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What is Cost per acquisition in marketing?
When you send promotional emails or run online ads, you want people to take action and become your customers. Cost per acquisition (also called Cost per action or Cost per conversion) is a marketing metric that measures the average amount you pay to bring in a new customer. Therefore, the lower the CPA, the more cost-effective your campaign is.
Unlike broader metrics like conversion rates, which give you the percentage of successful conversions, or cost per click (CPC) and cost per mille (CPM), which offer insights into user interaction and the reach of an ad campaign, CPA cuts right to the chase – how much does it cost to bring in a customer who will actually make a purchase?
The beauty of CPA lies in its adaptability across different actions and campaigns. Whether you're tracking the effectiveness of a Google Ads campaign aimed at boosting software downloads or measuring the impact of an influencer partnership for e-commerce sales, CPA provides a common denominator to assess the cost-effectiveness of diverse marketing strategies. This way, you can focus on the strategies that give you the best results.
How to calculate CPA?
To calculate CPA, you need to divide the total cost of your marketing campaign by the number of new customers you acquired. So, the formula to calculate CPA is:
For example, if you've invested $100 in targeted Instagram ads and acquired 5 new customers, your CPA is $20.
It's simple math, but making it work for you requires a deep dive into what these figures represent in the context of your overall marketing strategy. The lower the CPA, the more efficient your campaign is in translating dollars spent into conversions, whether that's sales, downloads, sign-ups, or any other valuable action.
It's important to note that CPA isn't a universal standard. What's a viable CPA for a high-ticket e-commerce brand can be prohibitively high for a start-up mobile app. Numerous factors sway this metric – from the scope of your marketing budget to the channels you use. The diversity in marketing goals, whether it's increasing software installs or boosting newsletter signups, means that the very concept of "acquisition" is used differently from campaign to campaign.
What is a good CPA?
Essentially, a good CPA allows you to acquire customers at a cost that leaves you with a reasonable profit. So, you should keep track of the CPA and the average revenue generated per customer over their lifetime with your business (customer lifetime value). For example, if your average revenue per customer is $100 and you want to maintain a 40% profit margin, you should aim to keep your costs, including CPA, below $60 (60% of $100).
You can determine the average CPA for your business by finding the CPAs for every acquisition channel you have. This assessment will also help you understand which channels have higher efficiency and returns on investment. The ultimate goal is to find the balance between acquiring customers at a reasonable cost and maintaining profitability.
Let's say you're running two simultaneous campaigns: a pay-per-click (PPC) search engine campaign and a sponsored content series on a popular tech blog. Your PPC campaign has a CPA of $30, while your sponsored content sits at a CPA of $80. This clear comparison leads to informed decisions about where to invest your marketing budget for the highest return. You can take this a step further, segmenting CPA by demographics or behaviors, thereby uncovering even more nuanced insights into campaign performance and customer acquisition cost. You can also use our campaign optimizer to compare the performance of your campaigns, creatives, and even specific keywords.
When aiming for a good CPA, there are two other metrics you don't want to overlook. First and foremost, you should excel at bringing in potential customers, which is often reflected in a high click-through rate (CTR). This increased engagement sets the stage for a higher probability of conversions (meaning a higher conversion rate). The higher your conversion rate, the lower your CPA tends to be, assuming you're not paying a fixed amount per converted customer.