Cost Per Acquisition: The Ultimate Guide

Small businesses on shoestring budgets need to keep costs down. Here, we discuss different ways to reduce cost per acquisition to maximize your sales and marketing budgets.

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If there’s one thing about digital marketing that you can count on, it’s the abundance of data that you can track, measure, and analyze to see which part of your marketing plan is working, not working, and what to do to improve the results.

One metric that merits your time and attention as a marketer is cost per acquisition (CPA). In a nutshell, it’s the total sales and marketing money you spend to acquire or instigate a lead to perform an action.

In this guide, we’ll talk about why you should pay attention to cost per acquisition, the cost per acquisition calculation, and what to do to keep your acquisition costs down.


Overview: What is cost per acquisition?

For small businesses on a shoestring budget, every dollar counts. If you can help it, you wouldn’t pay more than you have to for any single business expense.

Unfortunately, that’s what’s likely to happen if you go about the lead generation process without at least a working knowledge of cost per acquisition, also referred to as cost per action or pay per performance (PPP).

There are three main ways ad networks or digital media companies charge advertisers:

  • Cost per click (CPC): Pay for each click your ad generates.
  • Cost per mille (CPM): Pay for every one thousand impressions or ad views.
  • Cost per acquisition (CPA): Pay when a user clicks your ad and then performs the desired action.

Many marketers prefer the cost per acquisition model because they’re free to determine the conversion goal of each marketing campaign. This can be an ad click, an ebook or app download, newsletter sign-up, a page view, or a form submission.

Plus, you only need to pay the advertising platform when the conversion goal is achieved.


How to calculate cost per acquisition

The cost per acquisition formula is pretty straightforward. You only need to divide your total marketing, advertising, and sales costs by the total number of acquisitions or conversions generated within a specific time frame.

Total marketing and sales spending covers salaries, bonuses, commissions, creative and technical costs, advertising expenses — essentially all overhead related to attracting new leads and then turning them into customers:

CPA = total marketing and sales spend / # of acquisitions

For example, if you spent $10 to get one person to download your white paper, then your CPA is $10.

$10 / 1 = $10

If it’s $25 for 10 app downloads, your CPA is $2.50.

$25 / 10 = $2.50


How to analyze cost per acquisition for your business

Cost per acquisition shows how much your business would have to spend to gain customers. Successfully reducing your CPA is a telltale sign that:

  • Your marketing, sales, and customer retention initiatives are working.
  • You’re managing your company’s money more efficiently.
  • You’re likely to see an increased return on revenue or net profit margin.

Cost per acquisition vs. customer lifetime value

One way to better appreciate the value of religiously tracking cost per acquisition is by comparing it to another marketing metric called customer lifetime value (CLTV, also abbreviated as CLV or shortened as LTV for lifetime value).

CLTV is a representation of the total net profit a business can make from any customer, from the moment they make their initial purchase until such time they “churn.” Customer churn or attrition, in simple terms, is when customers stop buying from you.

There are different ways to calculate CLTV. But if you use this formula by HubSpot, you will need to consider several variables:

  • Average purchase value: Total revenue, usually a year’s worth / number of purchases within the same time period
  • Average frequency of purchase: Number of purchases within a time period / number of unique customers who completed a purchase within the same time period
  • Customer value: Average purchase value x average purchase frequency
  • Average customer lifespan: The average number of years (or months) customers purchase from your company

Once you have all of the above values figured out, calculate CLTV as follows:

CLTV = customer value x average customer lifespan

CLTV to CPA ratio

The CLTV to CPA ratio (CLTV:CPA) shows how much profit you can achieve per customer versus the cost of acquiring them.

It allows you to pinpoint which groups of customers are profitable and helps you figure out if spending a certain amount to acquire a particular customer is worth it in the long run, especially since not all customers are created equal.

A good CLTV:CPA benchmark, according to various marketing experts, is 3:1. If your ratio is 1:1 or close to it, your acquisition cost is more than it should be. But if it’s higher than the benchmark, such as 4.5:1, you’re likely not spending enough and might be losing opportunities to acquire and convert leads.


Strategies to lower your average cost per acquisition

When you improve conversions, you lower your CPA. It’s as simple as that, but improving conversions and, thus, lowering CPA, is not a feat many marketers can pull off overnight.

For the most part, you’ll have to take risks and exercise discipline in how you manage your campaigns. You’ll have to keep a close eye on your customer analytics, even your social media management software data, to understand what makes potential and existing customers tick.

You’ll have to continuously refine your customer segmentation approach to market to the right audience and meet evolving customer needs.

To squeeze the most value out of every penny you’ve earmarked for sales and marketing, consider the following cost per action marketing tips:

Improve your quality score

Quality score is a metric used by the search engines to gauge the relevance and quality of your ads and keywords. It affects your ad ranking, which is the rank or position of your ad in the search engine results pages (SERPs).

Factors that impact quality score include:

  • Click-through rate (CTR), which is the number of clicks on your ads divided by the total number of impressions
  • Landing page quality (more on this below)
  • How relevant your keyword is to your ad group, which is a collection of ads and keywords within a pay-per-click (PPC) campaign
  • Relevance of the ad text or copy to the keyword you’re bidding on
  • Your Google Ads account’s historical performance

Improve your targeting

Let’s say your conversion goal is to get people to sign up for a webinar. If your target market is specific to a certain geographic area, ensure that your campaign is targeting that specific market.

Showing your ads to people who have no plans of doing business with you, or can’t do business with you even if they want to because of the geographical barrier, will cost you if those people sign up for the webinar you’re advertising.

Optimize your landing pages

When a lead clicks on your ad, the first page they see is your landing page. How your landing page performs in terms of conversions will largely depend on whether you understand what leads or prospects want, need, or expect from your website.

In order to optimize or improve the conversion performance of your landing page, you’ll need data insights from your marketing analytics tool.

If you’re running an online store, some e-commerce software platforms have built-in analytics, while others may need to integrate with third-party analytics software such as Google Analytics or Mixpanel.

Data from your analytics tool can show you several things, including landing page views, which landing pages get the most traffic, and the point at which website users drop off.

Analytics tools with the heatmap feature record user behavior on your website, indicating which sections of a page get the most user engagement and which ones are largely ignored.

Next, determine which parts of a web page to change, and then perform A/B testing, which compares two versions of a landing page to see which one performs better.

Create funnel-specific campaigns

Your sales funnel, also referred to as the sales process or revenue funnel, represents the sales stages a customer goes through in their buying journey. There are five stages in a typical sales funnel:

  • Awareness: People are looking for solutions to a problem. Making it easy for them to find your brand, product, or service is the goal here.
  • Interest: Leads know who you are or what your company does. At this stage, the goal is to build relationships with them.
  • Decision: Leads have a full understanding of their problem and are ready to make a decision. The goal is to get them to pick your product or service.
  • Action: If you’re doing e-commerce marketing to generate sales, for example, this is when the sale happens. If collecting email addresses to build an email list is what you’re after, this is when the user registers on your website to download an ebook or free guide.
  • Retention: How you treat your customers after the sale, plus the quality of your product or service, will determine whether they’ll continue to buy what you offer. The goal is to keep them happy so they turn into loyal customers advocating for your brand.

Improve your sales funnel by ensuring that the language of your ad and landing page copy aligns with where your target audience is in the buyer journey.

For example, if your target customer is already in the decision stage, bombarding them with ads introducing them to your product as if they’re seeing it for the first time is not a good idea. Instead, show them an ad detailing how your product or service is better than competitors.

Improve website performance

Website speed is a Google ranking signal, and various statistics compiled by website optimization platform Crazy Egg point to the negative business impact of even just a second of page loading time delay:

  • An 11% decrease in page views
  • Lost conversions of 7%
  • A customer satisfaction decrease of 16%

Also, 40% of users will abandon a web page if it takes more than two seconds to load, while approximately 80% of consumers don’t have plans to revisit a website that performs poorly.

To improve site speed performance:

  • Enable image compression: Use photo compressors, such as TinyPNG or TinyJPG to reduce the file size of your images without affecting quality.
  • Enable browser caching: Use browser caching tools, such as the W3 Total Cache plugin for WordPress, to store some of your web page’s files locally in the site user’s browser. The next time they visit your website, loading time won’t be as long as their first visit, as they won’t have to request your site’s server to load all of the page’s elements all over again.
  • Enable HTML minification: Minification is the process of minimizing code to reduce the file size. This means removing unnecessary elements in the code, such as comments and extra spaces, without impacting functionality.

Optimize your checkout process

Online shoppers abandon their carts for a number of reasons, and a confusing or unnecessarily lengthy checkout process is one of them.

If you’re looking to generate e-commerce sales from your integrated marketing and CPA campaigns, ensure that your checkout process isn’t the reason leads or prospects are leaving your website without completing their purchase.

To do that, consider the following tips:

  • Remove unnecessary fields in your checkout form. For example, if you’re selling a digital product, you likely don’t need to know the customer’s physical address.
  • Add live chat to address customer questions in real-time.
  • With more people using their mobile devices to shop online, make sure your checkout process is mobile-friendly.
  • Enable guest checkout. Don’t require customers to create an account to be able to purchase goods or services from your site.
  • Allow customers to pay via their preferred payment method, such as credit or debit cards, prepaid cards, mobile wallets, bank transfers, direct deposit, etc.

Reduce CPA and make the most of your advertising dollars

Keeping costs to a minimum is essential to maintaining business profitability, which is why it’s no surprise that many companies are cutting costs where it makes sense. Reducing your target cost per acquisition lets you put your ad dollars where they can make the most difference on your bottom line.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.