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Cost per action

How to Calculate CPA

In the world of pay per click, it pays to know your cost per acquisition, or CPA. By knowing what is your average CPA you’ll be able to analyse what works for you with your advertising spend, optimise your marketing budget and see if you’re getting your money’s worth. But what is cost per acquisition and how do you calculate your CPA?

What is CPA?

Put simply, your CPA is how much it costs you, after spending out all those ad dollars, to win one customer. In terms of spending on adwords (now known as Google Ads), you already know your budget can vary. You might also take other advertising factors into consideration when working out your CPA, such as how much you spend on print advertising or sales staff.

With all these extras, your CPA formula can be tricky to work out, but even an average can help.

How to calculate CPA

In fact the formula to calculate your cost per acquisition is actually pretty straightforward. It goes a little something like this:

Marketing budget (per specified period of time) / new customers (in same period of time) = CPA

As an example if you spend $1000 on advertising on Google Ads in a month and you win 40 new customers, your cost to win one new customer is $25.

Of course, this is just taking into consideration one stream, such as your Google Ad spend. But if you want to get a truer look at your CPA incorporating all channels such as sales staff, commissions, expenses and sundries will give you a more accurate but slightly more depressing CPA.

So the CPA formula could now go:

(Google Ad spend+Sales staff spend+display advertising+social media spend+office sundries)/new customers = CPA

You might only make an extra 5 customers from other channels for example, so it might then look more like:

($1000+$1800+$200+$500+$200)/45 = $82

Now taking everything into account including the cost of one sales guy and a print ad in your local paper, the CPA jumps to over three times that of just paying for the PPC campaign.

If you’re measuring where your leads and sales are coming from then you’ll also be able to understand which channel is giving you the best CPA. And if you’re monitoring customer spend as a result, then you’ll also be able to see the CPA ROAS (just to double up on the acronyms).

How does CPA work?

CPA isn’t a static figure, and you’ll likely find CPA in one month differs wildly from the next. This could depend on a whole variety of things depending on your industry such as seasonality, consumer demand, competitor activity or promotions, your own costs and the cost of advertising.

And to add fuel to this particular fire, do you know your ROAS (return on ad spend) for your CPA? The ROAS figure shows how many units you make back per unit spent. So for example a ROAS of 3 means that for every $1 you invest in your CPA you’re getting 3 back.

To work out your ROAS, simply:

Conversion value / cost of acquisition = ROAS

So lets say your $25 new lead spends $300, that’s a ROAS of 12. Not bad!

But if your CPA is $82 and the new lead spends the same $300, the ROAS is 3.65. Not quite as impressive, but still solid.

How to create the best CPA strategy

By regularly monitoring CPA throughout the year you’ll be able to build a solid picture of what your marketing costs are. And from this you’ll be able to construct a more robust CPA strategy. For example, if you know August is a slow month, why spend the same $1000 on your ad spend? But if November is your peak month, you’ll likely want to double or treble your ad spend to boost those sales.

And if the average ROAS goes up in specific months, that’ll be when you want to target more new leads.

Understand your CPA and the ROAS for each month and you’ll be able to use this to help construct that CPA strategy.

If you have the data to analyse then creating a picture of CPA over the past few years is going to go a long way towards helping your marketing strategy. You might already know your peak months, but do you also know how much you spend per acquisition in those months?

Google Ads features a CPA option, allowing you to set a target cost per acquisition. However, like all PPC bidding strategies, it’s a fine art that doesn’t always work first time. But if you’ve worked out your average CPA throughout the year, using Google Ads targeted CPA can be a useful way to bring on new customers.

Ilan Missulawin

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