Marketing costs are often thought of as fixed overhead: inflexible expenses a business has to pay to promote its products or services in a competitive market. However, marketing dollars can be just as dynamic as material costs in a business’s budget.
A shrewd entrepreneur wouldn’t produce a prototype without ensuring the cost of materials was low enough compared to the retail price. You can look at marketing costs the same way. Are the methods you use to reach and convert a shopper into a paying customer worth the cost to deploy? One way to determine the value is by calculating cost per acquisition, or CPA.
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What is cost per acquisition?
In marketing, cost per acquisition (CPA) measures the aggregate cost of converting a lead as part of a marketing campaign. Some businesses define an acquisition as a literal sale, while some employ a looser meaning to include affirmative engagement metrics, like clicks and newsletter subscriptions.
CPA is one of the key metrics for determining marketing success and should not be confused with the customer acquisition cost (CAC). CAC represents the total marketing spend divided by new customers acquired during a given period. CAC paints a broad picture of the cost of acquiring new customers, while CPA is more targeted in its approach.
Why is cost per acquisition important?
While there are plenty of marketing metrics that can indicate an individual campaign’s general success (like conversion rates, unique webpage visitors, etc.), CPA directly measures the revenue generated by it. Here are other reasons why measuring CPA is important:
With the data a CPA calculation generates, businesses can allocate their resources more efficiently. By understanding the CPA for each campaign, a company can compare the effectiveness of various campaigns and make informed decisions about how much to spend and where to spend it moving forward. It can avoid wasting resources on campaigns or channels that are not delivering a reasonable marketing ROI, or return on investment.
CPA is also essential for assessing the profitability of acquired customers. If the cost of acquiring a customer exceeds the revenue impact of that customer, it can indicate an unsustainable business model. By tracking CPA, businesses can identify areas where it may need to cut marketing spend or adjust pricing.
CPA is an essential marketing metric for businesses looking to scale and grow. It helps determine how much additional investment is needed to acquire more customers profitably. A low and manageable CPA can signal that a business is ready to expand its customer base without incurring excessive costs.
CPA plays a crucial role in forward budget planning. It’s an objective metric that helps businesses set realistic marketing budgets by providing insights into the costs associated with achieving successful campaigns and deploying channels.
What factors influence cost per acquisition?
A wide array of factors can influence CPA. Here are a few and how they can affect your marketing efforts:
The choice of marketing channel can significantly affect CPA. Different channels—such as pay-per-click (PPC) marketing, affiliate marketing, social media marketing, and content marketing—have varying associated costs. The competition and demand within a specific channel zone can also influence CPA.
Marketing outcomes can also have different associated values. For instance, content marketing generally converts fewer customers in the short term, but can effectively drive long-term brand awareness.
A smaller marketing budget, coupled with a focus on high-conversion digital marketing strategies, generally produces a lower CPA. As a marketing budget increases over time, the CPA may increase along with it; strategies expand into campaigns and channels that might yield lower conversions in the near term but better results over the long term.
Definition of acquisition
CPA usually applies to the cost of acquiring paid customers or a customer taking an action that leads to a sale. However, some businesses expand the definition to include a click, a download, an app installation, a newsletter signup, or a direct mailing listing.
How to calculate cost per acquisition
CPA is calculated by dividing the cost of a campaign by the number of new customers acquired within the same time period.
The mathematical formula for calculating CPA is:
CPA = total cost of campaign / number of conversions
Let’s apply the cost-per-acquisition formula to a real-world example. Let’s say an online clothing boutique launched its first Facebook ad campaign. The total budget for the campaign was $1,000. At the end of the campaign, the retailer determined it brought in 10 sales. The CPA for this campaign would be calculated as follows:
$1,000 / 10 conversions = $100
With a calculation in hand, a business next needs to determine if the result indicates a good or a bad CPA. To do this, you may want to compare your CPA to your customer lifetime value (CLV), which looks at how much a customer is really worth to your business.
How to lower your cost per acquisition
- Landing page optimization
- More efficient check-out processes
- Identifying purchase intention
The more sales a campaign or channel brings in, the lower the CPA will be. That’s easier said than done, of course. Some steps businesses can take to encourage conversions and lower CPA are:
Leverage customer data to produce personalized marketing—emails, product recommendations, targeted discounts, and more, all of which are geared toward consumers’ specific preferences. Personalized ads have a higher click-through rate (CTR) than standardized ones and lead to reduced ad spend.
2. Landing page optimization
Landing pages have a huge impact on conversions because they’re the first thing a customer sees after clicking on an ad. The best ecommerce landing pages are finely tuned to a specific target audience, focus on a singular call to action (CTA), and include just enough information to convert a shopper.
3. More efficient check-out processes
Customers abandon online shopping carts before the checkout stage at a whopping rate of 68%. The main reasons people abandon carts are surprise fees and unwieldy point-of-sale pathways.
Be transparent about the total purchase amount before customers hit the checkout page, and create a streamlined ecommerce checkout flow guiding the user through the process in as few steps as possible.
4. Identifying purchase intention
By using “How did you hear about us?” surveys, businesses can identify the purchase intention arising from various sources of traffic (search engines, social media, etc.). If a particular traffic source has a lower conversion rate, you can adjust your online marketing budget for that channel accordingly.
Retargeting helps businesses reconnect with potential customers who bounce from their websites. Shoppers who abandon online shopping carts represent a sizable portion of bounced traffic. These shoppers are typically more inclined toward conversion than those who visit a site and never add anything to their cart.
You can use retargeting to reach these users by, for instance, sending personalized emails reminding them they left items in their cart and including promotional codes. You can also buy ads that use retargeting data to display products shoppers considered but didn’t buy.
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Cost per acquisition FAQ
What are the two types of acquisition costs?
The two types of acquisition costs are CPA (cost per acquisition) and CAC (cost of acquiring customers, or customer acquisition cost). CPA measures the cost of acquiring a customer by way of a specific marketing campaign or channel. CAC measures CPA combined with the cost of customer retention over an extended period of time.
Are acquisition costs capitalized or expensed?
Costs associated with acquiring new customers are treated as operating expenses, which are then deducted from the business’s revenue during the period in which they are incurred. Expensing customer acquisition costs is in line with the generally accepted accounting principles (GAAP).
Can you lower your CPA without sacrificing quality?
Yes. By carefully reviewing a campaign or channel’s conversion rate, you can adjust your budget or reduce your ad spending accordingly. Having a smaller total campaign cost does not necessarily mean your marketing campaigns will be of lower quality; it often means you’re targeting customers more efficiently and with better outcomes.