What is Cost Per Acquisition and How to Calculate It (+10 Optimization Tips)

the words "cost per acquisition" overlayed on an image of a man typing on a laptop

In the vast ocean of digital marketing metrics, Cost Per Acquisition (CPA) stands out like a shining beacon. But why?

Imagine knowing exactly how much you need to spend to gain a new customer – that’s the magic of CPA. For you, the ambitious marketer eager to streamline strategies and amplify returns, understanding and optimizing CPA is essential. Check out our comprehensive guide to digital marketing strategies here.

In this blog, we’ll provide an explanation of CPA, common metrics and strategies for improving it, and key takeaways. Let’s dive in! Trust us, your future self (and budget) will thank you!

What is Cost Per Acquisition?

Cost per acquisition (also known as Cost Per Action) is a metric that measures the amount spent to acquire one paying customer. It accounts for all marketing costs associated with the purchase of that singular customer. It is a pivotal measure used to assess the economic value and efficiency of advertising endeavors.

Calculated by dividing the total cost of an advertising campaign by the number of conversions, or actions, it provides advertisers and marketers with insights into the relative cost-effectiveness of various marketing initiatives. A lower CPA signifies a more cost-effective campaign, while a higher CPA might indicate a need for optimization or adjustment in strategy.

How do I calculate CPA?

Understanding cost per acquisition doesn’t require a degree in finance. Think of it like this: If you went shopping for apples and spent $10 to buy 10 apples, each apple would cost you $1, right? Now, replace apples with customers, and you’re getting closer to grasping CPA.

The calculation of CPA can be broken down as:

CPA = Campaign Cost / Conversions

Let’s break it down with a real-world example:

Imagine you run an online shoe store and decide to spend $100 on an online ad campaign. After the campaign ends, you find that this ad led to the sale of 20 pairs of shoes.

To find out the CPA, simply divide the total amount spent ($100) by the total number of shoes sold (20).

So, your CPA is $5. This means for every pair of shoes you sold from that specific campaign, you spent $5 in advertising.

It’s a straightforward way to measure how effectively your advertising dollars are turning into real customers. By keeping an eye on your CPA, you can refine your strategies to get the most bang for your marketing buck!

What is a good CPA?

Okay, so now you know what CPA is and how to calculate it. But what’s a “good” CPA? The answer is… it depends.

The question of what constitutes a “good” Cost Per Acquisition (CPA) can be somewhat elusive, as it varies significantly across industries, business models, variations in marketing budget, and specific campaign objectives. However, a “good” CPA is generally considered to be one that:

Is sustainable for your business

If the revenue generated from a customer (Customer Lifetime Value or LTV) is substantially higher than the CPA, then the acquisition cost might be considered ‘good’. For instance, if your CPA is $10, but that customer goes on to spend $100 over the course of their relationship with your brand, you’ve achieved a favorable return on investment.

Compares favorably to industry benchmarks

Each industry has its average CPA. For example, in e-commerce, a lower CPA might be expected compared to industries like legal services or real estate, where higher CPAs are more common due to the higher value of a conversion (e.g., a property sale or legal contract).

Don’t worry. We’ll go into this in more detail later on so you can see how your cost per acquisition holds up against other marketing efforts in your industry.

Achieves your specific marketing and business objectives

Sometimes, businesses are willing to accept a higher CPA if they’re trying to break into a new market, launch a new product, or target a particularly valuable audience segment. Conversely, mature campaigns aiming for efficiency might prioritize a lower CPA.

To really ascertain if your CPA is “good”, it’s crucial to:

  • Analyze historical data: How does the current CPA compare to past campaigns or periods?
  • Understand your customer’s lifetime value (LTV): This will give you a sense of how much you should be willing to spend to acquire a customer.
  • Regularly benchmark against industry standards: This can be done by accessing industry reports or using tools like Google’s Benchmarking Reports in Google Analytics.

You can learn more about marketing KPIs you should be tracking by checking out our blog about essential marketing metrics. But for now, know that a “good” CPA is relative and requires ongoing analysis and contextual understanding of your specific business and marketing landscape.

marketers looking over cost per acquisition analytics on a table

CPA standards by industry, platform, and ad format

Let’s dive into this a little deeper so that you can calculate cost-effectively for your target audience. We’re going to look at CPA data across industries and then break down what CPA target you should aim for through platform and ad format.

Keep in mind that these numbers constantly change based on evolving market conditions, so it’s essential always to consult up-to-date industry sources or tools like Google Analytics for the latest figures.

Industries:

  1. E-commerce: $45 – $65
  2. Travel & Hospitality: $40 – $70
  3. Real Estate: $80 – $110
  4. Education: $35 – $50
  5. Finance & Insurance: $50 – $100
  6. Health & Medical: $60 – $90
  7. B2B: $130 – $150
  8. Legal: $70 – $120

Platforms:

  1. Google Search Ads: Depending on the industry, CPAs can range from $45 to $120.
  2. Facebook Ads: The average CPA across all industries is about $18.68, but this number can vary based on targeting, industry, and ad format.
  3. Instagram Ads: Often similar to Facebook, with an average CPA around $20 – $25.
  4. LinkedIn: Typically higher due to its B2B nature, with an average CPA of $50 – $75.
  5. Twitter Ads: Around $30 – $50 on average.

Ad Formats:

  1. Search Ads: These are often higher intent, so they might have a lower CPA. Depending on the industry, this can range from $40 to $90.
  2. Display Ads: Due to their passive nature, these often have a higher CPA, ranging from $50 to $100, depending on the platform and industry.
  3. Video Ads: CPAs can vary widely based on the platform. On YouTube, for example, the average is around $30 – $40, but on Facebook or Instagram, it can be lower at $15 – $25.
  4. Native Ads: These can have a broad range, but on average, you might see a CPA of $40 – $70.
  5. Shopping Ads (for E-commerce): These often have a lower CPA due to their high intent, ranging from $30 to $60.

Please note that these are generalized figures and can vary based on the specifics of the campaign, targeting, region, and more. Always consider these numbers as benchmarks or starting points and not as definitive values for your campaigns.

How do I lower my cost per acquisition?

Right, so now we’re getting to the fun part. You want to know how to optimize your CPA, and that means optimizing your strategies! Here are some tips:

Optimize Ad Campaigns

Regularly review and adjust your ad campaigns. Weed out underperforming ads and allocate more budget to the ones that drive the best results. Use A/B testing to determine which ads resonate most with your audience.

Improve Landing Page Experience

A well-designed landing page can significantly increase conversion rates. Ensure that your landing page is relevant to your ad, user-friendly, loads quickly, and has a clear call-to-action (CTA).

Segment Your Audience

Target your ads to specific audience segments. By catering your messaging and offers to particular demographics, interests, or behaviors, you can increase your conversion rates.

Refine Keywords

For search advertising, regular keyword optimization is crucial. Remove or adjust bids for underperforming keywords and explore new ones that might be more cost-effective.

Use Retargeting

Retargeting campaigns can be more efficient in terms of CPA since you’re advertising to individuals who have already shown interest in your product or service.

Enhance Ad Quality

Platforms like Google Ads use Quality Score to measure the relevance and quality of your ads, keywords, and landing pages. A higher Quality Score can lead to lower costs and better ad positions.

Adjust Bids

Consider using manual bidding to have more control over how much you’re paying for each click or impression. If you understand which placements or times of day yield better results, you can adjust bids accordingly.

Expand Channels

Don’t rely solely on one platform. Sometimes, diversifying your advertising channels can help you discover a platform where your CPA is lower.

Monitor External Factors

External factors, such as competition or seasonality, can impact your CPA. Being aware of these and adjusting your strategies accordingly can be beneficial.

Enhance Offer Value

Sometimes, the offer you’re promoting might not be enticing enough. Consider bundling products, offering limited-time discounts, or adding bonuses to increase conversions.

Remember, while lowering CPA is essential for improving ROI, it’s crucial not to sacrifice the quality of your acquisitions. It’s always a balance between acquiring valuable customers and managing costs.

two women filming a video advertising a product (enhance offer value)

Final Thoughts

As we’ve explored, this invaluable marketing metric offers a clear lens into the efficiency of your marketing campaigns, ensuring that every dollar spent is being used to its fullest potential.

From industry to industry, platform to platform, and across various ad formats, one universal truth stands out: CPA directly impacts the cost of acquiring new customers. By keeping an eagle’s eye on this metric, marketers can make informed decisions, optimize campaigns, and ensure a healthy return on investment.

Remember that a well-managed CPA is not just a number – it’s a reflection of the strategic brilliance behind successful marketing campaigns.

Check out our blog on customer acquisition cost next!

Frequently Asked Questions

What’s the difference between CPC and CPA?

CPC is “Cost Per Click.” This refers to the amount an advertiser pays each time someone clicks on their ad. It doesn’t matter what action the user takes after the click; the advertiser pays for the click itself.

CPA is “Cost Per Acquisition.” This refers to the amount an advertiser pays when a specific action or acquisition is completed, such as a sale, sign-up, or another predefined action. The action is usually more involved than just a click, meaning advertisers might pay for CPA less frequently than CPC.

In essence, while CPC charges you for the sheer act of directing traffic, CPA charges you for a more definitive action or conversion from that traffic.

What is cost per acquisition CPA bidding?

CPA bidding is a method of paid advertising where advertisers pay for a specific acquisition or conversion. Instead of setting your bids for clicks (like in CPC) or impressions (like in CPM), you set bids based on the desired action’s value. Platforms like Google Ads offer a feature called “Target CPA” bidding, where the system automatically sets bids to help you get as many conversions as possible at your target CPA.

What is a CPA pricing model?

The CPA pricing model is a digital advertising payment model where advertisers only pay when a specific action is taken as a direct result of the ad. This action could be a purchase, sign-up, or other defined activities. The CPA model is considered more advertiser-friendly than the CPM (Cost Per Thousand Impressions) model, for instance, because advertisers only pay for actual conversions, not just views or clicks. However, since the risk for the platform or publisher is higher (they’re not guaranteed payment unless the user completes the desired action), CPA costs can be higher than other models.

In a nutshell, CPA prioritizes quality over quantity, focusing on meaningful user actions rather than just visibility or traffic.

Taylor Wise

Taylor Wise

Taylor is a seasoned entrepreneur and the mastermind behind Wise Growth Marketing, dedicated to helping businesses reach their peak. With over a decade of experience, he's on a mission to guide owners towards profitable transitions or sustainable, hands-off models. When not immersed in strategizing, he shares his travels and artistic prints at wisetaylor.com, or you can find him exploring the great outdoors and dispensing camping wisdom at campingtentexpert.com. His life's work reflects his belief in growth, adventure, and the freedom to enjoy the fruits of one's labor.

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