If you are looking to grow your brand this year through online advertising, you likely know that successful brands evaluate their standing in a number of ways to maximize profitability and efficiency. They’ll look at the cost to produce their product or service, minimum estimated profits, return on investment (ROI), and many more factors.
One way to measure efficiency and evaluate the health of your business is cost per acquisition (CPA).
CPA is a financial metric that refers to the cost of acquiring new customers or clients for your product or service. Sometimes, marketers might refer to CPA as the cost per conversion (CPC). A CPC measures the cost per successful conversion from the target audience to paying customers.
Cost per acquisition tells you how effective your digital marketing campaigns are in capturing and converting new customers. If you’re spending all this money to boost brand awareness and convert shoppers, it’s critical to consistently evaluate how well your marketing strategy is working — and CPA can help with that.
To calculate CPA, you must know the total amount spent on a particular campaign. For instance, if you spend $1,000 on a TikTok ad, you will need to evaluate the number of conversions generated from that ad.
Let’s say you run a DTC e-commerce shoe brand, and you want to measure the effectiveness of your latest marketing campaign on TikTok. You spent $10,000 on advertising and acquired 500 new customers.
To calculate your CPA, you would divide the total cost of your campaign ($10,000) by the number of conversions (500). Your customer acquisition cost would be $20.
This means that the average cost per new customer for this particular campaign was $20.
By tracking this metric over time, you can refine your marketing efforts to reduce costs and increase the number of conversions.
For example, you may analyze the data to identify which aspects of the TikTok ad campaign generated more conversions at a lower cost, such as specific video styles, user engagement patterns, or the most effective targeting criteria. You could then adjust your marketing budget to scale more aggressively with these successful elements to achieve a lower CPA.
While each brand and the goals behind its strategies vary, the general benchmark is the lower the CPA, the higher the return on investment. For example, suppose you run an e-commerce fashion brand and launch an Instagram ad campaign promoting a limited-edition clothing line.
You spend $2,000 on advertising, which includes engaging videos featuring your unique designs and targeting users interested in fashion. The campaign generates 100 new customers who make a purchase.
To calculate your CPA, you would divide the total cost of your campaign ($4,000) by the number of conversions (100). Your customer acquisition cost would be $40.
In this scenario, a CPA of $40 could be considered “good,” especially if the average order value (AOV) and customer lifetime value (CLV) are significantly higher than the acquisition cost. This would indicate a strong return on investment for the campaign.
However, analyzing and comparing the CPA against industry benchmarks and your specific business goals is crucial to determine the campaign’s success.
Of course, it is important to evaluate other impacts on your brand as well, such as your promotional offers, messaging, targeting, creative, and other factors, to truly understand how and why your marketing strategy is successful.
CPA tells you whether the agency you’re working with is creating campaigns that are right for you and helps outline what kind of effect your strategy has on your potential customers. While CPA is a helpful tool, remember that it isn’t the end-all, be-all.
While CPA is one important metric to consider when evaluating your marketing strategies, there are many other additional metrics that factor into the health of your campaigns.
Customer lifetime value (LTV or CLV) is very different than CPA, but it’s equally important to the health of your marketing campaign. LTV measures the total value a customer generates for your brand over their relationship. By comparing the CPA to the LTV, you can assess whether you are acquiring customers at a cost that is justified by the revenue they generate over time.
For example, if a brand spends $4,000 to acquire a new customer (CPA), but that customer generates $8,000 in revenue over the course of their relationship with the brand (LTV), then the brand has a positive return on investment (ROI) and the CPA is high enough to consider the strategies in place successful.
However, if the LTV is only $3,000, then the brand is losing money on each new customer it acquires and needs to reduce its CPA or find ways to increase the LTV. By tracking both CPA and LTV over time, you can identify areas for improvement in your messaging, targeting, and other components of your online marketing strategy.
Lowering your cost per acquisition (CPA) is an important goal for you if you’re looking to maximize the efficiency and profitability of your brand.
Here are some strategies to reduce your CPA:
For example, if you sell sustainable cookware, your ideal customer is high-income millennials. It should be a warning sign to retarget if your typical site visitor is a single, sixteen-year-old boy. The likelihood that a high school sophomore will buy premium food for small children is slim to none.
Ultimately, retargeting allows you to reach customers who have already shown interest in your product or service, which can be much more cost-effective than trying to acquire new customers. You can run retargeting campaigns to encourage customers who have engaged with your brand to take action.
Work with your marketing team to continuously test and optimize your advertising campaigns to improve their effectiveness. Experiment with A/B testing to determine winning messaging, creative, promotional offers, and other parts of your online marketing strategy.
At MuteSix, we utilize high-speed creative A/B testing to optimize ad campaigns for our clients, ensuring that the most compelling value propositions connect with the target audience. By evaluating different creative components, such as headlines, visuals, or calls to action, we rapidly pinpoint top-performing ad variations
Using the insights gained from the extensive A/B testing, we measure omnichannel performance against objectives and key results (OKRs), fine-tune channel and audience strategies, and refine their activations. From there, we develop a thumb-stopping creative formula based on the best-performing ad elements and messaging. This data-driven approach allows MuteSix to deliver agile and effective marketing solutions for brands, leading to lower CPA and sustainable growth.
For example, if you are trying to get high schoolers to convert to regular customers, you wouldn’t put ads on Facebook. They won’t see it; if they do, they’ll likely be uninterested since Facebook does not resonate with that generation well.
To lower CPA through Conversion Rate Optimization (CRO), e-commerce brands can focus on specific improvements to their landing pages. For example, use A/B testing to compare different headline variations, button colors, or product images on a TikTok ad landing page.
By analyzing performance data in real-time, you can identify the most effective elements and refine the page layout accordingly. The goal is a frictionless shopping experience, which you can ensure by simplifying the checkout process and offering personalized product recommendations.
When you implement these targeted optimizations, you can drive higher conversions and reduce your CPA, leading to sustainable growth for your e-commerce brand.
To lower your CPA for your e-commerce brand, focus on adjusting your budget effectively.
Analyze campaign data to identify high-performing channels, such as TikTok ads with engaging content and strong conversion rates. Allocate more budget towards these successful areas while reducing spend on underperforming campaigns, like poorly targeted Instagram ads.
Continuously monitor performance and make data-driven adjustments in real-time, such as reallocating funds from low-converting Pinterest ads to top-performing Google search campaigns. By concentrating on cost-efficient channels and strategies, you can effectively reduce your overall CPA and enhance your marketing ROI.
Lowering CPA by focusing on LTV requires a targeted approach for your e-commerce brand.
Begin by refining the user experience on your website, ensuring quick load times and intuitive navigation. Consistently communicate your brand’s values and mission through your content and creative assets, and utilize data-backed personalization tactics, such as sending customized product recommendations and tailored promotional offers via email or SMS. Finally, you can develop a loyalty program that rewards repeat purchases, driving long-term engagement.
By implementing strategies like these to increase LTV, you can effectively reduce CPA and achieve sustainable growth for your brand. For more in-depth information, explore MuteSix’s LTV Complete Guide.
If you’re looking to grow your brand this year, it’s crucial to evaluate your marketing efforts and determine the CPA. Tracking CPA over time and implementing the strategies discussed in this article can make your marketing efforts more efficient and increase profitability.
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Dynamic Cost-Per-Action Mechanisms and Applications to Online Advertising | Stanford University
How Should You Calculate Customer Lifetime Value? | MIT
How to Calculate ROI to Justify a Project | HBS Online