Cost Per Acquisition in digital marketing (CPA) is a vital metric that measures the cost of acquiring a new customer through your marketing efforts. It helps businesses determine whether their marketing strategy needs to be revised by indicating how much they spend to gain each new customer.
The formula for calculating CPA is:
CPA = Total Marketing Spend / Total Number of Conversions
What is Cost per Acquisition (CPA)
Cost per Acquisition, also known as Cost per Action or CPA, is a marketing metric that measures the cumulative costs of a customer taking an action that leads to a conversion. Sometimes, a conversion is synonymous with a sale, but it can also be a click, a download, or an install.
Ad networks will give you the option of choosing between CPA, CPC (Cost per Click), and CPM (Cost per 1000 impressions) bidding. The reason CPA bidding is preferred by marketers is that you are paying for a direct result. This approach provides a clearer picture of the effectiveness of your campaigns, enabling you to compare performance across different channels. For example, you can evaluate the cost-effectiveness of campaigns running simultaneously on both Facebook and Google.
How to Calculate Cost per Acquisition
Cost per Acquisition Formula is:
CPA = Total cost of a campaign / Number of conversions
But how do you know whether you have a good or bad CPA? To determine what is a good CPA, you need to compare it to your Customer Lifetime Value (CLV).
CLV (Customer Lifetime Value) represents the total amount of money that a particular customer is likely to spend over his or her lifetime relationship on your website. To ensure profitability, CLV should be greater than CPA (CLV > CPA).
Your target Cost per Acquisition is determined by the budget you can allocate to acquire a new client. To determine that, you need to:
- Calculate CLV:
- For one-time purchases: The CLV is simply the price of the product. If a bouquet costs $10, the CLV is $10.
- For subscriptions: Use the formula: CLV = Average Monthly Revenue per Customer / Churn Rate. If your subscription is $100/month and the churn rate is 25%, then: CLV = 100 / 0.25 = $400
- Determine Marketing Budget: Subtract your operating costs from CLV to find your CPA target. If your monthly operating cost is $1,000 and your CLV is $400, allocate 40% of CLV to operating costs: $400 * 0.4 = $160 This means you can spend up to $160 on acquiring a new customer to remain profitable.
Cost per Acquisition Example
Let’s take a practical example. Suppose you run a Facebook campaign for your online shop that sells flower bouquets, and your total budget for that campaign is $500. After the campaign ended, you calculated that it brought you 25 sales. So, what is the CPA for this campaign?
CPA = $500 cost of campaign / 25 conversions = $20 CPA
To determine if $20 is a good CPA, compare it to your Customer Lifetime Value (CLV):
- For one-time purchases: If each bouquet costs $10, your CLV is $10, which means spending $20 to acquire a customer is not profitable.
- For subscriptions: If your subscription service costs $100/month with a 25% churn rate, your CLV would be $400. In this case, spending $20 to acquire a customer is highly profitable.
How to Reduce Cost per Acquisition
Most marketers focus on sales and traffic acquisition and don’t think about cost optimization. But it’s best to think about reducing CPA from the very beginning because that way you will not have to think about ways to increase conversions later. Reducing the Cost per Acquisition can increase your Return on Investment (ROI) within a relatively short period.
Below I have put together a list of best practices that will help you reduce the Cost per Acquisition.
1. Landing Page Optimization
Your landing pages have a significant impact on conversions because they are the first thing your customers see after clicking on your ad. To measure the effectiveness of a landing page, run an A/B test where you change a single characteristic of that page.
For example, you could drive half of your traffic to a generic landing page and the other half to a page with a targeted offer, and determine which of them brings you the best results.
Find the winning version of your website using A/B testing.
2. Identifying Purchase Intention
By using surveys, you can identify the purchase intention for various sources of traffic and adjust your marketing budget accordingly. Two different traffic sources can have a similar conversion rate, but bring you customers with different purchase intentions and retention rates. That depends on how loyal they are and how effective the channel/initial nudge was.
Want to find out why some customers convert on your website, while others don’t? Start using surveys now!
3. Check-Out Process Optimization
The average check-out shopping cart abandonment rate is 68%, and the top reason people abandon their carts at check-out are hidden charges. So be straightforward about the total amount of the purchase, including shipping fees.
Other reasons customers abandon their carts at check-out are related to technical issues (website time-out, website crashes, screen freezing, etc.). By creating a more pleasant experience for your customers, you will also lower your Cost per Acquisition.
4. Retargeting
Retargeting/remarketing helps you reach out to people who have bounced from your website. By connecting with potential leads, you can, hopefully, convert them into customers. This means that increasing your conversion rate by using retargeting techniques can reduce your Cost per Acquisition.
For e-commerce businesses, a special segment of bounced traffic is represented by users that have abandoned their shopping carts. These users actually have a strong inclination to buy something from you, more so than website visitors for example. With the right offer, converting them into customers after retargeting should be easy.
5. Personalization
Use dynamic text replacement to ensure consistency between your ad’s promise and your landing page. Let’s say you advertise for “most comfortable chairs”; your UVP can be: Looking for “most comfortable chairs” in [CITY]? You’re in the right place!
Personalized ads are important, so make sure you get started today!
6. Applying the Pareto Principle to Targeted Locations
80% of your sales come from 20% of the locations you are targeting. So by focusing your budget on these locations, you can generate more sales, which in turn will lower your CPA.
Once the sales start pouring in and you get a bigger budget to spend, you can go back and focus on those low-sales locations.
7. Using Exit-Intent Overlays
By using exit-intent overlays you can re-engage your visitors and find out why they’re not converting. One smart way to do this is by using the logic branching exit-intent overlays with objection treatment: if your customers are not convinced by the price/return policy, you have various scenarios at your disposal to address those objections.
8. Improving Google Quality Score
Quality Score is Google’s rating of the quality and relevance of both your keywords and PPC ads. It is used to determine your cost per click (CPC) and multiplied by your maximum bid to determine your ad rank in the ad auction process. (Wordstream)
To improve your Quality Score, you need to find the most relevant keyword groups for your business and enhance your UX. This will also improve the clickability of your ad. An improved Quality Score will translate into a lower Cost per Click and Cost per Acquisition.
