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Cost per acquisition (CPA) is a metric used to measure the conversion of an online resource (online store, commercial or non-commercial site) by targeted actions. The latter may be an order of goods, subscription to a newsletter, registration. The CPA indicator is used to determine the value of a web page and the success of a marketing campaign.
Unlike conversion rate (CR) or the number of sessions, the acquisition cost is a financial metric that can be used to measure the impact of marketing campaigns on total revenue. It is determined by dividing the total campaign cost by the conversion rate. Using the average cost of orders and lifetime customer value, it is possible to determine the cost of conversion required in e-commerce. And while one of the main marketing metrics is CR, only through CPA can the prospect of a successful campaign be assessed.
Pros of CPA
The advantage of Cost per Acquisition is that it can bring 10 to 100 times more than a simpler CPL. You can find offers where a conversion costs from $10 to $200.
Thus, this option is the most profitable of all those mentioned and could very well lead you to revenues in the thousands of dollars per month.
Cons of CPA
Due to the high cost per action, Cost per Acquisition is not suitable for every affiliate. This model requires both a large amount of traffic and significant experience. You’ll need a big budget, a landing page builder, a reliable tracker, and a good optimization strategy to get conversions. And all of this is an expense.
Acquisition costs apply in many paid marketing environments. These can be social media, content marketing, e-commerce. They are also considered for other platforms where instead of direct advertising costs, there are overhead costs (content production, labor, etc.).
How to calculate cost per acquisition
The classic formula for the calculation looks like this:
CPA (actual) = Cost / Number of Leads
You calculate the percentage ratio of advertising costs to the number of performed target actions (received leads). Here is a simple hypothetical example: you have spent $1000 and received 10 leads, it means that the price of each lead is $100.
Firstly, to get the most objective CPA value, add the specialist’s fee for setting up the campaign to your expenses.
Secondly, of the total number of requests, you should count only the qualitative ones — those who are really interested in your proposal. This is important for any type of business.
What is a good cost per acquisition
The fact that you paid $100, in fact, does NOT mean that if you had paid less, you would not have received the same 10 leads.
The correct approach is: “I can pay $100 (this should be a figure adequate for your business) per lead, but I would like to pay less if I can get the same result”.
This is obvious: the lower the cost per lead, the less you spend on attracting in general. Thanks to this, you can optimize your budget.
To find out if you can pay less per lead, you need to calculate a favorable cost.
Here’s the formula:
CPA (favorable) = Customer Cost x Sales Conversion
The cost per customer is how much you can spend to attract one customer through advertising.
Please note! It’s the customer that counts here — the one who has already paid you money and not just left an application.
The principle of calculation is as follows.
Let’s say your product costs $700, the cost of production is $350. You want to make a $100 profit from it. Minus that, you are left with $250, which is the cost of the client.
Conversion into sales also needs to be considered since not every application is converted into a purchase. Not every lead becomes a client. In our practice, every third bid usually ends up in a transaction, so the conversion rate will be 30%.
Note. If you are just starting a business and you do not yet have the sales data, you can take this 30% as a hypothesis (or any other number that is adequate for your industry — if you do not know it, see the cases of experts).
Total, the favorable value of the application, according to our calculations, is $83.
This is a classic calculation scheme. For a fuller picture, it is necessary to take into account other costs: rent, taxes, transport, and additional fixed expenses incurred by the business.
