What is Cost Per Acquisition? How to Calculate it

Cost per acquisition (CPA) is a digital marketing metric used to measure the cost of acquiring a new customer, usually using a marketing campaign or channel.

CPA is sometimes referred to as “cost per action.” This is because the term acquisition can represent various actions taken to earn a new lead, such as the customer making a purchase, downloading materials, or signing up for something a business offers.

When tracked accurately and considering all areas, CPA helps businesses assess the efficiency and cost-effectiveness of their customer acquisition efforts. Marketers can use their analysis to make data-driven decisions that improve their future marketing strategies.

There are several areas to be aware of when considering CPA as a whole:

• Cost measurement: This measures the total cost of acquiring a customer, including advertising and marketing costs, agency fees, and other associated costs.

• Conversion tracking: Accurate tracking and attribution are essential for calculating CPA. Marketers use conversion tracking software and analytics platforms to understand which marketing tactics led to a conversion.

• Optimization: Low CPA indicates to marketers that their campaigns must be improved to target potential customers better.

• Budget allocation: Understanding CPA helps businesses determine an appropriate budget for acquiring customers while maintaining profitability.

• Industry variations: Each business has different CPA targets depending on their industry and size. For example, ecommerce companies will likely have a different CPA target than subscription-based businesses.

• Lifetime value: CPA is crucial for assessing short-term campaign performance, but it’s also essential to consider the lifetime value (LTV) of the customers you successfully acquire.

Why is CPA a vital metric?

Tracking your CPA metrics provides a clear and quantifiable way to measure the efficiency of marketing campaigns. A business can use the information provided by these metrics to understand better what they have to spend to earn money.

CPA is a crucial component in assessing the return on investment (ROI) of marketing activities. It enables businesses to compare the cost of acquiring a customer or lead to the revenue generated from those acquisitions. This information is vital for decision-making and optimizing marketing spend.

It also encourages businesses to focus on cost control and efficiency. Companies strive to reduce their CPA over time, which can lead to more sustainable and profitable customer acquisition strategies. The best way to do this is through budget allocation, which you can do more successfully once you know how much to spend on each area of your campaigns.

CPA also offers competitive insights and strategic decision-making. By comparing your CPA to competitors, you can gain insights into where places wherestrategic changes are necessary to keep up with the game.

What is a good cost per acquisition?

The concept of a "good" CPA is subjective and highly dependent on several factors, including the industry, business model, product or service pricing, and profit margins. What’s considered a good CPA for one business may not be for another.

Typically, a good CPA enables a business to maintain profitability and achieve its marketing goals. The higher the profitability, the better the CPA is considered.

There’s a specific formula to use to calculate the CPA, and it’s relatively simple:

Total campaign cost ÷ Number of acquired customers = CPA

Work out the total campaign cost by adding up all the expenses. This can include advertising costs, creative development, agency fees, software or marketing analytics tools costs, and any other expenses directly related to the campaign. Be sure to include all relevant costs to get an accurate total.

You must then identify and count the number of desired actions achieved through the campaign, such as sales, lead sign-ups, or downloads—this depends on your business goals.

Suppose your campaign costs $10,000, and you build your customer base by 100 new customers. That would make your CPA $100.

If you find your CPA too high, aim to reduce it to improve efficiency and profitability.

Here are some ways you can reduce your average cost per acquisition.

Focus on customer retention

Existing customers are often more cost-effective to retain than acquiring new ones.

Invest in customer loyalty programs, provide excellent customer service, and create strategies to keep current customers engaged and satisfied. Happy, loyal customers can lead to higher lifetime value and lower overall CPA.

Conduct market research

Market research helps you understand your target audience better. You can create more relevant and targeted campaigns by knowing your audience’s preferences, pain points, and behaviors. This can lead to higher conversion rates and a lower CPA, as you’re more likely to attract more quality customers.

Make the most of landing page copy

Your landing page plays a crucial role in the customer journey, giving all the information they needed make an informed decision on your product or service.

Ensure your landing page copy is clear, persuasive, and aligned with your ad campaign. A well-optimized landing page can increase conversion rates, reducing your CPA.

Use retargeting strategies

Retargeting involves showing ads to users who have previously interacted with your brand or visited your website.

These individuals are more likely to convert, and retargeting can help bring them back to complete the desired action, such as a purchase or sign-up.

Periodically review your copy and keywords

Regularly review and update your ad copy and keywords. Testing different ad creatives and keywords can help you discover which performs best.

Use A/B testing to make the most of your campaigns continually. This process can help improve click-through and conversion rates, lowering your CPA.

Lower your bids

Consider lowering your bids if your current bid strategy results in a high CPA. While this may reduce the traffic volume to your site, it can also decrease your overall ad spend and lower the cost of each acquisition.

Avoid reducing bids too aggressively, as it may impact visibility and ad position.

Earning customers and increasing conversion rates are the main goals of any business.

Of course, while you have to spend money to earn money, you want to ensure you’re spending only what you can afford to acquire new customers.

Enter Amplitude Analytics. Our robust and innovative tools give you deeper insights into what you’re spending where and how effective your tactics are for earning new leads.

Sign up with Amplitude today to discover where your efforts are best applied in future campaigns.