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What is CPA? Cost per Acquisition
In digital marketing, there are different ways to measure the effectiveness of ad campaigns. One key metric to gauge the success of your efforts is the cost per acquisition (CPA). This metric calculates the cost of securing a new customer or action.
Delve into the definition of CPA, its advantages and when to use it, and how to calculate CPA in the guide below.
Cost per Acquisition – Definition
Cost per Acquisition (CPA) is a key marketing metric that measures the cost of acquiring a new customer or lead.
It is calculated by dividing the total cost of a marketing campaign by the number of new customers or leads generated. This metric helps businesses to identify which marketing channels and campaigns are most cost-effective in acquiring new customers. Enabling them to allocate their marketing budgets more efficiently.
By understanding the cost to acquire a new customer, businesses can better assess the overall return on investment (ROI) of their marketing activities. This data can help businesses set realistic customer acquisition targets and budgets based on the actual costs involved.
If a marketing campaign or channel has a high CPA, it may indicate that it is not performing as well as expected. This allows businesses to make adjustments or reallocate resources to optimize their marketing strategy.
CPA vs. CPC. vs CPM
CPA (Cost Per Acquisition) is a method where advertisers pay for specific actions taken by potential customers. Such as making a purchase, filling out a form, or signing up for a newsletter. Advertisers only pay for successful sales or leads generated through their ads.
Types of CPA:
- Sales (CPS): Payment based on each sale generated by an advert.
- Leads (CPL): Refers to when users fill out a form.
Cost per acquisition is only one method of advertising payment. Depending on the goals of your ad campaign, and what you hope to accomplish, CPC or CPM might be a better choice:
- CPC (Cost Per Click): Advertisers pay each time a user clicks on their ad, which is commonly used to increase web traffic.
- CPM (Cost Per Mille or Cost per thousand impressions): Advertisers pay per thousand impressions, meaning how many times their ad is displayed, regardless of whether it was clicked or not. This method is often used for ads in search engines.
When to use CPA
Cost per Acquisition (CPA) is the most effective online ad payment method if your goal is to boost sales or customer volume. This is because you only pay for successful sales or leads. Making it a more budget-friendly option compared to Cost per Click (CPC) or Cost per Mille (CPM).
CPA is particularly useful for businesses seeking to evaluate the effectiveness of their marketing efforts and track the cost of acquiring each new paying customer. This metric provides valuable insights into the return on investment (ROI) of various marketing campaigns, helping businesses optimize their strategies.
However, CPA is not the best choice for branding campaigns. Where the objective is to increase the number of people who see your content. For this, CPM is more suitable. Additionally, if your goal is to drive traffic to a specific website, CPC is a more effective option. Therefore, consider the specific goals and objectives of your campaigns when deciding whether to use CPA.
How to Calculate Cost per Acquisition – Formula
To calculate the cost per acquisition, divide the total cost (whether media spend in total or specific channel/campaign to acquire customers) by the number of new customers acquired from the same channel/campaign.
💡 CPA = Total Spend / Customers Acquired 💡
For example, if you spend $3,000 on a social media ad campaign and acquire 550 new customers:
CPA = $3,000 / 550 = $5.45
What is a Good Cost per Acquisition?
While there is no fixed “average” CPA to use as a benchmark, marketing experts generally agree that a 1:3 CPA to CLTV (Customer Lifetime Value) ratio is a good indicator of a profitable campaign.
This means that for every dollar spent on acquiring a customer, they are likely to generate three dollars in revenue over their lifetime.
If your ratio is closer to 1:1, it may indicate that your acquisition costs are too high. And you might need to adjust your strategy to optimize your returns. On the other hand, if your ratio is significantly higher, such as 5:1, it could suggest that you are not spending enough to effectively acquire and convert leads.