- CPA = Ad Spend ÷ Conversions. Alternate Equation. …
- CPA = CPC ÷ Conversion Rate. Note: Use Conversion Rate as a decimal to get your answer. …
- Cost = CPC x Clicks. Actions = Conversion Rate x Clicks. …
- CPA = (CPC x Clicks) ÷ (Conversion Rate x Clicks) This simplifies to:
- CPA = CPC ÷ Conversion Rate.
How To Calculate CPA (Cost Per Acquisition) For Ecommerce – Shopify & Facebook Ads Tutorial 2021
Why is CPA important?
One of the most crucial marketing metrics you can track is the CPA for your business or website. When combined with other marketing metrics like customer lifetime value (CLV), it demonstrates the financial viability of all your marketing and sales efforts. It’s also one of the most important aspects of a return on investment (ROI) analysis for marketing and sales expenditures.
Without using CPA, there is a significant risk of overpaying for customer acquisition or paying for each new customer more than they are worth to your business. CPA is essential to developing a strong customer acquisition strategy and can play a significant role in ensuring your company’s long-term sustainability.
What is CPA?
A mathematical formula called “cost per acquisition,” or CPA, is used to determine the typical amount of money spent on sales and marketing to bring in one new customer. You can also consider it as a marketing metric that calculates the total cost of every customer action that leads to a conversion. Though a conversion can take many different forms, most often it involves a click, sale, app download, or form submission.
Clicks are crucial in the paid acquisitions world of the internet, but they only reveal when a customer has clicked on your content; they do not reveal whether the customer has stayed and engaged with it. The CPA metric is the most accurate way to determine whether your content is compelling and emotionally resonant enough to persuade readers to stay on your page and buy or download your service or product. The best way to gauge how well your content converts in advertising campaigns is through CPA.
Here is a simple example of the CPA concept. Suppose you own a hot dog stand and your total marketing expenses were $140. You spent $50 on digital advertising, $50 on paper advertising, and $40 on a part-time sales representative. The CPA for your hot dog stand is $5 if your efforts resulted in 25 additional customers. 60. In other words, it costs you $5. 60 to gain a new customer.
Creating a CPA strategy
Regularly monitoring your CPA, especially over longer time periods, will help you develop a solid CPA strategy. If, for instance, your monthly CPA over the past three years shows that March and September are consistently slow months, it would make sense to spend less on advertising and sales during those months. Alternately, you might find that December is your peak month, in which case it makes sense to invest twice as much in marketing and sales to increase December sales.
How does CPA work?
CPA isnt a static value. It can differ significantly from one era to the next, depending on a wide range of factors. Industry, seasonality, competitor activity, consumer demand, promotions, and advertising expenses are a few of these factors. Calculating your return on ad spend (ROAS) is one way to help make sense of this variation in CPA. Your return on assets shows you how much you earn for each unit you invest. For instance, if your ROAS is $4, it means that you will receive $4 back for every $1 invested in your CPA.
What is the CPA formula?
The CPA formula is the sum of the marketing and sales expenditures for a given time period divided by the number of new customers for the same time period. Although it is essentially a division problem, some of the most effective metrics are easy to calculate. Mathematically, the CPA formula looks like this:
CPA = (Marketing costs + sales costs) / New customers
How to calculate CPA
Here are the steps for calculating cost per acquisition:
1. Gather data
Select the precise time frame that you will be measuring, then collect the information listed below:
Two things to note:
2. Calculate the formula
You can use the CPA formula to calculate your CPA once you have the total cost of your marketing and sales as well as the total number of new customers. Here is an example.
Consider that you have a website where you sell your original artwork, and that in the previous month, you spent $350 on marketing, $225 on sales, and attracted 50 new clients. This is how the CPA formula would appear if you entered that data:
CPA = ($350 + $225) / 50
CPA = $575 / 50
CPA = $11.50
If you prefer, you can calculate the marketing or sales costs separately rather than combining them to determine the cost per acquisition of new customers. In fact, you can isolate any cost associated with marketing or sales to get a thorough analysis of how your efforts vary.
3. Analyze the results
Knowing your CPA will help you analyze the data and determine what it means for your company. Here are some various interpretations of your CPA results:
What it means if your CPA went up:
What it means if your CPA went down:
4. Take the next step
Since your CPA is a crucial performance indicator for your business, make a plan to monitor it over time. Whether it’s annually, quarterly, monthly, or all of these, you should begin reviewing your CPA on a regular basis. Additionally, you can take your CPA and modify it or combine it with other metrics to better understand the effectiveness of your company’s marketing and sales efforts. Here are some ideas:
CPA example
Let’s say you run Gregs Board Games, an online store that sells board games for kids and adults. In addition to the $400 you typically spend on marketing and sales each month, you decide to run an advertisement campaign on social media for the month of August, which costs you $800. You gain 60 new customers as a result of that campaign, and they all buy something from your website. You enter your data into the CPA formula and perform the following calculation to determine your CPA for August:
CPA = ($800 + $400) / 60
CPA = $1,200 / 60
CPA = $20
In order to get a conversion or purchase for this social media campaign, it cost an average of $20 per customer. You review the data and see that August’s CPA decreased significantly when compared to CPA values from the previous six months. This means your social media campaign was effective. In order to make sure you aren’t overspending on customer acquisition, you calculate the marketing and sales percentage of CLV as a final step. You are pleased to see that it is only 6%, well below the 10% recommendation.
FAQ
How does target calculate CPA?
Simply divide the total cost (whether media spend overall or a specific channel/campaign to acquire customers) by the number of new customers acquired from the same channel/campaign to arrive at the cost per acquisition.
How is CPA CPM calculated?
FORMULA FOR A BASIC TARGET CPA Start by taking the average transaction value or revenue amount you receive from selling your good or service, deducting the cost of production, and then deducting the estimated fixed costs (non-marketing) that are involved. This will leave you with the Gross Profit before advertising.
