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Advertising Acronyms Explained

Heidi Thorne is an author and business speaker with over 25 years of experience in sales, marketing, advertising, and public relations.

Advertising acronyms don't have to be a mystery!

Advertising acronyms don't have to be a mystery!

Advertising Acronyms

I was listening to a podcast on advertising the other day, and I was struck by the liberal use of advertising acronyms in it—particularly those for online advertising, which could have baffled listeners unfamiliar with these terms.

I’ll decrypt some of the more common advertising acronyms and explain why the concepts behind them are important.

CAC

CAC, sometimes pronounced “kak,” refers to Customer Acquisition Cost. It might also be referred to as ACoS (Average Cost of Sale, explained later), although that is not entirely correct.

CAC is a measure of how much it costs to acquire a new customer. Examples of CAC costs include coupons, Internet advertising, etc., prorated down to what it costs to get each new customer to buy from you.

It can be a tricky number to figure out. Some advertising costs may reach or serve both current and prospective customers. So teasing out the exact costs can sometimes be challenging. But specific advertising campaigns aimed at new customers would be the costs that should primarily be considered and only compared against new customer sales gained.

CAC is expressed in dollars and returns the average cost to acquire each new customer. It would be calculated as follows:

CAC (in dollars) = Total Advertising Spend to Acquire New Customers/Number of New Customers Acquired

To express as a percentage of sales:

CAC (as % of sales) = Total Advertising Spend to Acquire New Customers/Total Sales

Note: Some accountants may refer to “Cost of Sale” as Cost of Goods Sold (COGS). That is not what is being discussed here in the context of advertising! COGS is the cost of producing the business’ product or service. CAC is used to measure the advertising and sales costs to secure the sale.

Why Is It Important?

CAC is important because it tells you how much you’ll need to spend to gain new customers. If the cost to acquire a new customer is $10, then if you want 100 new customers, you can project that you might have to spend at least $1,000 to acquire them.

If the price for acquiring new customers is too high, the sales, and ultimately the business, will become unprofitable.

Example #1

An instance where small business owners often ignore CAC to their peril is coupon and deals services such as Groupon. The owner may use a 50 percent off coupon to get an initial order. However, if the normal cost to make and deliver that order is 60 percent of the retail price, the owner will sustain a 10 percent loss.

Some owners reason that once they’ve demonstrated their value to their coupon-generated customers, those customers will come back to pay full price. Unfortunately, many owners have discovered that coupon-using customers are customers who like using coupons, not necessarily loyal customers.

Example #2

When I was the ad director and editor for a trade newspaper, the publishers and I wanted to open up a new regional edition in a state just next door to my home state. It involved hundreds of miles (days!) of road time, hotel stays, and travel expenses for me. The cost of gaining a new customer prorated to hundreds of dollars each, which ate up my revenue share on every sale. Plus, the customers we did gain were one-timers, meaning they didn’t sign annual contracts.

My operation was bleeding cash fast on this venture, and after about six months, I told my publisher we were done. My CAC (and LTV, which we’ll discuss later) were creating an unprofitable scenario.

ACoS

A related metric to CAC, and one used on Amazon Marketing Services (AMS) that many authors use to advertise their books, is ACoS, or Average Cost of Sale. Expressed as a percentage, you will see that the formula for figuring ACoS is identical to that for CAC, except that it lumps all sales together.

ACoS (as % of sales) = Total Advertising Spend/Total Sales

Like CAC, it measures the cost to achieve a sale. However, on systems such as AMS, neither the ad nor the sales tracking differentiates between what is a new customer and what is an existing customer (even though Amazon probably knows!). A sale is a sale to the system.

Why Is It Important?

While it is a good measure of how much it takes to create sales for the entire business, because it is an average, it could hide extraordinarily high ad costs incurred to reach new customers or even service existing ones. Also, like CAC, if the ACoS is very high, it can lead to unprofitability.

LTV

LTV refers to Lifetime Value. It adds up the sales individual customers make over the entire time they are customers. Loyal customers who continue to spend substantial money over time are pure gold!

Why Is It Important?

This is a metric to be considered in concert with CAC. In cases where the CAC may be high, if the LTV is also high, the CAC investment is easily covered by the sales and profits these customers generate over time. However, if the CAC is high and the LTV is low, those customers become a drain on the business.

The coupon customers in the earlier example perfectly illustrate high CAC, and low LTV. They buy when there’s a deal but won’t buy again (unless there’s another deal).

RoAS

RoAS, which can be pronounced “ro-as,” refers to Return on Ad Spend. It measures how many sales are generated by advertising. Because a business may do a lot of different advertising, RoAS may be done just for specific ad campaigns and specific types of sales.

Some businesses may calculate RoAS on total advertising spend and total sales gained, though that is not entirely insightful since it can hide “robbing Peter to pay Paul” situations. One product or profit center may require a high ad spend while others don’t. This can either overestimate or underestimate advertising performance. If at all possible, analyzing RoAS for specific campaigns and profit centers provides better insight.

RoAS can be thought of in terms of a ratio. A 1:1 RoAS would mean that for $1 spent on advertising, $1 of sales is received.

Why Is It Important?

RoAS determines if your advertising is actually generating sales results. If you’re not making back your investment in advertising, you are sustaining a loss. Some companies are willing to go negative on their RoAS for a limited time if the anticipated customer LTV is sufficiently high.

One of the dangers of relying solely on RoAS to determine if advertising is successful is that it does not account for other business expenses. On a 1:1 RoAS, the business is making no profit and may even be sustaining a serious loss since $1 of advertising generates $1 of sales. The advertising is covered, but the business's overhead and taxes are not. In some businesses, overhead and taxes can be as high as 50 percent or more of sales revenues. In a 50 percent overhead scenario, a 1:1 RoAS would generate at least a 50 percent loss for the business.

Determining a target RoAS that would cover the ad spend plus overhead, taxes, and the desired profit margin would be a more helpful metric.

ROI

ROI is a commonly used acronym for business and investments. It refers to Return On Investment. As with other metrics discussed here, the calculation will depend on what exactly is being evaluated.

Why Is It Important?

Actually, many advertising metrics can be thought of as a measure of ROI. RoAS is a measure of return on ad spend. CAC measures how many customers are gained in return for acquisition costs incurred. All advertising is an investment.

ROI can also include evaluation of standard financial metrics such as gross sales and net profit margin.

Impressions

Though not an acronym, impressions are a key ingredient of online advertising that needs to be understood. An impression is the display of an ad on a user’s device. Some examples of an impression would include:

  • A Facebook ad that shows up in a user’s news feed.
  • A Google AdWords text ad that appears in search results.
  • A sponsored product ad that shows up as a “you might also like” type suggestion on a product page on Amazon.

Why Is It Important?

The goal of online advertising is to generate impressions that result in clicks to the advertiser’s website or sales page.

But the key is that the impressions need to occur in relevant places. Proper targeting of ads is critical to generating more relevant impressions. This is usually done during the ad setup process.

PPC

PPC refers to Pay Per Click, a specific type of Internet advertising that only charges the advertiser when someone actually clicks on the ad to go to a landing page or sales page. Google AdWords and Facebook ads are PPC.

Why Is It Important?

PPC advertising can be cost-effective for advertisers since they only have to pay when someone actually clicks on the ad. Thus, they only pay for those people who are genuinely interested in buying—or so the theory goes.

CTR

CTR refers to Click Through Rate. It compares how many clicks a website or sales page receives as a percentage of total impressions. It measures how well your advertising encourages a potential buyer to view more about you or what you offer.

In today’s competitive Internet environment, CTRs of only a couple of percentage points, sometimes even a fraction of 1 percent, are not uncommon. It is calculated as:

CTR = Number of Clicks Generated by Advertising/Number of Impressions Generated by Advertising

Why Is It Important?

This is one of the most important Internet advertising metrics.

Advertisers who use PPC may find that there are lots of lookers who click on ads because they’re curious and not actually interested in buying. So while hoping for a high CTR, paying for useless clicks wastes ad dollars. Therefore, monitoring the CTR rate against how many sales are actually made (referred to as sales conversion rate) is critical. Should there be high CTR but a low rate of sales conversions, an ad’s targeting (audience selection), creative (photos, video, layout, color, etc.), or placements (where the ad appears) may need to be changed to improve CTR and get greater opportunities to make sales.

I found this out with my Google AdWords advertising for my promotional products business years ago. I ran ads for search keywords relating to American and union-made promotional items, such as imprinted T-shirts, which were a specialty market for me. Unfortunately, my keywords were a bit broad, and Google delivered up a bunch of buyers who thought I was an apparel retailer like Land’s End but with American-made items. High CTR, but also high aggravation having to field inquiries from people who wanted to buy two shirts when I was looking for those who wanted to buy 200!

After correcting my errors in my targeting with keywords, I got my ad costs under better control. But I was still getting a fair amount of irrelevant traffic. Eventually, I stopped doing AdWords altogether.

CPC

CPC stands for Cost Per Click. This is a metric to help measure the cost of making a sale and ad performance. It is measured in currency (dollars).

CPC = Total Ad Spend/Number of Clicks Generated by Advertising

The good news is that advertisers can bid on how much they’re willing to pay a system such as Google AdWords if someone clicks on their links. Capping bids can preserve ad budgets, but it could also reduce the number of clicks received. This is a difficult balancing act that must be constantly monitored and adjusted to achieve optimal returns while conserving cash. Many newbie advertisers make the mistake of trying to win the ad bidding game, losing lots of cash.