Cost per acquisition, or CPA, is one of the key metrics for marketers as well as the businesses they support to understand, optimize and track progress against. CPA tells you exactly how much each new conversion or customer costs to bring on board.
Some of the primary benefits of knowing your acquisition costs are that it will help you control your advertising limits, set bid amounts and monitor your overall marketing costs. Although calculating CPA is relatively easy, setting CPA goals requires planning, foresight and an understanding of your company’s business model.
What Is an Acquisition?
In most cases, acquisitions are conversions — that is, when someone does what you need them to do in order to move them through your sales funnel. An acquisition can be someone who has purchased a product, registered for an event, signed up for a newsletter or taken just about any other action you have decided is essential to your business. This is why an acquisition is often synonymous with an action, particularly on ad platforms that allow you to use target CPAs for pay-per-click (PPC) bidding.
CPA vs. CAC
CPA is often used interchangeably with another marketing term, customer acquisition cost (CAC), but there is an important distinction between them: CAC refers only to new paying customers.
As an example, if you do email marketing and launch an ad campaign to get new subscribers, then every new subscriber acquired would count as a CPA. Once a subscriber actually purchases something from you, they would count as a CAC. The same rule applies to free trials and other free offers.
The distinction between CPA and CAC can also apply to loss leaders, when you offer a promotion at a price that costs you money in order to get people to buy more expensive items. You could decide that the first purchase that costs you money is an acquisition, and any subsequent purchase that makes you money is a bona fide customer. It all depends on how you want to categorize them.
How To Calculate CPA for an Ad Campaign
CPA represents an average cost, so calculating it is just a matter of addition and division. Add up your advertising costs and then divide this amount by the number of conversions you received for that campaign:
Total ad spend/New customers = CPA
As an example, if you spent $1,200 on an ad campaign and got 30 new customers, then your CPA for that campaign would be $1,200/30 = $40.
Tracking CPA for Campaigns
Calculating CPAs for each campaign is a good way to compare one with another, provided your definition of an acquisition is the same for each campaign. Suppose, for example, you’re running CPC (cost per click) ads on two social media platforms, being charged for each click, and a CPM (cost per 1,000 impressions) ad on a third platform, being charged for each 1,000 impressions.
Each of these campaigns will likely give you widely different numbers for ad spend, impressions, clicks and conversions. But when you calculate the CPA for each campaign, you can easily see which was the most effective by looking at which CPA is the lowest.
At the risk of sounding obvious, the CPA only tells you the effectiveness of the campaign. You shouldn’t try to generalize the effectiveness of one channel, ad format or any other variable based on a few ad runs. Just because your video ad did better on Instagram than Facebook last week, this doesn’t mean a Facebook carousel ad couldn’t outperform your Instagram video.
You’ll find that your CPA can vary between platforms and the types of ads you run. If you’re using Google Ads in the technology industry, you may find that your average CPA using Google Display Network is $100, whereas the average CPA using Google Search ads is as much as $130.
Does this mean you should dump search ads? Absolutely not! This is why in baseball, runs batted in for other players is just as important as the runs a player earns for himself. It’s quite likely that those search ads are working to set up your success with the display ads. Eliminating one could cause your overall CPA to skyrocket.
Using Target CPA for PPC
If you’re using Google Ads, Microsoft’s Bing Ads or Facebook Ads, you have the ability to use target CPA bidding for your PPC ads. This can be very handy if you are running a PPC ad that is being successful and you would like to automate the process.
Most platforms define CPA as “cost per action” rather than cost per acquisition, but this is really the same thing, provided you specify your action as a conversion.
Once you select your CPA, the platform’s algorithms will automatically detect the best bids based on your budget with the goal of getting as many conversions as possible within your CPA. If you set your target CPA as $15, for example, the algorithms will aim for that cost, although the final outcome could be higher or lower than $15.
Before using a target CPA on any platform, you should run your ads for at least a couple of weeks. This is because the target CPA algorithms use historical data from your previous campaigns, so you want to ensure they have sufficient data to build on.
Tracking CPA for Your Marketing Department
Marketing entails a lot more than just a series of ads, so there is an important difference between the CPA of an ad campaign and the CPA of your entire marketing department. To determine what the CPA is for your marketing department, you need to factor in additional costs beyond your ad spend for a specific time period, such as a year or a business quarter. This includes such things as:
- Salaries of marketing staff
- Marketing-software subscriptions
- Marketing production costs (including image and video sourcing)
- Marketing-department office expenses
- Consultant fees
- Printing costs
- All advertising costs
- Sales costs, including salaries and commissions if applicable
While there are more costs to take into consideration, calculating CPA is the same, dividing costs by the number of new acquisitions for the same time period:
Total marketing costs/New acquisitions = CPA
Why Your Overall CPA Is Important
Your marketing department’s CPA will always be higher than that of an ad campaign, but it provides you with a realistic number for determining the effectiveness of your marketing efforts as a whole for any specific period of time. If you make changes to your marketing strategy, or if you hire new staff, your CPA will tell you how effective those changes have been.
Imagine you decided to hire a digital marketing consultant, who recommended that you increase your ad budget. The consultant’s fees, plus the increased ad spend, could dramatically increase your costs, but at the end of the day your total conversions should have gone up, resulting in more sales and decreasing your CPA. On the other hand, if you decrease your advertising and reduce staff, you would see your costs go down, but if this resulted in a higher CPA, then you would have lost more money than those cuts saved you.
When To Examine Your CPAs
The more often you calculate CPA, the more data you’ll have to make informed decisions about your marketing strategies and ad campaigns. CPA will constantly shift, going up at times and down at others, but over time you will be able to see trends emerge.
Some platforms or ad formats may consistently do better than others. Similarly, some times of the year, or even days of the week, may give you better CPAs than others.
These changes can even be in defiance of your ad spends. During the holiday season, ad spend may rise sharply, but if sales also rise, your CPA could be lower than other seasons. If your CPA increases during the holiday season, you should use this as an opportunity to reevaluate your strategy.
Setting Realistic CPA Goals
In an ideal world, advertising would be free and customers wouldn’t need to take time to think about buying your products or services, wouldn’t abandon carts and wouldn’t need to be retargeted. But marketing does cost money, and the amount it takes varies with every industry and every business.
If you’re launching a new brand, you should expect your CPA to be high in the early days, compared to what the costs would be for an established competitor. It takes time and money to establish brand awareness, train ad pixels and perfect your marketing techniques.
If the industry average CPA is $42, setting a goal of $10 simply won’t be realistic, and if you use $10 as CPA goal in your bids, your results will be disappointing to say the least.
Comparing CPA to Revenue
An important component in setting your CPA goals is to look at the long-term value of each customer to your business. This is called the customer lifetime value, and represents the amount of revenue you should expect to generate from each customer.
If you sell coffee, a customer’s initial purchase may only be worth a few dollars, and a CPA of $40 would appear to be excruciatingly high. But over a decade, that same customer could bring you over $10,000 in revenue, making that $40 CPA a real bargain.
Knowing the CPA benchmark for your industry is invaluable when setting your own CPA goals. These are sometimes provided in industry reports, but the information is often dated. To know what the benchmarks are today, talk to a digital marketing consultant with experience in your industry. Hawke Media has helped hundreds of clients across almost every industry to successfully leverage their acquisition marketing into real, sustainable profits. Your first consultation is free.
Sources
Google: About Target CPA bidding
Wordstream: Google Adwords Industry Benchmarks
Exponea: CAC vs CPA
Shopify: Customer Lifetime Value
Facebook: Your Guide to Facebook Bid Strategies
Microsoft: Let Microsoft Advertising Manage Your Bids With Bid Strategies