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Cost Per Acquisition Guide: Everything You Need to Know
   

Cost Per Acquisition Guide: Everything You Need to Know

As a marketer, you have a long list of items to keep top of mind.

You’re running ads, writing copy, optimizing keywords, managing writers, planning events, establishing partnerships — in short, you’re a very busy person. But that’s probably what attracted you to marketing in the first place! Whether you work at a startup, an agency, or an established company, a lot of your day is likely spent on digital channels.

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A typical Monday for a Digital Marketer.

There are a lot of acronyms to remember in online advertising, but one of most critical measurements you must know and understand is cost per acquisition (CPA).

Without a working understanding of CPA, you risk overpaying for your customers or paying more to acquire a customer than what they’re actually worth to your company. Calculating an effective CPA is central to any robust customer acquisition strategy and critical to the long-term sustainability of your company.

Maybe you already have a great understanding of cost per acquisition, or maybe you’re hearing it for the first time. Either way, this guide will help you more effectively understand what CPA is, why it matters, and how to use it to put your marketing dollars into the right channels.

What exactly is Cost Per Acquisition (CPA)?

At the most basic level, cost per acquisition is a marketing metric that measures the aggregate cost of a customer taking an action that leads to a conversion. The conversion can be one of many things, but in most cases, it will be a sale, a click, a form submission, or an app download.

Cost per acquisition is also referred to as cost per action or CPA — but don’t get confused with diction, these three terms all mean the same thing!

You’ve likely seen CPA as an option when bidding on Facebook, Google, or another ad network. Often, you’ll have the choice between bidding on a CPC (cost per click), CPM (cost per 1,000 impressions), or CPA (cost per acquisition) basis.

cpa-vs-cpm-vs-cpc

Many marketers, especially those with eCommerce or SAAS business models, flocked to CPA bidding for the ability to pay for a direct result and easily compare performance across channels.  

CPA = the total cost of a campaign / number of conversions

Still unclear?

Let’s take a look at the cost per acquisition formula and see the concept in action!

We’ll start with an easy scenario. Imagine you’re the owner of an e-commerce site called Mark’s Shirts that retails men’s dress shirts. You run a campaign on Facebook in January 2018 and spend $1000. From that campaign, you sell 10 shirts on your site.

What’s the CPA?

If you said $100 — you’re correct! How’d we get there?

$1000 spent in January / 10 sales = $100 CPA

So for this campaign, it costs $100, on average, for a conversion.

Remember, CPA can also be calculated for companies that don’t directly sell a good — a conversion can be a lead capture, a demo signup, or one of many other indicators.  

CPA Marketing on Google and Facebook

Now that we have a working understanding of CPA, let’s look at how you might see it reported when purchasing ads on the two biggest ad networks: Google and Facebook.

On Google Adwords, you’re able to bid for your ads using many Smart Bidding methods. One of the most popular and effective of those methods is bidding with a target cost per acquisition.

To do so, you provide Google with a CPA you want to hit. Then Google uses your past performance, advanced machine learning, and automatic bidding algorithms to work backward to calculate the optimal CPC bid. You’ll pay more than your target for some conversions, and pay less than your target for others. But these two forces offset each other in the long-run, leading to a CPA incredibly close to your target.

And the best part?

Once you plug in a CPA, you don’t have to worry about adjusting CPC bids — Google does the work for you!

On Facebook, you’re also able to bid on a CPA basis (Facebook calls it “cost per action” rather than “cost per acquisition”). This is an extremely versatile tool — you are able to combine Facebook’s advanced targeting with the ability to only pay when you reach the desired action.

To start bidding on a CPA basis on Facebook, navigate to Business Manager. You’ll then set your Campaign Objective and choose an Ad Set optimization that allows you to pay on a CPA basis.

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How does LTV relate to CPA?

If you work at a startup, you’ve likely seen LTV on nearly every company pitch deck. LTV stands for Lifetime Value and is exactly what it sounds like: the lifetime value of a customer to your business. More specifically, it’s the present value of the future net profit from a single customer over their relationship (lifetime) with your company.

Let’s see how to calculate it:

LTV = Monthly contribution margin per customer (the revenue from a customer minus variable costs for that customer) x Average lifespan of a customer (the number of months they stay a customer)

So, why are we talking about LTV?

It all goes back to what we mentioned earlier!

  1. You don’t want to pay more for a customer than what they’re worth for your business AND
  2. You want to put your ad dollars in the right place.

So, you’ll want to make sure that LTV > CPA for each channel. If this relationship does not hold, you’re paying more to get a customer than what they are worth to your business — not a great long-term strategy!

Let’s revisit Mark’s Shirts from earlier. Remember, our CPA was $100. Here’s some new information:

Monthly contribution margin per customer: $20

Average customer lifespan: 6 months

Is our LTV greater than our CPA?

Looks like the answer is yes this time! 

How’d we calculate it?

LTV = $120 ($20/month x 6 months)

CPA = $100

LTV > CPA

Let’s look at another scenario for Mark’s Shirts (one in which variable costs are higher and contribution margin subsequently decreases from $20 to $10).

Is LTV still greater than CPA?

In this case, no. Here’s the math:

LTV = $60 ($10/month x 6 months)

CPA = $100

LTV < CPA

In scenario #2, you’d want to turn off the campaign, look for a channel with a lower CPA, and reallocate your marketing budget there.

Cost per acquisition by industry

You’re probably asking: “what is a good CPA?”

While a lower CPA will almost always be beneficial for your business, it’s hard to benchmark a universally “good” CPA. America has 28 million businesses — and while some look similar, each is as unique as its owners and employees. Businesses sell different products and services in different markets at different prices. So how do you know what’s “good” and how do you gauge your performance?  

One effective method we’ve found is comparing your CPA to others in your industry. Keep in mind this is not a perfect science, but it can give you a reasonable range of results you can accomplish.

Wordstream commissioned a study in 2018 that looked at cost per acquisition for Google AdWords, Google display network (GDN), and Facebook. The study found that the average CPA across all industries was $18.68 on Facebook, $48.96 on AdWords, and $75.51 on GDN.  

What industries had the lowest CPAs on each network?

Automotive, e-commerce, employment services, and travel all performed well on Google Search — with average CPAs below $50. On GDN, automotive and legal were the leaders with CPAs under $40.

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Thanks to Mark Irvine at Wordstream for the data & infographics!

On Facebook, CPAs were even lower than on Google! The apparel, education, fitness, and healthcare industries all saw average CPAs below $15.

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CPA takeaways for your business

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In the world of marketing, there are a lot of forces that you have direct control over, some you have partial control over, and other variables that you cannot control at all.

If you think of your business in this way, you’re always looking for the levers that you can directly manipulate. For instance, you can improve your conversion rate on site by iterating content, you can reduce customer churn by building out retention campaigns, and you can use CPA as a great tool for re-allocating your budget.

As a marketer, you enjoy the hustle of acquiring new customers, and you love the responsibility of driving growth for your business. Mastering CPA is something that can bring in new customers and power the growth that you desire.

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