This is the second in a series of articles on Essential Understanding of Growth in 2020, contributed by Unmarketd, a curated marketplace for elite performance marketing and data & analytics experts. You can find the first article here.
We already discussed about the essential questions to ask before running any paid marketing.
And if you do decide to go ahead (which you usually will for a consumer company), what metrics do you really need to know? The agencies or the ad networks will tell you how amazing they are in clicks, traffic, installs etc.
Ignore all of those!
The only metrics that you, as a CEO or founder of a company, need to know are:
Revenue (in the form of GMV or Monthly/Annual Recurring Revenue) OR New (paying) customers
Paid Customer acquisition cost (CAC) vs. Life Time Value (LTV) of paid customers OR Return on Advertising Spend (ROAS).
You can google (or Bing if you are in China) what these acronyms mean (if you do not already know). Essentially any paid marketing only makes sense if you LTV is higher than CAC or your proxy ROAS is higher than one.
Ideal benchmark: LTA: CAC = 3:1, or Proxy ROAS > 3X
Paid Marketing is tricky to grow, at scale, as the primary channel. It’s highly dependent on both against external forces – competition and platform – as well as the leadership team’s psychology when things get unsustainable.
Some essential knowledge you need to have:
- Does your business model (margins) allows running sustainable paid acquisition? Don’t spend more than you make.
- What metrics each paid channel needs to achieve based on your overall growth goal? The higher the channel in the funnel the low target ROAS
- Understand CAC of each paid channel and don’t fool yourself with blended CAC
- Attribution models – how user interacted with your product and via what channels before they brought the revenue and where it makes sense to invest. Make users aware that you exist vs. giving them little push to buy
- When it is feasible to pay to retarget dormant users and when you can do it via own tools
- Attributed vs. incremental growth. Do not pay for users who will buy from you otherwise (locked on customers)
- Ad fraud cost $30bn in 2019