What is a cost per acquisition?
We explain what a CPA is in digital marketing and how to calculate it
What is a cost per acquisition?
Cost per acquisition (CPA) in digital marketing is the aggregate measure of how much it costs to drive one conversion. It is used when analyzing campaign results as it lets the marketer understand which digital channel, vendor or ad is driving the most cost-efficient performance. While conversion rate is useful to understand what has been effective at converting your audience, the CPA provides the understanding of cost-efficiency.
An example is if you have spent $100 on PPC ads that have driven 5 conversions, your CPA would be $20. Once you work out the CPA across vendors, targeting and which ads are performing the strongest, you can then, at a very granular level, optimize your campaign spend to ensure you are getting the most efficient performance out of the budget spent.
When you combine CPA with understanding the CLV (customer lifetime value) of each conversion, you have a powerful set of metrics, which can be used to confidently optimize your marketing spend as effectively and efficiently as possible.
CPA is often referred to as cost per action - both terms meaning the same thing.
The CPA meaning can also refer to a buying model of only paying the vendor for when an action or acquisition has occurred. We discuss this in a later section of this article.
Cost per acquisition formula
To calculate cost per acquisition, you will need the following metrics:
- Budget / ad spend
How to improve and decrease CPA
If you were to reduce the budget on high CPA vendors, ads and targeting methods, and upweight the more efficient performers, then your campaign CPA will decrease.
Within paid channels, especially biddable channels, to improve CPA you should aim to improve your quality score (Google Adwords) and improve the relevance score (Facebook) to lower your CPMs and CPCs. By lowering your bids, you may not see that large of a drop-off, meaning there could be efficiencies to be found.
A re-targeting strategy can also be far more efficient than prospecting. By tagging up your site and app at all stages of the funnel, you will be able to re-target on a granular level and reach higher intent users who have shown interest but not converted and target lookalike audiences of those who share similarities with previous convertors. These strategies will nearly always produce lower CPAs than prospecting lesser intent audiences.
Eventually there will be a limit to how much the paid media can be improved, which means you will have to consider improving the landing page experience (conversion rate optimization on the website), adding more enticing pricing or offers, adding sale periods or improving the creative messaging and copy.
Buying impressions and inventory on a CPA basis
The majority of impressions are bought on a CPM or CPC basis. Another method of buying impressions is on a CPA basis, which means you only pay for when the impressions drive a conversion. The benefit of this method is that you know exactly how much you are paying for one conversion and can therefore understand the efficiency of the channel or vendor you are using from the beginning.
This is common in affiliate networks, whereby websites will advertise a product or service of another company’s and will earn a commission % off the value of the conversion.
The downside of this is that some of the inventory and websites that your brand will be appearing on may not be as brand safe or premium as others. This means if you wish to shift brand perception, this method of buying is not advised. A CPA buy is far more relevant for performance or direct response campaigns whereby you are purely focused on generating conversions.