Cost Per Acquisition

What is Cost Per Acquisition?

Cost Per AcquisitionCost per acquisition (CPA), also known as “cost per action” is the average cost an online marketing advertisement incurs when a specific action has been made. These actions include clicks, sales, downloads, and form submissions. This digital marketing metric is the ratio between the total cost of the campaign divided by the number of “actions” occurred. A CPA calculation enables online advertisers to place a cost on each conversion, which allows for campaign optimization strategies as well as a more in-depth understanding of your organization's sales and operation.

Cost Per Acquisition Pricing is Used For:

  • Pay-Per-Click (PPC)
  • Cost-Per-Action (CPA)
  • Social media marketing
  • Affiliate marketing
  • Display marketing
  • Content marketing

Examples of Cost Per Acquisition:

  • Making a purchase on a company's website
  • Signing up for a mailing list, wait-list newsletter
  • Downloading an app
  • Registering for an online course or tutorial
  • Signing up for an e-book or guide download

Calculating Cost Per Action

The basic formula for calculating your target cost per action is as follows:

Average Transaction Value or Revenue Amount

- Cost to Produce Products or Service

- Estimated Fixed Costs Involved (Not Including Marketing Costs)

= Gross Profit (Before Advertising)

- Desired Net Profit

= Target Cost Per Conversion

Tracking Cost Per Acquisition

You can track CPA through the various mediums with a variety of methods including:

  • Implementing a CRM system
  • Including additional questions on forms that can link a conversion to your CPA campaign
  • Using promotion codes for CPA specific links
  • Using UTM parameters to generate trackable link codes

Why is CPA an Important Metric?

There are various marketing metrics that indicate the success of a campaign, such as:

  • Marketing qualified leads
  • Sales qualified leads
  • Funnel conversion rates
  • Brand awareness
  • Customer engagement
  • Conversion rate
  • Cost per conversion
  • Marketing spend per customer
  • Return on investment
  • Lifetime value of a customer
  • Customer retention

However, what's key about cost per acquisition is that it's a financial metric that directly measures the revenue impact of marketing campaigns. Not only does it indicate how successful an ad campaign is, it also enables you to know what you can reasonably afford to pay to acquire new customers.

To be more specific, the cost per action indicates how much your advertising budget would cost, over all, if it's successful in converting a potential customer. Since advertising is crucial for ensuring your target audience sees your product or service—and the success of your business is rooted in the success of your marketing—there are many benefits of being in control of your CPA.

If you don't have an understanding of your cost per action, you're essentially operating in the dark. Your business will be at constant risk of overpaying for your customer acquisition, which can have negative consequences for your bottom line.

By taking the time to calculate an effective CPA, you'll be able to create solid customer acquisition strategies that are essential for your business' long-term success. Tracking your CPA ensures you're investing in the most cost-effective channels, as well as gauging the success of various marketing efforts. This will help you adjust and pivot when necessary to improve the success of said campaigns.

Cost Per Acquisition VS Cost Per Lead Advertising

CPA and CPL campaigns are different, although it's easy to confuse the two. In Cost Per Lead campaigns, advertisers pay for an interested lead, such as the contact information of a person interested in your product or service. The goal is lead generation. This differs slightly from a CPA campaign, which looks to engage consumers at multiple touch points. For instance, you may have the option for a newsletter list, reward program, online course, etc.

Typically, although not always, a CPA campaign involves a completed sale or transaction. Whereas a CPL campaign involves basic lead acquisition—such as supplying an email address. Think of it this way, CPL remains fairly top-of-funnel, whereas CPA campaigns have more moving parts and tend to be middle or end-of-funnel marketing.

How Do I Know if I Have a Good CPA?

There's no magic number for what constitutes a “good” CPA. There are a variety of factors that influence a business' desired CPA including:

  • Business Stage: What stage are you at with your business? The goals of a start-up are very different from those of an established company. Your marketing strategy is informed by whether profits can come second to brand exposure, and how much you can financially risk while establishing a good CPA.
  • Marketing Budget: A limited advertising budget for your business tends to mean you have less to invest in ad campaigns. If you don't have much of a budget, SEO or organic social media campaigns might be a better option. When your business gets to a point where it can afford a higher CPA, that will change what kinds of campaigns you run and invest in.
  • Advertising Medium: Where you choose to spend the most ad dollars is influenced by what business stage your company is at and what your end goals are. Content marketing, pay-per-click and social media have different expectations and desired outcomes. For instance, blogs tend to be top of funnel content that drives brand awareness or establishes expertise, as opposed to making sales.
  • What “Acquisition” Means to You: Typically, CPA refers to customer acquisition cost. However, it can be used to measure newsletter sign ups, e-book sign ups, online course registrations etc. It's up to you to define the metric according to what you want out of the campaign. It's considered best practice to use CPA as an overarching metric connecting secondary conversions (e-books, newsletters, etc.) to the primary conversion, which is making a sale.

CPA Bidding

Unlike CPC bidding (cost per click), which is when you pay Google for every time a consumer clicks on one of your ads, CPA bidding only requires you to pay for each conversion. As we mentioned earlier, you define the conversion metric when you set up each campaign.

Unlike a conventional auction, the highest bidder does not always win when it comes to CPA bidding. Advertising platforms, like Google, look at Ad Rank to establish who the successful bidder will be. Ad Rank is calculated by multiplying your maximum cost per acquisition bit with the quality score of your ad. There are a few factors that decide what quality score your ad has:

  • Your page's relevance to the keyword
  • User experience
  • click-through-rate

Google wants to prevent organizations with big ad budgets buying their way to the top. Instead, the search engine wants quality content and advertisements to be what searchers discover. So they reward companies with good ads, and discourage companies with bad advertisements. Although it's still possible to rank highly with poor content, companies unwilling to invest in their content wind up with massive costs.

Google's Target CPA Bidding

To generate as many conversions as possible that your budget will allow, a helpful tool is Google's target CPA bidding. It leverages machine-learning to analyze the historical conversion data of your campaign. Then, it will recommend an optimal average target CPA and automatically optimize all your eligible bids to meet the target CPA you set for each campaign.

Keep in mind target bidding doesn't mean all your conversions will cost the same. Some may be more than others because they have a better quality score or there are different levels of competition in your ad auction. These competition levels could also fluctuate over time. That said, Google will do its best to keep your cost per acquisition as close to the average target as possible.

How to Optimize Your CPA Costs: Improve Your Quality Score

While there is no set formula for optimizing your cost per acquisition costs, there are a few factors to keep in mind. Your quality score is the most influential determinant in securing top ad ranking. It's a metric that measures how positive, relevant and authoritative your content is for a searcher. Having expertly honed content is key for generating conversions and landing the top ad rank spot.

Most consumers are exposed to 4,000 to 10,000 ads each day. It might be hard to wrap your head around this number, but it goes to show how important it is for your ad copy to stand out from the thousands of other advertisements your audience sees. Because of these high numbers, many people experience ad fatigue. This is when they essentially start to “glaze over” when an ad pops up in Google search, on Instagram or on YouTube. While this makes it additionally challenging to craft an ad that will grab the attention of your target customer, it's not impossible.

So, how do you persuade your audience to pay attention to your ad, instead of glance past it, while having a lower CPA? Here are a few tips to get you started.

1. Evoke Curiosity

Your ad is just the tip of the iceberg, so to speak. You want prospects to feel compelled to click and sign up on whatever acquisition you've set the metric on—be that a newsletter sign up or free online tutorial registration. By piquing your audience's curiosity enough, without satisfying it, they'll click on your ad. What's key here is to find the balance between ambiguity and clarity. Your audience needs to know what the ad is about, but still be left wanting more. It's important to be clear and concise, but also engaging.

2. Sell a Feeling

In any Marketing 101 class, one of the first tenets of persuasion is to appeal to your target audience's emotions. People tend to associate human personality traits with brands, like they do with people. A brand could be sophisticated, inspirational, fun, witty, etc. Consumers resonate with brands that highlight emotions they relate to—or more importantly—aspire to.

When writing your ad, don't just focus on a product's features. This only appeals to logic, and it won't be as appealing as an advertisement that appeals to emotion. Think about the need your product or service is filling and work back from there.

3. Design a Persuasive Landing Page

You didn't think your work was done at writing a convincing ad, did you? Once your target audience clicks on your expertly crafted ad, they need to be taken to a lead magnet or landing page that ushers them to your desired acquisition. Writing compelling landing pages is both an art and a science, but a few tips to keep in mind include:

  • Write intriguing headlines and subheadings
  • Clearly include the value your lead magnet provides
  • Don't include external links, so your prospect is less likely to leave your site
  • Consider using a video, which is more engaging than text
  • Include customer testimonials
  • Highlight the benefits of your product/service, not the features
  • Write conversationally, not technically
  • Include a motivational call-to-action

Remember, It's the Conversions that Count

It can be all too easy to get caught up in “vanity metrics” as a marketer, or when looking at the engagement metrics for your content. For instance, the amount of clicks your ad got might sound impressive, but clicks are not as important compared to the amount of people who actually sign up for your email list, free guide etc.

Other Cost Optimization Tips

While your quality score remains king, and optimizing content for Google or your chosen advertising platform will lower your CPA costs, there are a couple other factors to keep in mind.

Switch to a Different Marketing Channel

The two most-used platforms for CPA advertising are Facebook and Google, so their CPA rates will be significantly higher than alternative platforms. Depending on your target audience and your brand, consider running A/B tests on Instagram, Twitter, Pinterest or Reddit. These platforms are less expensive, but could be just as effective—if not more, depending on your product/service and audience.

Narrow Your Target

A key determining factor is a good-quality online advertising campaign that ensures your ad is reaching the right audience. You might assume that the more people who see your ad the better, but this is not the case. Advertising to audiences who aren't interested in your products/services will hurt your CPA rating. Instead, keep the following in mind:

  • Utilize negative keywords on your Google ad. This tool prevents your ads from being shown to users who look for a certain word or phrase. It's helpful because it will streamline your marketing campaign and reach the right prospects.
  • If you've been running campaigns that target a certain demographic or geological area, and they aren't working, stop those campaigns temporarily and pivot your efforts.
  • Monitor your analytics to see what times you're getting the most conversions at the lowest costs. Stop running ads during times that have a low return on investment, and instead focus your efforts on getting your ads out when your target audience is active.
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