What is CPA(Cost Per Acquisition)? And How to Calculate it?
Cost per Acquisition (CPA) can be defined as one of the most essential metrics for all the marketers that should be tracked and measured. Now the question arises: Why? Because CPA gives marketers a clear estimate of how much your new customers are costing you. Moreover, it gives you an idea of whether or not you need to revise your strategy.
In contrast to conversion rate (an indicator of success), Cost per Acquisition is a financial metric that can be used to measure the revenue impact of a marketing campaign.
No matter which industry you belong to, as a business owner knowing what the Cost per Acquisition is and how to calculate is essential for your business. And here we will talk about:
What is the Cost Per Acquisition
How to Reduce the Cost Per Acquisition
How to Calculate the Cost Per Acquisition
What IS the Cost per Acquisition ?
Cost per Acquisition also referred to as Cost per Action or CPA, may be a marketing metric that measures the cumulative costs of a customer taking an action that results in a conversion. Sometimes, a conversion is synonymous with a purchase, but it also can be a click, a download, or an install.
Ad networks give options to choose between CPA, CPC (Cost per Click), and CPM (Cost per 1000 impressions) bidding. Marketers prefer CPA bidding because it gives direct results, and you can easily compare the performance across channels (when you are running campaigns on both Facebook and Google for example).
How to Calculate the Cost per Acquisition?
So if you want to learn how to calculate the Cost per Acquisition, it can easily be done using a straightforward formula. The formula goes something like this:
Marketing budget (per specified period of time) = CPA
New customers (in the same period of time)
Let’s take an example if you have a budget of $1500 to spend on Google Ads in a month and at the end of the month, you won 50 new customers, according to the formula your cost to win one new customer was $30.
Of course, this example that we quote is taking into consideration only one stream “Google Ads”. So, if you aim to get a clear look at your CPA incorporating on all channels such as expenses, sales staff, commissions, and sundries will give you a more accurate but slightly more depressing CPA.
In this case the CPA formula goes like this:
Google Ad spend + Sales Staff Spend + Display Advertising + Social Media Spend + Office Sundries = CPA
Now let’s suppose you get an extra of only 5 customers from other channels, so now the calculation will look more like this:
($1500+$1800+$200+$500+$200) = $76.3
Now let’s take everything into account including the amount of that one salesperson you hired and that print ad you paid for to add in your local paper, the CPA jumps to over 3x that of just paying for the PPC campaign.
If you’re measuring where your leads and sales are coming from then you’ll also be able to understand which channel is giving you the best CPA. And if you’re monitoring customer spend as a result, then you’ll also be able to see the CPA ROAS (just to double up on the acronyms).
But how do you find out whether it’s a good or bad CPA?
To find out whether a CPA is bad or not you need to understand CLV first because CPA and CLV are closely connected. CLV (Customer Lifetime Value) stands for the total amount of money that a customer is likely to spend over his or her lifetime relationship with your website.
Why do you need to know the CLV for each customer? Well, because it makes sure you’re not paying more to get a customer than what they are worth to your business, but also to determine which channels are the most effective to invest in your business growth. Therefore, you’ll want to make sure that CLV>CPA for each channel.
If one of your primary acquisition channels is media, then calculating CPA is helpful in determining the effectiveness of your campaigns. The lower your CPA in relation to your LTV, the higher your profit will be.
Cost Per Acquisition measures the success of various paid marketing channels such as PPC (pay per click), affiliate, display, social media, and content marketing. It can also measure channels that have more indirect costs (e.g. salary, etc.) such as SEO, email, or other platforms.
Since CPA is a more granular metric, it’s important to also track other more holistic metrics (Marketing ROI, LTV, Website Conversion Rate, etc.) to gain an accurate picture of all your marketing efforts in relation to the revenue they’re generating.
How to Reduce the Cost per Acquisition
Most marketers today focus only on sales and traffic acquisition and not on cost optimization. But to keep running the business it’s best to think about reducing CPA from the start because this 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 We have put together a list of best practices that will help you reduce the Cost per Acquisition.
1. Landing page optimization
Your site landing pages have an important impact on conversions because that is the first thing your visitors see after clicking on your ad. So, if you want to measure the effectiveness of a landing page, you have to run A/B testing 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. By doing this, you will know what kind of landing page brings you the most conversions and helps you reduce CPA long-term.
2. Identifying purchase intention
You can utilize surveys to identify the purchase intention for various sources of traffic and accordingly adjust your marketing budget. However, 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.
3. Check-out process optimization
Keep it straightforward, the average check-out shopping cart abandonment rate is 68%. Why? Well, because of the hidden charges, don’t confuse your customers with extra amounts and hidden shipping fees. Keep it transparent!
Moreover, other reasons that customers abandon their carts at check-out are simply because of technical issues (website time-out, website crashes, screen freezing, etc.). Creating a pleasant experience for your customers will help you lower your Cost per Acquisition.
Retargeting will help you reach out to people who visited your website but bounce out. By making a connection with these 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.
If you are running an eCommerce business, there is a special segment that tracks the bounce traffic that has abandoned their shopping carts. These are the users that are your potential customers holding a strong inclination to buy your products, more than the visitors on your website for example. With amazing offers, you can easily convert them into customers after retargeting should be easy.
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!
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. Improve 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.
If you want to improve your Quality Score, all you need to do is optimize your website with the most relevant keyword groups for your business and enhance your User Experience. This will not only improve the clickability of your ad. But will also improve the Quality Score which will lower Cost per Click and Cost per Acquisition.
These methods will significantly reduce your Cost per Acquisition, which means you’ll have a bigger budget to reach your target KPIs. Below, you can see a model that demonstrates why you should focus on conversion rate optimization.