Intermediate Metrics

By , July 29, 2009

I am growing to detest intermediate metrics, which are often used in deceptive ways.

Occasionally, one of my clients will decide, midstream, that one particular metric is especially important. Often it’s “raw CTR” or “raw conversion rate.”

The problem is that the only metric that really matters is profit.

There are many campaign adjustments we can make that will improve profits while pushing “intermediate” metrics downward. For example, if a PPC client uses Google AdWords but hasn’t been using the Content Network, and I find a way to profitably add Content Network campaigns, the average CTR will drop but of course this is OK if profits increase (generally, the “cost per click” and “cost per conversion” decrease and overall OI/ROAS increases).

But any metric can be abused. For example, I’ve seen companies that focused incorrectly on “cost per conversion.” They start with good logic: their “average transaction size” is $75, and they earn $40 gross per transaction, so they can afford to spend $20 per conversion. But then they don’t close the feedback loop by monitoring the average transaction size, and soon they are paying $20 per conversion but they’re not making money because their average transaction size has dropped to $35.

When clients approach me with “cost per lead” as their desired metric, I tell them up-front that they can’t stop there — any cost-per-lead campaign absolutely MUST include additional elements (such as conversion rate and average transaction size), or else the CPL campaign will bring in poorer-quality leads every week (not necessarily invalid leads, but competitors will cherry-pick the best leads by tracking and paying more accurately for them). Of course, nearly all clients who seek to hire me on a “cost per lead” basis don’t have effective post-lead tracking (often, the leads are handed off to sales staff who won’t follow through on any follow-up required for tracking, or they’re resold to others).

In the affiliate-management space, I assume that there are folks out there who are measured or compensated based on all sorts of “intermediate metrics,” such as “average sales per affiliate,” “percentage of affiliates activated,” or even absurd metrics like “effective CPM” or “cost per click” which don’t make sense in the affiliate-marketing space.

Imagine the dilemna faced by the second-hired “Affiliate Manager” in a firm. When the existing affiliate base was “split” by the original Affiliate Manager, she kept all the affiliates with whom she had built a strong relationship, and therefore the new guy ends up with all the poorest-performing affiliates. Then the boss turns around and says, “She is managing 6,000 affiliates, who generate an average of $Y in in sales; you are managing 5,000 affiliates, who only generate an average of $Z in sales. If you can’t improve that measure, we need to look for someone else for this job.” What would you do, if you wanted to keep your job? (Bye-bye, non-performing affiliates.)

Measurement is an absolutely critical component of nearly all online marketing; relying on the wrong metric is a common, expensive mistake.

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