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:
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