Cost Per Acquisition (CPA): How to Use It to Your Advantage
Cost per acquisition is one of the most important financial metrics in digital marketing. Why? Because it indicates how much you spend to acquire new customers through a specific channel. Unlike cost per conversion (CPC), it takes into account the entire customer journey from the initial contact to conversion.
Read on to learn what CPA is, how to calculate CPC, and how to optimize your cost per acquisition.
- Cost per acquisition (CPA) measures the cumulative costs of acquiring a new customer via a channel or campaign.
- CPA is calculated by dividing the total advertising spend by the number of generated acquisitions.
- To better understand your marketing channels' performance and profitability, analyze CPA in the context of other metrics, such as customer acquisition cost, customer lifetime value, and return on ad spend.
- Factors that help optimize cost per acquisition are purchase intent, website performance, retargeting, personalization, and more.
What Is Cost Per Acquisition (CPA)?
Cost per acquisition (CPA) is a type of metric used in digital marketing to determine the efficiency of an advertising campaign. It's the cost incurred to acquire a lead or customer. In eCommerce, CPA is usually calculated based on how much revenue is obtained from the traffic generated by the marketing campaign.
Unlike customer acquisition cost (CAC), cost per acquisition looks at specific channels or campaigns rather than the average cost across all channels.
Why CPA Is Important To Measure
Tracking CPA, marketers monitor if the investments in advertising and marketing are paying off.
The CPA's importance lies in the fact that it stops you from overspending on acquiring new customers. Imagine you analyze an ad campaign’s performance by looking at the number of website visits or conversion rate alone. The numbers may be good, but they don't show what revenue impact the campaign had.
By calculating your CPA values, you can improve the sustainability of your business and develop a comprehensive marketing strategy to attract new customers to your business.
“Understanding the cost to acquire a customer is important, however, understanding where you are acquiring customers from for the best price is even better. Using Google Analytics and paid media platform’s first-party data can help ecommerce leaders triangulate this data to get a better read on their best performing CAC channels” — Alex Cruz, Founder & CEO of PenPath, a leading business intelligence platform for enterprise and DTC brands.
Cost Per Acquisition Formula And How To Calculate It
To calculate cost per acquisition, divide the cost spent on a particular platform by the number of customers acquired.
For example, suppose you run a Google Ads campaign for your eCommerce business selling tourist gear with a total budget of $1,000. As soon as the campaign ends, you calculate that it’s brought you 100 customers. So, what is the CPA for this campaign? Using the formula above: $1000 cost of campaign / 100 conversions = $10 CPA. Meaning that you have to invest $10 in order to attract one paying customer through Google Ads.
In reality, tracking CPA is more tricky than in the example, as you need to be 100% sure you can attribute particular sales to the campaign or a channel. Some methods that simplify lead source tracking are UTMs, CRM integration, AdWords data extraction, and advanced marketing analytics platform integration.
What Is a Good CPA?
Using the example from the previous section, how do you know whether $10 is a good or bad CPA? As there is no universal benchmark for CPA, you will have to determine it based on your own circumstances, such as your margin, operating costs, prices, and goals.
If each sale has brought your eCommerce business at least $20 in revenue, then you might have turned a profit, provided that you don't have any other expenses on top of ad spend. But if each customer spends $7 or less, then investing $10 into acquiring customers isn't financially sustainable.
To better understand your ad performance and measure profitability, you need to analyze CPA in the context of other metrics, like ROI, ROAS, CLV, and website conversion rate.
The CPA and CLV have an especially close relationship. Customer lifetime value (CLV) refers to how much your customers are likely to spend on your website during their lifetime. It can be a 1-year, 3-year, 5-year, or average subscription renewal time.
You want to know the CLV for each customer group because you want to make sure you’re not paying more to get a customer than what they can bring to your business.
Understanding the LTV/CPA relationship can also justify additional investments into an ad campaign or channel. Back to our tourist gear shop example: you may decide to spend way over $10 on acquiring a larger customer, like a camping organization, that will make a bigger purchase, stick around for longer, and pay even more across their lifetime.
Where To Use Cost Per Acquisition?
In the case of PPC, it is quite simple. We can design a campaign to maximize conversions or optimize conversion costs.
Unlike PPC advertising, affiliate marketing, in most cases, charges only for conversions, not clicks or traffic. This way, you don't run the risk and incur the costs of acquiring traffic; you just settle with your affiliates for sales/leads. The compensation for the vendor has to be attractive enough to make it profitable for them to generate traffic for you.
The appeal of influencer marketing lies in the fact that you don't pay for every single click. Instead, you pay for publishing a post or series of posts. In short, a properly chosen influencer marketing strategy and the right influencers (matched to profile + compelling campaign) can lead to an interesting CPA, but it's not the norm.
This is mainly because attribution comes into play here: sure, many people will go directly to the website via the link in the influencer's post. But it also happens that someone sees the influencer's post and searches for the brand online or on social media. Thus, the traffic is rarely attributed to the influencer campaign, even if it results in a conversion. Marketers need to be mindful of edge cases that can lead to misleading conclusions, based on which they will plan future campaigns.
Due to the long-term nature of the investment in social media presence, measuring the cost of "free traffic" and translating it into CPA is tricky. Why? Because the scale of sales/lead generation from this channel is contingent on long-term presence and development of profiles on a given social media platform.
So again: dividing the monthly cost of maintaining and running a profile by the number of customers acquired from it should provide you with an approximate CPA, but it is worth remembering that this is more of an estimation to inform decisions rather than a precise metric with 100% accuracy.
Measuring CPA in the case of content marketing is also a challenge. You can measure the cost of creating an article by looking at the invoice from the agency we hired to create the content or by adding up the man-hours spent creating the text if it was created in-house.
But what about the additional cost? Blog traffic doesn't come by itself. It requires SEO efforts. Should you add the cost of SEO? What about content distribution on social media? Should you consider the cost of advertising campaigns to promote the content in question?
CPA Bidding: Google Smart Bidding Strategy
The principle behind it is that the bidder with the highest Ad Rank gets the trophy.
When optimizing Google Ads campaigns, most marketers will focus on Quality Score. It's a direct metric telling whether a keyword is relevant to what a business promises in an ad and a landing page. Sure, it's important because it demonstrates how to tweak a campaign to become more appealing to potential customers, but even the best ad doesn't do the trick by itself.
Other factors are at play: competitors and how much they are willing to spend. And this is when Ad Rank comes in handy. Not only does it analyze our campaign and ad configuration, but also external factors like how competitive our bidding strategy is compared to other companies in the auction.
Ad Rank is a tool that helps us to better understand how our ads will perform based on their copy, targeting, user experience on the landing page, especially when considering our investment compared to other businesses.
How to Optimize Your Cost Per Acquisition Metric
There are a few key things you can do to optimize cost per acquisition:
- Ensure you know your target audience well and what they expect or need from your product or service.
- Once you know this, you need to tailor the message to meet their expectations and address their pain points, and create a user journey that increases their purchase intent at every step (i.e., a sales funnel that fuels purchase intent for your product).
- Next, track your acquisition costs closely, so you know exactly where your money is going. Then you can look for ways to lower those costs.
Acquisition costs can be a major drain on your marketing budget, so consider the following strategies to optimize your cost per acquisition.
Spark audience interest
Curiosity is a powerful motivator, so make sure you understand what your audience is interested in and appeal to those interests. There are a number of ways to do so, including using strong headlines and images, providing useful and relevant information, and offering incentives such as discounts or free shipping.
Optimize your landing page
The next step to lowering CPA is designing a compelling and engaging landing page. It's the first thing a potential customer sees after clicking on the ad, so it should trigger a user to convert and explore the website.
Run A/B tests to see what copy, headline, and CTA text has the highest conversion rate. Experiment with CTA placement, pop-up banners, and messaging to lower the CPA further. Make sure you run one experiment at a time to gain clear results.
Identify and work with purchase intent
Accurately identify your audience's purchase intention. You must understand when someone is actively considering making a purchase and then target them with your marketing messages.
There are several ways to determine purchase intent, including online surveys, customer interviews, and website behavior analysis. Often, the source of traffic tells a lot about purchase intent:
- A user searching for “marketing analytics software” has a higher purchase intent than one looking for “marketing strategy definition.”
- A user looking for tool comparison information, brand 1 vs. brand 2, has an even higher purchase intent.
Once you understand when someone will likely be considering a purchase, you can adjust your marketing efforts and budget accordingly. Thus, you can reduce your cost per acquisition and improve your overall profitability.
One of the most effective tools to optimize your CPA is remarketing or retargeting. As the name suggests, it is a form of online advertising that allows you to target users who have already visited your website or interacted with your brand.
By targeting these users with relevant ads, you can increase the likelihood that they'll convert and lower your overall CPA. Remarketing is an essential tool for any online marketer and can be used to great effect to improve your metrics.
CPA is undeniably an important marketing metric, but so are ROI, ROAS, CLV, and a few more. To get a holistic picture of your advertising efforts, you need to analyze ads in a broader context.