Latest / The Yield Doctor with James Deaker / How to Measure True Ad Performance: iROAS, MROI, and iCMAM Explained

Transcript

How to Measure True Ad Performance: iROAS, MROI, and iCMAM Explained · The Yield Doctor with James Deaker

• 0:00
  hi welcome to my explainer Series in
• 0:03
  digital media today we tackle iroz M and
• 0:10
  cmam which is so many acronyms I
• 0:12
  couldn't even get through this recording
• 0:14
  the first time without laughing and
• 0:16
  breaking down it's a lot of metrics but
• 0:19
  it's important to understand the details
• 0:22
  because if you don't you might think
• 0:24
  that you are spending your advertising
• 0:26
  budget in a way that is helping your
• 0:28
  business in fact you are hurting your
• 0:31
  business so before we Define IR row as
• 0:35
  we have to start with what is row as
• 0:38
  it's simply return on ad
• 0:42
  spend what does that mean the definition
• 0:45
  of return on ad spend is the revenue
• 0:48
  from advertising divided by the cost of
• 0:52
  advertising for a given
• 0:55
  budget I'm going to use a fictional
• 0:58
  Advertiser James newco who just starts
• 1:01
  out and starts spending $11,000 on
• 1:04
  Advertising as an example they look at
• 1:07
  their sales for the first month and they
• 1:10
  got $2,000 in sales from their $1,000 of
• 1:14
  advertising budget if it's a new bu a
• 1:18
  new business you might expect that all
• 1:20
  of those sales are a direct response of
• 1:24
  the advertising dollars that were spent
• 1:26
  and so then the row calculation is
• 1:29
  simply taking the revenue the
• 1:31
  $2,000 over the cost of the advertising
• 1:34
  the $1,000 and this gives a rowes of two
• 1:39
  this is a simple interpretation that
• 1:42
  they got twice as much revenue as they
• 1:45
  spent on
• 1:46
  Advertising this would often be
• 1:48
  considered a low row as different
• 1:51
  Industries have different rules of thumb
• 1:53
  but in many Industries a row as of four
• 1:56
  is viewed as a watermark that needs to
• 1:59
  be achieved and in others you might need
• 2:01
  to achieve as high as a row a of 10 so
• 2:05
  let's talk about why row a is a much
• 2:08
  maligned metric part of it is simply the
• 2:12
  misuse of roow a over time because it
• 2:17
  has been hard to measure the sales
• 2:19
  growth from marketing and advertising
• 2:22
  efforts many marketers have simply used
• 2:25
  rowers as shorthand for The observed
• 2:28
  revenue or the total revenue that the
• 2:31
  business is bringing in and as a result
• 2:35
  we now have a new term iro where I
• 2:38
  stands for incremental which makes it
• 2:42
  more clear that we're looking at the
• 2:44
  incremental sales from the marketing
• 2:46
  efforts in our example where the
• 2:49
  business is new the total revenue and
• 2:51
  the new Revenue are the same but in
• 2:54
  practice they usually aren't and so
• 2:56
  let's continue our example I gave the
• 3:00
  example of the business that didn't
• 3:02
  expect to do any sales if they didn't
• 3:05
  advertise however for most businesses
• 3:08
  they expect that they are going to get
• 3:10
  some volume of sales even if they don't
• 3:14
  advertise that might be from returning
• 3:17
  customers or in the case of an online
• 3:19
  business customers that just stumble
• 3:22
  upon the product without advertising and
• 3:25
  then decide that they want it so
• 3:28
  continuing our fixtion
• 3:30
  business let's assume that they're going
• 3:32
  to do $11,000 of sale even if they don't
• 3:35
  advertise essentially Baseline Revenue
• 3:39
  they still go ahead and they advertise
• 3:41
  and they spend
• 3:42
  ,000 and at the end of the second month
• 3:45
  their revenue is
• 3:47
  $2,000 so the incremental Revenue
• 3:50
  through advertising is
• 3:52
  $11,000 which means that their
• 3:54
  incremental IR row as is a th000 divided
• 3:58
  by 1,000 equals 1 the reason this is
• 4:02
  significant is it means that there was
• 4:05
  effectively no incremental benefit from
• 4:08
  spending that
• 4:09
  $1,000 on Advertising it was a wash if
• 4:13
  the irz is under one it means that your
• 4:17
  advertising budget is literally hurting
• 4:19
  you the incremental benefit is less than
• 4:22
  the incremental cost and again just to
• 4:25
  hammer the point strictly speaking row a
• 4:28
  should be calculated in exactly the same
• 4:31
  number but because historically rowes
• 4:34
  has been abused and marketers might not
• 4:36
  have stripped out the Baseline Revenue
• 4:39
  it's possible that they may not have
• 4:40
  even known what that is so let's talk
• 4:44
  about a related term to IRAs which is
• 4:47
  M the marketing return on investment
• 4:52
  it's extremely similar to RZ but we
• 4:55
  subtract out the marketing cost of
• 4:57
  advertising from revenue it is simply
• 5:00
  the sales growth minus the advertising
• 5:04
  all over the advertising dollars and in
• 5:07
  our fictitious example this gives an
• 5:11
  mroi of zero and this highlights the
• 5:14
  fact that there is no incremental value
• 5:17
  from our spend in fact it is worse uh
• 5:21
  than a wash for reasons that we'll now
• 5:23
  get into as we start to incorporate the
• 5:27
  profitability of the underlying business
• 5:30
  continuing our example our startup
• 5:32
  Advertiser is spending $11,000 to to
• 5:35
  sell $11,000 worth of goods but in
• 5:39
  practice most businesses have a cost of
• 5:42
  goods associated with them so let's say
• 5:46
  that our fictitious business that it
• 5:49
  costs
• 5:50
  $800 worth of to make the physical
• 5:53
  product to generate the $1,000 worth of
• 5:56
  sales this means that the gross profit
• 5:59
  is $11,000 less $800 which is
• 6:03
  $200 we can also call this the the gross
• 6:07
  margin the gross margin is simply the
• 6:09
  gross profit over the sales and in this
• 6:12
  case it's
• 6:13
  20% now again our business is deciding
• 6:17
  to spend $1,000 on Advertising
• 6:19
  generating $1,000 of sales but if we're
• 6:23
  incurring $800 of additional costs that
• 6:27
  means that we are actually spending
• 6:29
  $1,000 to only generate $200 worth of
• 6:33
  gross profit and that will surely Drive
• 6:36
  the business into the ground very
• 6:37
  quickly so I've pointed out all the
• 6:40
  problems with iro and M Roi and in
• 6:45
  particular that they don't account for
• 6:47
  profitability so what should you be
• 6:50
  using the simplest thing is to say that
• 6:53
  you need to ensure that you look at the
• 6:56
  contribution margin after marketing in
• 6:59
  our example that is essentially the
• 7:02
  gross margin less the cost of
• 7:05
  advertising and even though the term is
• 7:08
  used a lot in marketing and it can be a
• 7:10
  little bit ambiguous so I'm going to put
• 7:11
  an i in front to make sure we focus on
• 7:15
  incremental and make it clear that we're
• 7:17
  talking about the incremental profit
• 7:20
  from the advertising spend so i c
• 7:25
  m the incremental contribution mark
• 7:29
  margin after marketing which is
• 7:32
  essentially the incremental sales less
• 7:35
  the variable costs less the marketing
• 7:38
  costs again it's a mouthful but this
• 7:41
  makes you look at your incremental
• 7:44
  advertising budget is it driving
• 7:47
  incremental
• 7:49
  profitability if you want to look at
• 7:51
  marketing efficiency you would now D
• 7:54
  divide this by the marketing spend I
• 7:57
  fully recognized that this is easy it's
• 8:00
  complicated even in these toy examples
• 8:03
  that I've created but at the end of the
• 8:05
  day it's the only way to truly judge
• 8:08
  whether your advertising budgets are
• 8:10
  driving the desired outcome thanks for
• 8:13
  joining me today make sure you subscribe
• 8:16
  if you want to get more of this content
• 8:18
  particularly related to how to make more
• 8:21
  money through your digital advertising
• 8:23
  assets thanks
• 8:25
  [Music]