In the increasingly saturated pool of online advertising, there is a range of marketing metrics available to digital marketers looking to evaluate the success of their marketing campaigns.
Cost per acquisition (CPA) is a financial metric that can help directly measure the success of an ad campaign by calculating the aggregate cost of acquiring a paying customer.
This article takes a deep dive into what CPA is and how it can be leveraged for reduced ad spend, maximum revenue impact, and marketing success.Table
Table of contents:
What Is CPA (Cost Per Acquisition)?
Cost per acquisition (CPA) is a digital marketing metric that calculates the cost of a single consumer becoming a paying customer or subscriber. CPA is usually tied directly to an ad campaign or specific marketing channel.
By combining CPA with average order value (AOV) and Customer Lifetime Value (CLV), an online business can calculate what CPA will work in their marketing budget.
It may be of interest to note that CPA is sometimes referred to as cost per action, but the two terms are interchangeable and mean the same thing.
How to Calculate Cost Per Acquisition (CPA)
CPA is calculated by dividing a marketing campaign's total costs by the number of new customers acquired during the same time period. Here’s the CPA formula:
CPA = Campaign Cost / Conversions
Use Publift's easy-to-use free CPA calculator to track your campaign and make informed decisions fast.
Let's look at a practical CPA example in online advertising.
Say you run a display ad campaign for your online clothing store and the total cost of the campaign is $1,000. From this campaign, you make 15 sales from 15 new customers.
To calculate the CPA, you would divide 1,000 by 15, delivering a CPA of $66.66.
What Is a Good CPA?
Determining what makes a good CPA is a subjective endeavor and is closely related to each business’ customer lifetime value (CLV).
CLV is the total amount of money a customer is likely to spend over the course of their relationship with a business. Determining the CLV allows marketers to ensure they are not spending more to acquire a customer than the dollar amount the customer is worth to the business long term.
In order to calculate a CPA target, businesses should first calculate the average CLV of an online customer. Once that is determined, businesses can look at their overall operating costs to determine how much can be allocated to CPA. This will generally mean a lower CPA for a business with relatively high fixed costs.
While CPA varies from business to business, a good target is 3:1, roughly three times lower than the CLV.
There are several factors that online businesses can consider in order to calculate the cost and determine how much they can reasonably afford to spend to acquire customers.
With a limited marketing budget comes a more conservative advertising budget. Marketers with a relatively small amount of ad dollars to spend should focus on low-hanging fruit—queries that have been demonstrated to have a high conversion rate.
Brands with a larger budget for ad spend can look to include lower converting terms with a higher cost per acquisition (CPA).
Paid Marketing Mediums
The channel used in an ad campaign will play a factor in what is considered an affordable CPA. Affiliate marketing, pay per click (PPC) ads, and content marketing all have different goals, and the CPA will vary accordingly.
While CPA is most usually defined as the cost of acquiring a new customer, it sometimes applies to other marketing endeavors such as having a customer complete a form submission or other action.
Why CPA Is an Important Marketing Metric
Cost per acquisition (CPA) is an important metric for digital publishers because it allows them to measure and optimize the effectiveness of their marketing campaigns. By understanding how much it costs to acquire new customers, publishers can optimize their campaigns to maximize return on investment (ROI).
Additionally, CPA data can help publishers identify which channels are most effective at driving new customer acquisition and which channels are less effective. This information can then be used to make strategic decisions about where to allocate marketing resources.
However, like most marketing metrics, CPA should be used in the context of a range of data sets, such as ROI, conversion rate, vCPM, and more.
When You Should Use CPA
Cost per acquisition (CPA) is used in the following marketing campaigns:
- PPC advertising
- Affiliate marketing
- Display advertising
- Social media marketing
- Content marketing
3 Tips to Reduce CPA
Reducing cost per acquisition (CPA) is not merely about driving traffic in order to increase new customers.
For most marketers looking to reduce their average CPA, it is advisable to look at cost optimization as a part of a larger strategy that aims for a low CPA and high ROI from the very top of the marketing funnel.
1. Optimize the Landing Page
Usually the first thing that users see after clicking on an ad, landing pages play a large role in whether a customer will convert.
With an effective landing page being shown to boost conversions by 300% or more, it is crucial that advertisers optimize their landing pages via A/B testing to ensure they are maximizing return on ad spend (ROAS).
2. Check Out Optimization
For marketers directing customers to an eCommerce site, checkout optimization is a must to ensure a reduced CPA rate.
Checkout cart abandonment sits at almost 70%, with the top abandonment reason being hidden charges. Therefore, being upfront about any extras (shipping, conversion rates, etc) is essential, as is making the checkout process as seamless and fuss-free as possible.
3. Apply the Pareto Principle
The Pareto Principle states that 80% of a business' sales will come from 20% of customers, meaning that repeat customers will make up the bulk of revenue.
Marketers who focus on acquiring customers who make more than one-off purchases will see their CPA shrink.
CPA Advantages for Publishers
- The model can be customized to fit the advertiser's needs, so publishers can optimize their campaigns to get the best results.
- Publishers can more easily pair up with niche-related brands to drive higher revenue.
CPA Disadvantages for Publishers
- Advertisers only pay for conversions, placing more risk on publishers.
- If acquisition costs grow too high, advertisers may lose interest in the model.
Average Industry CPA Benchmarks
The lower the cost per acquisition (CPA), the better it is for business, but what is considered a universally good CPA? It can be hard to benchmark, as it differs across industries and channels.
In order to gauge CPA performance more specifically, it can be useful to compare the average CPA across industries in Google Ads and the GDN.
CPA Industry Averages
CPA marketing can be a great way to reach your target audience and generate leads for your business, but it's important to understand how it works and how to use it effectively.
Publishers also need to understand the benefits and risks of embracing the CPA model before deciding whether it is the right fit for their content and audience.
At Publift, we help digital publishers get the most out of the ads on their websites. Publift has helped its clients realize an average 55% uplift in ad revenue since 2015, through the use of cutting-edge programmatic advertising technology paired with impartial and ethical guidance.
If you’re making more than $2,000 in monthly ad revenue, contact us today to learn more about how Publift can help increase your ad revenue and best optimize the ad space available on your website or app.