.

• Optimal Value: There is no single "optimal" engagement rate, as it can vary widely depending on the industry, platform, and type of content. However, a good benchmark for a strong engagement rate is typically between 1-5%.

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Video Completion Rate (VCR)

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• Definition: Video Completion Rate measures the percentage of viewers who watched a video ad from start to finish.

• Formula: VCR = (Number of Completed Video Views / Total Video Impressions) x 100

• Usage: VCR helps assess the level of viewer interest and engagement with the video content. It indicates how effective the video is at capturing and retaining the audience's attention.

• Optimal Value: A good VCR can range from 30-80%, depending on the platform and video length. For shorter videos (under 30 seconds), a VCR of 70% or higher is considered strong. For longer videos, a VCR of 50% or more is a good benchmark.

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Customer KPIs

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Customer Lifetime Value (CLV)

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• Definition: Customer Lifetime Value (CLV) is the total revenue a customer is expected to generate for a business over their lifetime. It is a key metric for understanding the long-term value of each customer and how to optimize marketing strategies to maximize this value.

• Formula: CLV = Average Order Value (AOV) * Average Purchase Frequency (APF) * Average Customer Lifespan

• Usage: CLV is used to determine the optimal marketing strategies for customer acquisition and retention. It helps businesses understand which customer segments are most valuable and how to allocate resources to maximize these segments.

• Optimal Value: The optimal CLV varies by industry and business model. A general rule of thumb is that CLV should be at least 3-5 times the cost of acquiring a customer.

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Customer Acquisition Cost (CAC)

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• Definition: CAC measures the total cost associated with acquiring a new customer, including all marketing and sales expenses.

• Formula: CAC = Total Acquisition Costs / Number of New Customers

• Usage: CAC provides a holistic view of the cost of acquiring new customers, going beyond just paid media expenses. It helps marketers understand the profitability of their customer acquisition strategies.

• Optimal Value: The optimal CAC is one that is lower than the customer's lifetime value (LTV). A CAC that is 1/3 or less of the LTV is generally considered a strong benchmark.

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Customer Retention Rate (CRR)

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• Definition: Customer Retention Rate is the percentage of customers retained over a given period.  

• Formula: Customer Retention Rate = (Number of Customers Retained / Number of Customers at the Beginning of the Period) * 100

• Usage: Customer Retention Rate is used to evaluate the effectiveness of customer retention strategies and identify areas for improvement. It helps businesses understand which customer segments are most likely to churn and how to retain them.

• Optimal Value: The optimal Customer Retention Rate varies by industry and business model. Generally, a retention rate of at least 75% is considered good.

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Brand KPIs

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Market Share (MS)

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• Definition: Market share represents a brand's portion of total sales in each market or industry.

• Formula: Market Share = (Brand's Sales / Total Market Sales) x 100

• Usage: Market share metrics assess a brand's competitive position and the effectiveness of paid media in driving sales and customer acquisition.

• Optimal Value: The optimal market share depends on the brand's goals and industry dynamics. Maintaining or growing market share is generally desirable, with industry leaders often aiming for 20-30% or higher market share.

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Share of Voice (SOV)

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• Definition: Share of voice measures a brand's advertising presence relative to its competitors in a given market.

• Formula: SOV = (Brand's Advertising Spend / Total Category Advertising Spend) x 100

• Usage: SOV provides insights into a brand's advertising visibility and competitiveness within its industry. It helps evaluate the impact of paid media investments.

• Optimal Value: There is no single optimal SOV, but a general rule of thumb is that a brand's SOV should be proportional to or slightly higher than its market share. Maintaining an SOV higher than market share can help a brand gain a competitive edge.

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Brand Awareness

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• Definition: Brand awareness measures the extent to which a brand is recognized by potential customers and how easily they can recall or recognize the brand.

• Formula: There is no single formula, but common metrics used to define this KPI include: Unaided brand recall, Brand Searches, Ad recall, Impressions.

• Usage: Brand awareness metrics help evaluate the effectiveness of paid media campaigns in increasing visibility and memorability of the brand among the target audience.

• Optimal Value: There is no universal "optimal" brand awareness value, as it depends on the brand's goals and industry benchmarks. Increasing the selected KPI for brand awareness over time and outperforming competitors are generally good indicators of success.

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Net Promoter Score (NPS)

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• Definition: NPS measures customer loyalty and the likelihood of customers recommending a brand to others.

• Formula: NPS = % of Promoters - % of Detractors

• Usage: NPS can indirectly reflect the impact of paid media in driving positive brand sentiment and customer advocacy.

• Optimal Value: An NPS above 0 is generally considered good, with scores above 50 viewed as excellent. Industry leaders often have NPS in the 50-80 range. The optimal NPS depends on the brand's goals and competitive landscape.

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These KPIs provide a comprehensive view of paid media performance, helping marketing and media leaders to make informed decisions, optimize campaigns, and demonstrate the impact of their strategies on business outcomes.

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Eager to learn more about marketing and advertising strategies? Get in touch with our MINT Academy!

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