What is cost per acquisition?
Cost per acquisition (CPA) measures how much it costs your business to gain one new customer through marketing efforts. It helps you understand the efficiency of your advertising spending.
Key points
- CPA shows the average cost to acquire one new customer.
- It is crucial for understanding marketing efficiency and profitability.
- Calculated by dividing total marketing spend by the number of new customers.
- Optimizing CPA helps businesses make smarter budget decisions and improve campaign performance.
When you spend money on marketing, you want to know if that money is bringing in new customers or clients. Cost per acquisition, often shortened to CPA, is a key number that tells you just that. It's the total cost of acquiring one new customer through your marketing and advertising campaigns. Think of it as the price tag for bringing someone new into your business.
Understanding CPA is super important because it directly impacts your profitability. If it costs you too much to get a new customer, and that customer doesn't spend enough with you, then your marketing isn't working as well as it could be. By tracking CPA, businesses can make smarter decisions about where to invest their marketing budget, helping them get the most bang for their buck.
Why cost per acquisition matters
CPA is more than just a number; it's a window into your marketing's health. For marketing professionals, business owners, and teams, monitoring CPA is crucial for several reasons:
- Profitability: It helps you understand if your customer acquisition costs are sustainable. If your CPA is higher than the profit you make from a new customer, you're losing money.
- Budget allocation: Knowing the CPA for different marketing channels (like Google Ads, social media ads, email marketing) helps you decide where to spend more or less money to get the best results.
- Campaign optimization: A high CPA signals that a campaign might not be performing well. This allows you to make changes, such as tweaking ad copy, improving landing pages, or refining your audience targeting, to lower the cost.
- Scaling your business: If you know your CPA and the value of a customer, you can confidently scale up successful campaigns, knowing that each dollar spent will likely bring in more than it costs.
How to calculate and track CPA
Calculating CPA is straightforward. You simply divide the total cost of your marketing campaign by the number of new customers (acquisitions) it generated.
The CPA formula
CPA = Total Marketing Cost / Number of Acquisitions
For example, if you spent $1,000 on a social media ad campaign and it resulted in 50 new customers, your CPA would be $20 ($1,000 / 50 = $20). This means it cost you $20 to acquire each new customer from that specific campaign.
Tracking CPA
Most digital advertising platforms, like Google Ads and Facebook Ads Manager, can track CPA for you. You just need to make sure your conversion tracking is set up correctly. This involves placing small pieces of code (pixels) on your website to tell the platforms when someone completes a desired action, like making a purchase or filling out a form. For broader campaigns, you might need to combine data from different sources to get your total marketing cost and total acquisitions.
How to improve your cost per acquisition
Lowering your CPA means getting more customers for the same amount of money, or the same number of customers for less money. Here are some practical steps marketing teams can take:
- Improve targeting: Make sure your ads are shown to the right people. Refine your audience demographics, interests, and behaviors to reach those most likely to convert.
- Optimize ad creative and copy: Test different headlines, images, videos, and ad text. Engaging and relevant ads lead to more clicks and conversions.
- Enhance landing page experience: Your landing page should be clear, fast-loading, and easy to navigate. Make sure the message on the ad matches the message on the landing page. A strong call to action is also vital.
- A/B test everything: Continuously test different versions of your ads, landing pages, and offers. Small improvements can lead to significant drops in CPA over time.
- Use negative keywords: For search advertising, negative keywords prevent your ads from showing for irrelevant searches, saving you money on clicks that wouldn't convert.
- Focus on conversion rate optimization (CRO): Look for ways to make it easier for visitors to complete the desired action. This could involve simplifying forms, improving website speed, or adding trust signals.
By regularly reviewing and optimizing these areas, you can significantly reduce your CPA and make your marketing budget work harder for you. Remember, the goal is not just to get a low CPA, but to get a low CPA for valuable customers who will contribute positively to your business's bottom line.
Real-world examples
Social media ad campaign for an online store
A small e-commerce business spends $800 on an Instagram ad campaign. This campaign brings in 40 new customers who make a purchase. Their CPA for this campaign is $20 ($800 / 40 customers).
Search engine marketing for a service business
A local service provider runs a Google Ads campaign costing $1,200. This campaign generates 60 new leads that convert into paying clients. Their CPA for new clients is $20 ($1,200 / 60 clients).
Common mistakes to avoid
- Not clearly defining what counts as an 'acquisition' (e.g., lead vs. sale).
- Ignoring the customer's lifetime value when evaluating if a CPA is acceptable.
- Focusing solely on a low CPA without considering the quality or profitability of the acquired customers.