Why Cost per Acquisition Is the Only Metric That Really Matters

by · March 28, 20147 comments

There’s no denying it. You cannot consider yourself a great ad person unless you know your numbers.  At SME Digital (the agency arm of Social Media Explorer), we’re all about garnering results that are measurable. After all, you aren’t an effective marketer if you aren’t tracking the numbers.  Even more, you aren’t a top-notch marketer if you’re not tracking the one metric that matters above all others: Cost per Acquisition (CPA).

Now don’t get me wrong, all those other metrics are important too. Metrics like:

  • Cost Per AcquisitionClick-Thru-Rate
  • Cost per Click
  • Cost per Conversion

Just to name a few.

But, while these metrics are important to any well run campaign. They don’t hold a candle to the Holy Grail of marketing metrics: Cost per Acquisition. In other words, how much do I have to spend in marketing dollars to get a paying customer?

So why is Cost per Acquisition so important? Simple, it’s the quintessential metric for determining true return on investment. It doesn’t matter how many clicks or eyeballs a campaign receives, if it’s not generating revenue, it’s not successful.

Case in point, I was working for an agency charged with managing a company’s PPC account. My team’s ads were performing well above average (on paper). Through aggressive split-testing, we were able to attain a CTR greater than 4% and had the CPC down below a dollar; just fantastic. Yet, when we went to share our good news with the client, we were surprised to hear that they had only received one sale; just a single sale from all our efforts.  Their Cost per Acquisition was the entire spend on the marketing campaign to date. Not good. So instead of focusing on CTRs and click costs, we focused on Cost per Acquisition. The result, we began creating campaigns that drove sales, thrilling the client. Sure the impression counts and click rates weren’t always high, but they worked where it mattered, driving revenue.

Cost per Acquisition vs Cost per Conversion

For the record, Cost per Acquisition is not Cost per Conversion. The term conversion is often used for describe anything from making a purchase, to liking a brand on Facebook. Acquisition is centered solely on making somebody a customer. It’s all about revenue.

Cost per Conversion is great for answering the question, “What does it cost to get this newsletter subscription?” But you also need to answer the question, “How many newsletter subscribers do I need, on average, to make a sale?” This is Cost per Acquisition.

So What Should My CPA Be?

The most common question we hear from clients on Cost per Acquisition is what makes a good CPA? How much should we be spending to get a new client?  The answer, of course, is that it varies; it all comes down to what your average revenue is per customer.

There’s plenty of ways to determine your average revenue per customer, but a good starting place is to take your total revenue over a period (year/month) and divide by the number of customers you had during the same period.

Average Revenue per Customer = Yearly Revenue/Yearly Customer Count

Sure there are other formulas that take into account purchase frequency, lifetime value and average order size, but honestly the formula above is the easiest place to start. Once you know how much an average customer is worth, than you can see what your average profit is.

When you know how much you make from a customer, then you can know how much you’re willing to spend to get a customer.

Armed with this number, take a good hard look at your current marketing initiatives. It should be pretty obvious which channels are creating profitable customers and which channels are costing you far more than they are worth.

How Do I Track Cost Per Acquisition?

If you’re an Ecommerce company, great, CPA is easy enough to track, just look at the source of your sales, use custom links, and you’ll be good to go. For the rest of us out there, it gets a little trickier. Get aggressive with your tracking codes, get aggressive with building custom links, close the holes in your sales process, use unique promotional codes, and implement a CRM system. Most importantly, ask your new customers where they are coming from. By being smart, (and partnering with a company that gets measurement), anyone from long sales cycle B2B companies to retail locations using radio can track their Cost per Acquisition.

Remember, marketing isn’t a black hole anymore. Learn what works for you, get the ROI, commit the funds and make it happen.

How does your company track Cost per Acquisition? Let us know in the comments below

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About Jason Spooner

Jason Spooner

Jason Spooner is the Director of Client Services for SME Digital, the digital marketing extension of Social Media Explorer. During his career as a digital strategist, Jason has worked with a variety of large and small companies including: NAPA AUTO PARTS, NASCAR, Kraft, Wal-Mart and Wrangler. His passion: creating powerful digital marketing strategies that drive results. Oh, and he does improv comedy. Follow his antics @jaspooner.

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  • John Spooner

    Very interesting article. It would seem though that the CPA would depend upon the industry/product line you are talking about. I certainly see where I could use this metric across time with the same product line to gage performance, but how does it compare across product lines or industries?

  • http://www.wearerecurve.com/ Bradley Robb

    CPA is good, and agree that it’s the ultimate determent on each channel, but it’s not the only measure that matters, especially when looking to optimize across channels.

    Each channel should have both a channel ROI – [Money acquired as a result of efforts in a channel – Money (and time) spent using a channel] and a follower value [channel ROI / number of followers]. The first lets you know if a channel as a whole is working, and the second lets you project based on probabilistic growth patterns, how much the channel could earn you in the future.

    CPA alone won’t give you the data you need to actually improve CPA.

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  • http://www.lifenomading.com/ Ian Hoyt

    Well said, I agree that CPA is heads above any other metric. I have spent years working on FB ads and wasted money down the tube because I hadn’t learned that CPC doesn’t nearly have an impact as CPA does!

    Glad I’m quickly learning the ins and outs of CPA though!