How to Calculate CPA and Why it Matters in Business

Marketing requires a strict budget that allows you to build and implement multiple strategies, test them against one another, and find out which ones perform the best. Unfortunately, many small businesses don't know some of the most important marketing metrics they should be monitoring throughout all of their ad campaigns.

Your startup marketing strategy depends on your ability to analyze and understand data. You may already monitor your costs because you need to know how much everything costs you, but are you monitoring how much each action costs?

Cost per acquisition (CPA) is a term used to describe how much it costs your online business to get your audience to take action.

Knowing your CPA for each campaign can help you start with a baseline and reduce the price throughout the campaign to help you get more out of your marketing or advertising campaign.

What is cost per acquisition?

CPA, also known as cost-per-action, is an important metric typically used in the advertising industry to measure how much it costs them to get a conversion. These actions can be anything from purchase to completion of a lead generation form.

Knowing your CPA is crucial to growth marketing success because you can't grow if you don't know how much everything costs you. However, it can also be beneficial for nonprofit marketing to help you increase brand awareness.

Knowing your average CPA can also be beneficial when you're working on your business plan to start your business and looking for investors. Investors will want to know how much it costs to start acquiring customers so they can brainstorm ways to bring that spending down.

In general, your cost per action is the average pay when all your customers have taken the desired action on your website or via advertising. CPA can be a great way to determine how much money you're really spending on digital campaigns versus how much you're earning.

How to calculate cost per action?

It is fairly easy to calculate your CPA. If you're using a digital ads platform, it will calculate your CPA for you based on the conversions you've set up. However, if you're trying to calculate your spend per action for any actions taken on your site, you'll need to know the following:

  • How much you're spending on the targeted ad campaign
  • How many users have converted

The cost per acquisition formula is your total ad spend divided by total conversions.

cost per acquisition (cpa) formula

Sounds easy enough, right? It is.

Let's say you used Google to display ads to drive traffic to a landing page where you want them to fill out a form. If the total spend is $200, and you received 2 form submissions, your average cost per action is $100.

Why does CPA matter to marketers?

CPA marketing is important because it shows you how much each action costs your business.

Ultimately, you want your total cost per action to be as low as possible, so once you have a baseline, you can start experimenting with your strategy to find ways to reduce it. You can calculate your CPA for every type of campaign, including search ads, display ads, native ads, social media ads, and more.

Customer acquisition can pay up to 7 times more than selling to existing customers — while the probability of selling to a new customer hovers around a mere 5 to 20%.

If you run several advertisements at once, you may have several CPAs you can use to compare to one another. A single CPA can give you a general idea of how much it costs to get existing and new customers to take action on your website when encompassing all of your marketing efforts.

For example, let's say you've added all your paid marketing mediums up and have an average CPA of $125.

When you break your spending per action down by campaign, you can get a more granular view of which advertisements have performed best and increase the number of new customers acquired for lower operating expenses.

For example, let's say you ran Facebook Ads, Google Search Ads, and TikTok Ads, and these are your results:

  • Facebook Ads: CPA=$25
  • Search Ads: CPA = $50
  • TikTok Ads: CPA = $90

What do the above numbers tell you?

Ultimately, Facebook ads gave you the cheapest cost per action, which means you should invest more money into Facebook ads than the other two options because it gives you as many conversions at more than half the CPA of the other two other platforms combined.

The lower your spending, the higher your profit, so you should always try to make your total cost per action lower to ensure the success of your ads.

Unfortunately, CPA is a granular marketing metric, which means it shouldn't be the only thing you track to determine overall campaign success. Lowering your spending means higher profits, but it doesn't necessarily mean you're increasing your acquisitions on one platform over another.

For example, your campaign from earlier might have given your Facebook Ads a cost per acquisition of $25, but that might not help grow your business if only one became a paying customer.

If you want to get a more accurate picture of your campaign performance, you'll need to invest time and energy into data tracking to measure other marketing metrics like customer lifetime value impressions, conversions, and conversion rates.

What is a good (or bad) cost per acquisition?

Whether you have a good or bad total CPA depends on more specific industry benchmarks and platforms or websites you advertise on.

For example, Facebook advertisers can oftentimes yield a lower cost per acquisition than search ads for content marketing, depending on how your ads are set up. The more experienced the person managing the advertisements, the lower they'll be able to get your CPA.

For example, a good CPA on Facebook ads can range from $5 to $60 or more, depending on your niche and how well your online advertising performs. In general, you want your cost per acquisition to be as low as possible.

However, the good news is that once you have a benchmark from your first ad, you can find ways to improve your cost per acquisition to increase the number of new customers acquired.

How to improve your CPA

Since your goal should be to constantly improve your cost per acquisition, ultimately reducing how much it costs to obtain a customer, you should never turn your back on your ads.

The lower your CPA, the more customers you can earn without increasing your budget. Therefore, it's important to experiment and find out what works best for you. Here are a few tips to help you reduce your CPA acquisition:

A/B test everything

A/B testing every aspect of your ads can help you find the most effective elements. For example, you can test elements of your landing page, such as the headline and description, to make it easier to acquire customers to understand your offer. You can also optimize your form, as shorter forms tend to have a higher conversion rate.

Optimizing your landing page can help you make a better first impression, increasing the number of people who convert, a very important marketing metric.

Retarget customers

Retargeting involves showing your ads on relevant content to individuals who have already visited your website without taking action.

For example, if your goal is to get people to fill out a form to enter your sales funnel, you can target individuals who visited your website and didn't fill out the form. Retargeting strategies are effective because the audience you're targeting is already familiar with your company and offer, making them more likely to convert.

Companies that align sales and marketing save 30% on action costs.

Abandoned shopping cart ads

Abandoned shopping cart advertising is a type of remarketing strategy in which you specifically target people who have added items to their cart and never checked out. These visitors were already once interested in your products and may have gotten distracted or forgotten to finish the checkout process. By advertising to these individuals, you can bring them back to your website to convert.

Improve geo-targeting

If you don't use geo-targeting, you may be missing a valuable opportunity to convert more people in specific areas across the globe. Instead of blasting your ads out to anyone who can possibly see them using a shotgun approach, you can target individuals in specific geographic areas that may be more likely to convert. You can also stop targeting areas that aren't performing to maximize your ad spend in other areas.

Don't forget about email marketing

Email marketing is an affordable way to market to acquire customers and offers some of the highest ROIs. When you use the CPA formula with an email marketing campaign, you'll only need to divide the price of your marketing platform by conversion rate, especially if you use templates that allow you to save time and resources.

Email marketing can give you a lower cost per acquisition than many other marketing strategies, helping you to reduce your overall cost per acquisition and increase revenue.

Stop using poor-performing ads

If you're correctly tracking your data, you should know which campaigns simply don't perform. Temporarily or permanently stopping these unprofitable ventures can help reduce your cost per acquisition and free up your budget for more effective campaigns to bring in more customers without increasing your budget.

Keep track of all your data with Mailchimp

To understand your CPA, you'll need to track data across all your campaigns. Mailchimp makes reporting easy to track your website and performance to find new ways to reduce your CPA.

Whether you're running email marketing campaigns that generate sales or you're trying to increase conversions on paid ads, Mailchimp can help you measure your success to make better decisions to reduce your cost per acquisition and increase revenue for your organization without increasing your budget.

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