Marketing can be loosely defined as the act of paying to acquire customers. You have to spend money to make money, as the saying goes. But how much should you spend?
In cost per acquisition (CPA) you have a marketing metric that offers an answer to this question.
In this guide we’ll look at all you need to know about cost per acquisition: what it is, why it’s important, and how to improve yours.
What is cost per acquisition (CPA)?
Cost per acquisition (CPA) is a marketing metric that measures the total cost of acquiring/converting a customer.
CPA considers all the marketing costs associated with driving prospects down the sales funnel within a specific marketing campaign, from the very first touchpoint to the final conversion, then divides that total spend by the number of customers acquired or conversions achieved.
The terms ‘acquisition’ and ‘conversion’ can be used to describe a wide variety of actions from a customer: from completing a purchase to simply submitting a form.
The basic formula for CPA can be described as:
Campaign cost / total conversions = CPA
A basic example: if a $5000 marketing campaign earned you 100 conversions, your CPA would be $50.
Why should you focus on lowering CPA?
A business should focus on lowering CPA because a lower cost per acquisition is better. The more you can reduce your CPA, the less you will be paying to acquire new customers, and the more customers you will be able to acquire for a specific spend.
By measuring your cost per acquisition, you gain a far clearer understanding of how effective your digital marketing efforts are, and further analysis can give you a clear sense of how to improve those efforts. Monitoring and managing CPA in digital marketing can help with:
- Managing your marketing budget: Knowing how much you need to spend to acquire a customer allows you to form more precise budgets and better manage your spend.
- Optimising marketing campaigns: CPA lets you easily compare the effectiveness of different marketing strategies to identify where your money is best spent within a campaign.
- Knowing where to invest: CPA can also help to steer bigger business decisions, like whether to switch from an investment in marketing to an investment in improving your offering to drive organic customer acquisitions.
Ultimately, lowering CPA will earn you more business for less marketing spend, but a simple focus on CPA in digital marketing can offer a wealth of knock-on effects.
What is a good CPA ratio?
It’s impossible to say what a ‘good’ CPA looks like, as every industry, business and campaign is different. A good CPA for a car dealership will look rather different to a good CPA for a local cafe, for example.
That said, there is a way to quantify a ‘good’ CPA in terms of how it relates to another key marketing metric: customer lifetime value (CLV).
Customer lifetime value is the total amount of money a customer will spend with your business over the lifetime of your relationship.
If a car dealership customer buys a total of four cars, worth $40K each, over the course of their life, the CLV will be $120K. If a customer buys a $5 coffee from a cafe every weekday for a year, the CLV will be ~$1300.
By comparing CPA to CLV, you can compare the cost of acquiring a customer with the value that you are likely to get from them. Every industry and business is different, but generally speaking a solid CPA:CLV ratio starting point to aim for is 1:3 – i.e. you earn three times more from the customer than it cost to acquire them.
CPA can be further contextualised through marketing metrics like conversion rate and return on ad spend (ROAS).
How to reduce cost per acquisition
So how do you reduce acquisition cost? At Growth Partners we leverage a number of effective strategies as part of our DigitalArchitect System®.
The following tips can help to concentrate your acquisition efforts on the most relevant audience, and ensure fewer potential customers prematurely quit the A-C-T customer journey.
Awareness phase: SEO
When you take a more thorough and considered approach to SEO, your website moves up the Google rankings for the most relevant keywords – the ones that customers actually use when they’re looking for what you offer. This means you get in front of more relevant customers who are more likely to convert.
Consideration phase: quality content
Overlapping with SEO, when you create engaging, value-driven content that resonates with the target audience, you position your brand or offering as the very best choice for your target audience, which is critical if you are to drive a potential customer through the ‘consideration’ phase of the buyer journey.
Transaction phase: website user experience (UX)
The last step in acquisition/conversion is found at the transaction phase of the customer journey. One of the major reasons for prospects to fall out of the sales funnel at this point is website UX: if pages are too slow to load, if navigation is complex, or if the purchase process features too many steps, you’ll be left with half-filled forms and abandoned carts.
Enhancing your website UX is therefore one of the most powerful CPA investments you can make, as it targets prospects who are just a few clicks away from being acquired.
Reduce your CPA with DigitalArchitect
At Growth Partners we have a system for lowering your cost to acquire new customers, while simultaneously analysing and enhancing every aspect of your online presence.
Our proprietary DigitalArchitect System® is your blueprint for digital growth. It is designed to give us a deep understanding of your customers, your competitors and your market, revealing who you should target and how you should target them, reducing your CPA all the while. It also uncovers market challenges and opportunities, and how to solve or capitalise on them.
DigitalArchitect® even generates a three-year ROI projection, granting you unmatched clarity on the strength of the business case for your investment.
If you’re looking to reduce your CPA and get more bang for your marketing buck, we’re ready to help. Get in touch for no-obligation chat and kickstart your growth journey today.