Cost per acquisition (CPA) also known as cost per sale represents probably one of the most important metrics that you can track when running an online business or any business for that matter. This rings even more true if you, like many others, are utilizing multiple channels to promote your offers, whether that is PPC, SEO or some other form of advertising.
Do you know how much you are spending in each of these marketing channels? Do you know how to properly calculate your acquisition costs? If you're like most, you will probably be guessing if you're not calculating acquisition costs and measuring your CPA. This ultimately ties into the lifetime value of that specific customer, which is also an important metric for your company.
In this post we will tackle these topics:
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Tracking isn’t as accurate as you may think, and here are some reasons why:
All of these factors and many more make tracking quite difficult, but you can avoid most of those issues by having a benchmark of sorts. This benchmark can be put in place by being able to calculate your CPA, and you can do this utilizing this formula:
In order to have valid data, you will need to collect it for a certain time period that you want to measure the data for, and this includes:
We would recommend to either calculate your CPA on a monthly or annual basis. If you make it too short, various measurements can obscure your data and show erroneous trends.
Once you have collected all of the above data, you can use the formula above to calculate your CPA. We would recommend using a spreadsheet software such as Excel so that you can track your calculations over time. This will enable you to tweak your work when necessary. Note: If you decide to simply divide marketing costs with the number of customers, you will know your marketing cost for each individual acquisition. This will enable you to distinguish marketing spending from sales spending which in turn enables you to track your marketing performance over a given time period.
What does it all mean
Once you figure out your CPA, it is time to track it and compare it to previous periods in order to notice trends. An additional advantage of having your CPA is that you can compare it to your LTV (lifetime value of a customer). By performing these simple steps, you will grasp how profitable is a customer to you. If your CPA goes up, it means:
If your CPA is going down:
The next thing you should do is to track your CPA over time. This indicator will be key when it comes to your business. Helping you in multiple areas: foreseeing trends in your business, tweaking spending on marketing and sales efforts and changing your overall approach to your business if the numbers sway too much one way or the other. We would like to introduce the following elements to you, if you are serious when it comes to tracking your spending and earning.
To make better informed decision, you need better data. For marketing, the best data that you can have is the CPA. If you evolve your approaches to sales and marketing, the same formula will be efficient when it comes to calculating your CPA. If you start from inbound marketing approaches and move into paid ads or other forms of sales and marketing efforts, this key metric will help you gauge if your ship is steering in the right direction. Tie the CPA with the LTV of a customer and you will have a comprehensive approach and knowledge of your spending, your needs and future plans. Spending can be strategic, measured, informed and specifically targeted to meet your needs.