Home Data-Driven Thinking Forget Proxy Performance KPIs. It’s Time To Focus On Revenue Again

Forget Proxy Performance KPIs. It’s Time To Focus On Revenue Again

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Michael Morris, co-founder of Hyperlocology

Data-Driven Thinking” is written by members of the media community and contains fresh ideas on the digital revolution in media.

Today’s column is written by Michael Morris, co-founder of Hyperlocology.

The digitization of advertising unleashed a torrent of easily measurable statistics for marketers to measure performance. This led to a software category of partners that help brands and retailers understand how their campaigns perform on each channel by assessing KPIs like clicks, cost per acquisition and conversion rates.

These KPIs have their place in marketing strategy. But digital marketing has become too focused on proxy KPIs in lieu of the metric that matters most: revenue. 

Pursuing digital KPIs has led marketers to make strategic errors. They chase conversions that do not spur incremental revenue, preserve outdated strategies due to a focus on metrics instead of process and drive down costs when it would be more helpful to focus on revenue gains.

Chasing the wrong conversions

Many marketing teams measure their success based on digital metrics like CPA, CPL, ROI and ROAS. As a result, marketers’ efforts have become more geared toward gaining attribution (through various lower-funnel tactics) for online conversions to achieve often-inflated KPI goals. 

These proxy metrics do not capture incremental revenue. Instead, they attempt to capture the impact of a specific form of marketing that lends itself to last-touch attribution. 

For example, consider a retailer with five locations in a designated market area (DMA). The retailer is paying a marketing agency to calibrate advertising in that DMA. If the agency struggles to deliver on its chief KPI – boosting sales attributed to advertising – it can increase that number artificially by retargeting past customers or chasing bottom-of-funnel conversions that were likely to happen without marketing. The agency then seems to have done its job of bolstering marketing performance, but the retailer does not benefit from incremental revenue.

The independent variable in performance analyses needs to be a true test of marketing quality – such as creative, day parts, even product or service offerings – and not just budget allocation and audience targeting manipulation that focuses on easy targets such as repeat customers.

Preserving outdated strategies

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Focusing on performance KPIs also allows inefficient strategies to persist.

For example, agencies have historically charged clients based on the number of full-time employees required to handle an engagement. As long as the agency is hitting its metrics, the client may continue paying for its engagement with agencies. But the status quo may be woefully inefficient, as automation can now tackle many of the tasks that agencies once needed to hire full-time employees to manage.

Automation can help by allowing marketers to set up more granular campaigns. For example, it can help brick-and-mortar marketers set up campaigns per location, which would otherwise be impossible based on the required headcount. Setting up these more granular campaigns automatically generates stronger results and saves human talent time that would otherwise be wasted chasing digital vanity metrics. 

So, one of two improvements should be occurring in marketing relationships: Either the price of labor should go down, or the agency should be putting that spare human time back into improved creative, identification of new market opportunities or other tasks that require human ingenuity. 

If marketers are shortsighted and evaluate marketing strategy based only on performance KPIs, they risk missing these opportunities for gains in efficiency and productivity. It’s not enough to look at metrics on a dashboard. Marketers need to examine the human processes driving those metrics. 

Emphasizing efficiency over progress

Finally, even if marketers use performance KPIs to make real improvements to business processes, these metrics often incentivize efficiency to the detriment of growing the business and enriching relationships with existing customers.

Consider a performance marketing strategy that hinges on driving more conversions on Instagram while diminishing cost per acquisition. Ostensibly, this strategy may be working well. More conversions are coming in, and the advertiser is spending less to get them, generating higher ROI. But this often happens because technology vendors or agencies have gotten better at jumping in front of conversions that would’ve happened without advertising. 

This focus on efficiency creates a vicious cycle. Advertisers learn to expect unreasonable CPAs. Agencies and vendors face pressure to deliver on those expectations, so they go for easy wins. Marketing dollars keep flowing, but the advertiser is just getting more efficient at Instagram advertising without truly growing its business, and the agency will eventually hit a ceiling when it comes to efficiently targeting easy prospects.

To guard against this chain of errors, marketers need to vet their marketing measurement program to ensure it does not allow for distortion through the pursuit of hollow victories. They need to nurture customer relationships throughout the funnel rather than relying on bottom-of-funnel tactics that often lend the appearance of efficiency while brand equity quietly diminishes.

Follow Hyperlocology (@Hyperlocology) and AdExchanger (@adexchanger) on Twitter.

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