Why the Ad Industry’s KPIs Are Broken

By Aaron Andalman

Digital advertising has moved performance to center stage, prompting marketers to consider how to best monitor and measure the effectiveness of their campaigns. Measurement has therefore become one of the most critical aspects of building a successful campaign. However, it has also remained a huge hurdle for the industry despite a wide array of advancements in digital advertising in recent years.

Where Measurement Today Misses the Mark

With the industry continuing to evolve, it is more important than ever that marketers can demonstrate a clear connection between their ad spending, consumer action and business outcomes. But what happens when the key performance indicators (KPIs) you are tracking are misleading? Campaign optimization is derailed.

Last-touch attribution continues to be the dominant key indicator of campaign performance, with metrics like Cost Per Acquisition (CPA) determining the effectiveness of a campaign. However, last-touch CPA does not directly measure a campaign's ability to acquire or convert customers despite what its name suggests.

Instead, this metric typically "attributes" credit for a conversion to an ad based on its proximity to when the customer converts – even if the customer's mind was already made up before they saw that ad. Research assessing the relationship between consumers' baseline purchase probability and ad effectiveness establishes that CPA can be misleading, demonstrating that even if an ad-platform succeeds at optimizing a campaign toward lower CPA, this can yield a negative return on investment.

Advertising's primary purpose is to convert customers who would not have organically chosen to buy your brand. Thus, it is important to note that attribution and acquisition are not synonymous. Just because an ad generates last-touch attribution and drives down your CPA does not mean that the ad influenced the customer or played a meaningful role in their purchase decision. CPA therefore can give marketers a misleading picture of campaign performance.

Why True Optimization Lies with Incrementality

As expectations for campaign performance and return-on-investment (ROI) continue to increase, marketers should instead aim to integrate incremental KPIs into their measurement strategies and methodology. Here are some ways the industry is working to make them a reality in performance advertising:

Incrementality Testing: Advertisers interested in optimizing their campaign's performance can leverage scientific methods to accurately measure the extent to which an advertising campaign converts new customers. These methods – randomized controlled trials – are perfectly analogous to those used by the FDA to assess a new drug's effectiveness, and importantly these methods are valid even if a campaign exists within a complex multi-channel media mix.

Today's measurement providers are making these scientific methods even more accessible to advertisers. One important benefit of incrementality testing is that the resulting data can be used to improve the incremental value of your traditional CPA based campaigns. Statistical methods that detect the heterogeneous effects of ads, can be applied to randomized controlled data to identify audiences to target that will drive true incrementality.

New Media, New Metrics: In lieu of testing, some brands are also looking at different media channels to meet their incremental KPI needs. For example, when used strategically, social networks have long been seen as a tool to enable and test for incremental sales. Retail Media Networks (RMNs) are predicted to be the next big driver of incrementality for brands by linking in with social media platforms that enable shopping to leverage this ability.

More importantly, because RMNs are lower funnel, the impact of advertising can be viewed on a short-time scale. Rather than running a randomized control, RMNs allow marketers to estimate incrementality by methodically switching tactics over a period of time, such as turning the channel off and on, to determine if there is a consistent effect on sales. This is a great alternative to the standard CPA, offering the ability to measure ad effectiveness more accurately.

While applying any of these methods will add overhead or require higher quantities of data, advancements in technology are making the adoption of incrementality metrics more convenient and less expensive. The result is that incremental CPA can now often address many of the primary shortcomings of the traditional CPA by enabling brands to truly assess the influence of brands' media investments.

While traditional CPA may have been seen as an effective KPI in the past, the extensive data and insights marketers have access to today through digital advertising have made it possible to capture a campaign's impact more accurately. To effectively optimize campaign performance in the future, marketers must look to a more complex metric – incrementality.

The views and opinions expressed are solely those of the contributor and do not necessarily reflect the official position of the ANA or imply endorsement from the ANA.

Aaron Andalman is chief science officer and co-founder of Cognitiv.