Calculating and optimising CPA

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Calculating and optimising CPA

These days we have more metrics than ever before to choose and bundle in order to measure marketing performance. They all tell a different part of the bigger story that is your customer journey.

However, not all metrics were created equal. So whether you’re:

  • Allocating marketing budgets,
  • Designing new campaigns or,
  • Scaling and optimising new campaigns,

CPA (or cost-per-acquisition) data needs to be in the mix.

What is a CPA?

CPA or Cost-Per-Acquisition is most commonly used to assess the performance of a campaign that’s already run with the basic calculation of how much you spent, divided by how many results you got.
E.g. $1000 spent on ads / 25 leads = a CPA of $40/lead

CPA has become so important that many of today’s ad platforms now have campaign formats based entirely around it. Today you can set a campaign to work backwards from your nominated CPA amount, putting you in total control of your ROI which is amazing right? Yes, but only if you’ve chosen the right CPA.

Why is it important to marketing budgets?

Ideally, once you’ve integrated the right CPA into your budgeting model, your campaign budget will be led by the acceptable CPA, so it’s structured to instinctively reward ROI from the outset, leading to organic growth and easier scalability.

Knowing your CPA also helps you forecast the type of results you might achieve for a certain ad spend/budget.

What’s a good target CPA for my industry?

As an agency this is still one of the most common questions we hear from new clients. The short answer is that there is unlikely to be a meaningful industry average readily available to you when it comes to CPA. Competitor research is great for many things, but your assessment of what is a viable vs non-viable CPA is usually an internal process, tied directly to your margins and ROI.

Okay, so what is a good target CPA for me then?

A good CPA target to start with, most importantly, is the one that is both realistic and affordable.

In essence, the CPA target is you or your client saying “this is as much as I’m able to spend before I get a sale.” The best place to start is by calculating what your existing CPA or revenue per lead amount is.

Your basic CPA calculation is:
cost of advertising / number of sales or leads or transactions
E.g. $1000 / 25 leads = $40 CPA

To get from your actual CPA to a CPA target you’ll need to gather some additional stats and depending on your product, these might include:

  • Required volume – Do you have a target volume you need to fill? E.g. 20 course enrollments.
  • Profit margin or cost of sale – How much does it cost to deliver or produce this product? How much is left over if I sell one at X price?
  • Lifetime value – Is it possible that this new customer will come back? If so, you might be willing to spend a bit more to attract that new customer the first time.
  • Conversion rates within your funnel – This one is important. It’s the piece of information most clients don’t have on hand in the beginning, but one that they soon start tracking because of its power. Even if it’s just an estimate, you need to factor in the realistic conversion rate of your funnel to see what your overall CPA is.

Let’s use the example of selling course enrolments. If I spend $1000 and send the sales team 25 leads, I give myself a CPA $40/lead. But how many of those leads actually converted? Most sales teams running on a CRM or database should be able to tell you they’re average conversion rate, e.g. 25%. With that knowledge, I can now calculate that it cost $40 to get each lead, but a much higher $160, to actually land each enrollment.

To finalise your target CPA, you then need to factor in the other less-tangible factors surrounding the campaign, understanding that different campaigns can and should have different CPA targets based on their unique objectives. E.g.

  • Audience – Is the campaign reaching out to a broader audience or a more targeted one? There is almost always a trade-off in CPA when reaching out to new or broader audiences.
  • Market share – In CPA-led campaigns, you might miss out on impressions if a competitor has set themselves a higher CPA target.
  • Brand awareness – If you’re advertising this product for the first time, you might be willing to accept a higher CPA in return for great volumes.
  • Campaign maturity – If it’s a new product or campaign, you need to factor in that you might go through a period of higher CPAs while your campaign matures.

Got it. I’m ready to start crunching numbers!

Great, we’ve taken some of the difficulty out by creating a free CPA Calculator.

Can I use my CPA to plan my budgets?

Yes, that’s a great way to use CPA data. We can take the same course enrolments scenario to watch this in action:

Boss: “We need 200 new enrolments to fill this course. How much budget do you think you’ll need to do that?”

Enrolments required: 200
Conversion rate of lead funnel: 25%
Leads required: 800
If we already know either of these and are happy that they’re a viable target:
CPA per lead: $40
CPA per enrolment: $160
Budget recommended: $32,000

Our CPA calculator allows you to calculate the above in a bit more detail, taking into account aspects like what % of the total revenue you’re willing to spend on marketing.

What can I do to improve a high CPA?

If you’re trying to reduce a high CPA, you first need to take a look at your channel mix and attribution setup to see which channels or parts of the funnel have the most room for improvement.

Most of the information you need should be within your Google Analytics data: channels, goals and ecommerce reports if applicable.

  1. Break out the different CPAs you have. E.g. Cost per lead, vs Cost per sale
  2. Break out your CPA data into channels
  3. Make sure each channel is being measured according to its purpose. For example, a search campaign result and a social media post reach people at very different parts of the funnel so judging them all against the same goal will send you in the wrong direction.
  4. Gather information on the conversion rates of each stage of your funnel, online and offline.

Then ask yourself these questions:

  1. Can I improve my advertising? E.g. Can we optimise the ads to increase the click-through-rate?
  2. Can I refine my audience targeting? E.g. use segments to see if some audiences are converting better than others.
  3. Can I improve my landing page(s)?
  4. Is there a barrier in the lead capture process? E.g. check form completion rates
  5. Can we improve the conversion rate of the sales funnel?
  6. Can we recapture lost leads/abandoned carts with remarketing ads? E.g. all things being equal, it is cheaper to convert someone that has entered a funnel than to have to find a new customer.

If these types of calculations haven’t become routine for your organisation, with 2020 bringing so many permanent changes to almost every industry, by now they should be!

Tactic Lab is a full-stack digital analytics and marketing agency based in Australia. This knowledge base was developed as a resource for both our clients and anyone else wishing to improve their measurement, strategy, marketing and digital assets.

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