THE ANATOMY OF CPA

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Before calculating CPA, you need to know what you’re trying to accomplish. Regardless of your industry, you should know how to measure and monitor your customers’ spending habits. However, it’s important to note that this is not a static figure and can vary widely from industry to industry and even from month to month. In addition, the calculation method used should only include the costs of marketing and advertising.

CPA (Click per Acquisition) rates vary widely from industry to industry, channel to channel, and advertiser. It can be challenging to know what value you’re getting from an advertising network. In this guide, we’ll explain how CPA works and how you can use it as a benchmark for evaluating the quality of an advertising network before you decide whether to partner with them. Let’s get started!

What is CPA?

A cost per acquisition, or CPA, is a popular metric for measuring marketing effectiveness. It measures the total amount spent to successfully generate one new customer on a campaign or channel level. A detailed evaluation of CPA lets you know if your campaigns are profitable and what channels work best to gain new customers.

There are various paid marketing platforms, namely PPC, Affiliate, Display, Content Marketing, and Social Media, wherein CPA prevails. It is also used for evaluating SEO, email, and other platform effectiveness.

How Do You Forecast CPA?

Let us use Facebook as an example. When you advertise on Facebook, you pay per click. Facebook tracks all sorts of data, including clicks and cost-per-click (CPC), so it’s relatively easy to forecast your CPA. To calculate CPC, simply look at your historical data—how many clicks did you get overtime? How much was each one worth?

So, to forecast CPA, we need just two pieces of information: How much money is going to be invested, and what are the total number of predicted transactions.

Your marketing and sales efforts should be growing, and your past marketing and sales investments should be yielding results. It’s important to note and measure enough volume of data to determine whether CPA costs are going up or down. With any marketing campaign, there are down-days and up-days so reviewing data in 7, 14, and monthly windows is preferred for most ad spends.

Moreover, you can monitor your past CPA and future CPA to see whether it’s a good idea to increase your marketing or sales efforts to improve your ROI.

How is CPA Calculated?

To figure out your CPAs, you first must forecast how many leads or sales you think you can get from each campaign and then apply for that number over your set budget.

The easiest way to do that is through some simple math. It’s important to note that cost per acquisition can change in context. For example, in lead generation-based businesses, CPA is when the customer is acquired and not when a lead form was completed. CPA in lead gen-based businesses factors in the effectiveness of the sales and follow-up process whereas ecommerce is a little more straight forward.

To calculate CPA, follow the formula here:

First, we need to determine the number of transactions:

(Number of clicks x average conversion rate).

An example would look like this: (10,000 * .04) = 400 transactions.

Now all that’s left is taking the total amount spent on your campaign, let’s say $10,000, and divide this by your total number of transactions like so:

$10,000 / 400 = $25 CPA.

It is important to take cost per customer acquisition into account for many reasons. Your marketing and sales efforts should be growing, and your past marketing and sales investments should be yielding results.

Moreover, you can monitor your past CPA and future CPA to see whether it’s a good idea to increase your marketing or sales efforts in various channels to maximize your return on advertising investments.

What is a Reasonable CPA Rate?

There is no universal standard for what makes a good CPA in eCommerce operations. Every business has many facets, from margins to operating expenses and spending on customers. However, there are still general benchmarks regarding your industry before you decide. Listed below are critical influencing factors:

  1. Current Business Level – Profit margins should be the first, second, and third priority, or you’re struggling to grow. But there are times when you need to sacrifice profitability for marketing purposes. Establishing best practices means having all team members’ input aligned with one another so that there is no room for confusion about what needs to happen next.
  2. Budget – Limited ad budgets for your business often mean you need to focus on high converting terms or those with the highest conversion rates and lowest cost per acquisition fees (assuming conversions are what you’re looking for). When marketing budgets go up, it becomes possible to test other terms, creative, or ad copy that might convert less but have lower costs per acquisition.
  3. Marketing Platform – With so many ways to run ads and make money, where should you start? If your company is just beginning, it might be wise to invest in affiliate or influencer marketing – they’re typically cheaper than other types of advertising and the UGC, reviews, and photos make it all worth it. Once your company reaches a higher level of growth, doubling down on paid media makes scalability more predictable.
  4. Defining Acquisition – While Cost Per Acquisition (CPA) refers to the cost it takes to earn a new customer, marketers often use it when they need a secondary measure of conversions. Connecting those measurements directly back to your primary conversion – making sales – is the goal of CPA.

The world of digital marketing continues to evolve, so it is essential to measure your data accurately to make better informed decisions. “Bad data, bad decisions.” Sign-up today for more conversion tips to improve your revenue, lower your advertising costs, and scale your ecommerce or lead generation-based business.