Marketers have been using cost-per-lead metrics as the highlight (or lowlight) of their reporting for a long time, but should businesses care more about return-on-ad-spend?
As a business owner like you, I know that it’s important to understand whether the money I’m spending on advertising is actually paying off. I’m not interested in vague vanity metrics (at least not for bottom funnel campaigns), and I’m sure you’re not either. PPC campaigns can be difficult to interpret if you’re not accurately tying the right metrics to the right objectives; and we must know if healthy campaigns and profitability are being achieved.
Cost-per-lead (CPL) and return-on-ad-spend (ROAS) metrics are both important to look at when managing PPC campaigns. Let’s take a look at two important objectives below and see if CPL or ROAS is a better marker for success.
Campaign Health
Campaign health is an important objective when managing PPC campaigns. I like to break campaign health into three R’s: Relevance, reach, and return. We’ll look specifically at relevance.
Relevance in a campaign can be further broken down into: search relevance (if it’s a paid search campaign), ad relevance, and landing page relevance. Both CPL and ROAS are affected by relevance, but CPL can be a bit more misleading in gauging relevance.
For example, a campaign can generate a lot of poor quality leads due to bad search relevance, but if you as a business owner aren’t aware of what people were truly searching when they found you (hint: it likely wasn’t the keyword you were targeting), then you might think your campaign is doing great; all-the-while wondering why it doesn’t seem to be paying off. ROAS is a much better metric for determining relevance because – even if you’re simply assigning a value to a lead – it factors in what your closing rate is on leads. So, if you’re used to getting some bad eggs mixed in with the good ones, and you know that out of X amount of leads you tend to close Y, then your ROAS metric will help you better gauge how well your campaign is doing.
Profitability
Cost-per-lead is calculated by dividing the amount of money a campaign spent by the amount of leads that were generated. This is a poor way to gauge profitability because it cannot show you how much money was gained from your campaign.
ROAS, on the other hand, is calculated by dividing total conversion value by cost (ad-spend). The number you end up with tells you how many dollars your campaign generated for every dollar you spent. So, if your ROAS is 1x then you made $1 for every $1 you spent… not very good. But, if your ROAS is 4x, or 34x, then you can tell that your campaign is profitable.
Conclusion
When optimizing campaigns for health and profitability ROAS is a far better metric to use than CPL. That’s not to say that CPL is unimportant; normally, a lower CPL will translate into a higher ROAS. But, for those of us who simply want to know whether or not our campaigns are actually driving a profit, ROAS provides a much clearer picture.