What is Cost Per Acquisition (CPA)?
Most business owners today would agree that you must advertise and promote yourself if you want to grow. Being willing to spend money on paid media, such as online ads, is a requirement in today’s competitive landscape.
But, even though you are spending money to attract business, how do you know if your online ads and website content is persuading your audience to buy your product or service?
One metric that can help track your online ads’ value is Cost Per Acquisition (CPA).
The Definition of Cost Per Acquisition
Cost Per Acquisition (CPA) is a marketing metric. It measures the total customer acquisition cost to acquire a single paying customer for your business. Usually, cost per acquisition is tied to a specific advertising campaign or marketing channel.
If you run a business that advertises online, cost per acquisition is an essential measurement for tracking success. It’s a way for your business to determine if your investment in a particular marketing channel is worthwhile.
Why Does Cost Per Acquisition Matter?
Cost per acquisition matters as a marketing metric because it helps companies to measure their return on investment (ROI). No matter how much revenue your business makes, measuring your advertising results from a Google Ad, or Facebook Ad will show whether your revenue is generated efficiently.
While most other marketing metrics – such as bounce rate or unique visits per page – are indicators of success, they don’t have a dollar amount tied to them. But every marketing effort should ideally be tied back to acquiring a potential customer in some way.
Cost per acquisition is different than other online stats because it is a financial metric. It creates a direct link between revenue and how marketing campaigns impact it. Knowing your average CPA is essential to do cost effective lead generation.
Using some simple data, a business owner can quickly determine an acceptable cost per acquisition by calculating the average order value (AOV) for each customer and the customer lifetime value (CLV).
When Should You Use Cost Per Acquisition?
Whenever you are thinking of spending advertising dollars online, it’s crucial to track the results closely. Cost per acquisition is typically used in these paid marketing mediums:
Pay Per Click (PPC)
Pay Per Click (PPC) is a type of search engine marketing in which advertisers use the Google Ads platform (and other platforms) to target users searching for goods and services.
PPC advertising offers many services across other platforms such as Facebook, LinkedIn, Instagram, and more. Using tools such as the Facebook Pixel can also help with retargeting ads which can boost your conversion rate.
Any PPC campaign aims to generate as many conversions as possible while spending the lowest possible amount. This approach creates a lower cost per acquisition and helps a business to stay profitable.
Display Advertising is a type of online marketing in which advertisers use banner ads and display ads on websites or other social platforms. Typically, you will see these ads on popular blogs and news sites and have the small AdSense logo in the top corner.
The goal of display advertising is to strategically place ads on websites or platforms that generate users from your ideal target audience. This advertising approach ultimately converts a higher rate at a lower cost (and lowers your cost per acquisition).
Affiliate and Influencer Marketing
Affiliate Marketing is a lesser-known marketing strategy where a person or a company can make money by promoting another business’s products or services.
Any affiliate marketing campaign’s goal is to promote your products or services on another site that brings in your targeted audience through search or a following.
Affiliate marketing is essentially the same thing as influencer marketing, which is becoming more and more popular. Instead of using a targeted website, influencers use their social media channels to promote products and services to an audience. Affiliate and influencer marketing can be a great way to minimize your cost per acquisition through targeting promotion.
Social Media Marketing
Social media marketing is simply marketing across social media platforms such as Facebook, Instagram, Twitter, TikTok, and Snapchat.
Social media marketing aims to maximize your impressions and clicks to as many users as possible.
Social media platforms are also used for paid social campaigns, where keeping cost per acquisition low is critical. Social media campaigns can quickly cost a lot of money, and only amounts to impressions, so you must track them closely if you want to maximize your cost per acquisition.
How Do You Calculate Cost Per Acquisition?
The basic formula for calculating cost per acquisition is:
Total ad spend / Total customer sales
For example: if you own an ecommerce business that sells widgets, you can start by building a website and then running paid ad campaigns on social media to promote your products.
If you spend $1000 on advertising and sell 100 widgets, your cost per acquisition is approximately $10 per sale.
It is essential to keep in mind that if your company does not sell products, you can still easily calculate your CPA. You can track a conversion as demo signups; form fills, etc.
What is a ‘Good’ Cost Per Acquisition?
When it comes to determining your ideal cost per acquisition, there is no benchmark. Each online business will have different products and services, prices, margins, operating expenses, etc.
On top of this, each product or service will get different results depending on the ad campaigns you choose to use.
Perhaps the best way to define a ‘good’ CPA is to understand PPC, social media, display marketing, and affiliate and influencer marketing. Better knowledge of these different advertising types will help you calculate how much you can afford to pay for acquiring new customers.
As with everything in marketing, the best approach is to do small tests and measure the results. If you can find your cost per acquisition rates early and still make a profit on every sale, you are on track to growing your business through online advertising.