Cost per Acquisition, or CPA, is a marketing concept that focus on calculating the cost to companies of acquiring new customers. In other words, CPA is a measure of the amount of money being spent on digital marketing efforts to attract and retain new customers. Understanding CPA is important for any business since all enterprises thrive on turning a profit. If too much money is being spent on marketing, then return on investment drops. In order to maintain a healthy ROI, businesses need to know not only how much they are spending on customer acquisition, but also find their target CPA number. So, what can brands do to find this figure?
Start with Transaction Values/Revenue Amounts
The best place to start is by looking at your average transaction values. How much money does your product or service gross the company with each sale? This figure should be taken and then have two number subtracted from it. You’ll need to first subtract the cost of production for the individual product or service. Then, subtract the fixed costs involved that don’t involve marketing/advertising said product or service. This leaves you with a number that represents gross profit before advertising takes place.
How much does the Business NEED to Make?
In order to remain profitable, how much does the business need to make? You have to figure out how much the company needs to make on each transaction to earn a net profit. Once you find that amount, it should be subtracted from the figure you gained in the first step (gross profit before advertising). When you arrive at this point, you have determined a simple target cost per acquisition for new customers. While companies could conceivably stop here and move forward with that number, there are some factors you should keep in mind that should be applied to the unique situation of each individual brand and industry.
Lifetime Customer Value
For companies with narrow margins or low profits on initial sales, the calculations above may deliver a low target CPA. This may result in the brand remaining or becoming uncompetitive in the market compared to other brands. Remember to keep in mind the lifetime value of customers when setting a target CPA. If there is a high likelihood of repeat sales from your target consumers, it’s OK to set a higher target CPA even if the initial sales deliver low revenue.
Assigning Weights to Transactions
Another factor to keep in mind is the varying weight that can be assigned to different transactions. Though the calculations covered above give you a rough idea of a target CPA for customers, it is not representative of all customers as individuals. Some segments of your consumer base may convert more easily, while others will take some convincing. Remember that the target CPA above represents the average of all your sales. For example, some customers might just walk in off the street and make a purchase in a flash, while others need to interact with your brand numerous times before making a buying decision.
The target cost per acquisition for each business is different, because every business is different. You can use the simple calculations above to determine a starting target CPA, but be sure to add in your own relevant factors that customize the figure to your business, consumers, and ROI needs.