Cost Per Acquisition (CPA) Complete Guide For Ecommerce
Data in today's business world is essential to build a successful business and maintaining its steady growth. Think of measuring data about your business performance as a regular doctor checkup to stay healthy and avoid any serious illnesses or at least discover them early enough.
In the business world, measuring certain metrics helps your business grow and avoid many crises by predicting them. In this article, we cover a key metric essential for all types of businesses, especially eCommerce businesses; cost per acquisition (CPA). Read on to learn everything you need about the cost per acquisition (CPA).
Table of contents:
- What Is Cost Per Acquisition?
- How to calculate cost per acquisition?
- What is a good cost per acquisition (CPA) for eCommerce?
- Why Measuring Cost Per Acquisition Is Important?
- CPA VS CAC
- How to reduce Cost per Acquisition?
What Is Cost Per Acquisition?
It is a marketing metric that measures how much it costs to get a prospect to complete an action that leads to a conversion. It can be measured on a smaller scale, per campaign or per channel, using the ad spent value. It is directly related to measuring marketing efforts' results and their financial profit. Improving cost per acquisition directly increases your revenue and boosts your ROI.
How to calculate cost per acquisition?
To find out the cost per acquisition (CPA), divide the marketing costs paid by the number of converted new acquisitions-conversions in a certain time frame or per ad campaign.
Cost per acquisition formula = marketing costs/The number of new acquisitions-conversions
- Campaign: influencer marketing co-operation
- Cost spent: $10,000
- New customers (conversion): 1000
CPA = $10000 / 1000 = $10
What is a good cost per acquisition (CPA) for eCommerce?
This is one of these questions that don't come with a short answer or a definite number. Because there is no benchmark in eCommerce for a "good" CPA, in order to understand what is considered a good cost per acquisition (CPA), many factors should be taken into consideration:
- Your industry: What do you sell? Food, fashion, fitness products, electronics, etc.
- CLV "Customer Lifetime Value": After acquiring a new customer, how much is this customer worth, and how much profit do they bring in?
- Repeat purchase rate: how many purchases are made by existing customers vs. new customers.
- Customer Average life span: If you offer subscriptions or even if you don't, in both cases, you need to understand how long before a customer stops buying from you.
- Churn rate: How many of your customers will end up canceling their subscription or just stop buying from you?
Taking all the above into account when studying your CPA will help you understand if you are doing well, and if you have the chance to even allocate a larger marketing budget based on this CPA.
Why Measuring Cost Per Acquisition Is Important for Ecommerce?
1- Coming up with the right Marketing Budget
Knowing the cost per acquisition will provide you with a clear idea of how much you need to allocate for marketing. It also helps you make the right decision if you want to increase the budget or decrease it based on the CPA and the results it indicates. In other words, it helps you determine if this ad spend or marketing costs are worth it and you need to do more of it or if it cost you so much with bad ROI.
2- Measuring Marketing channel efficiency
Marketing channels with low CPA are, of course, the best channels that you should invest more in them. They bring new customers for lower rates compared to other channels that can be expensive and convert fewer customers.
3- Understanding campaign success from a financial point of view
Measuring conversion rate can be used as an indicator of marketing campaign success. However, Cost Per Acquisition is a financial metric which measures the revenue impact of a marketing campaign and if it was worth the investment. For example, you collaborated with a mega influencer, and their ad conversion rate was high. However, when you compare the amount of money you spent on this collaboration and the number of new customers, you might actually feel disappointed.
CPA VS CAC: What is the difference?
Many eCommerce brands confuse these two metrics with being the same thing, and they use them interchangeably to refer to marketing costs involved with acquiring new customers.
However, CPA and CAC are technically different marketing metrics:
Cost per acquisition CPA refers to only the marketing cost to get a prospect to take an action that leads to a conversion. This conversion is not necessarily completing a purchase. It could be signing up for the newsletter or downloading an e-book, or submitting a lead form, whatever your conversion objective is.
Customer acquisition cost (CAC) refers to the marketing cost and other costs for acquiring customers on a large scale. The other costs include the cost of marketing and eCommerce tools used, ad vendor costs, team salaries, and agency costs. is used with the metric customer lifetime value (LTV) in LTV:CAC ratio, to understand the direct relationship between customer lifetime value and the total cost to acquire a customer.
How to reduce Cost per Acquisition?
The shortcut is to increase CONVERSION. More new paying customers per campaign/timeframe mean lower CPA. However, we understand how increasing conversion can be a real challenge for many eCommerce business owners. To get the most value out of all the ad spend and marketing paid efforts, follow these cost-per-acquisition improving tips:
1- Improve audience targeting
Targeting a wide range of audiences can get you conversions, but with low lifetime value because they are not the right audience for your business. Instead, try to find the ideal targeted audience, and don't waste money on any customer BUT the right customer.
2- Understand that not every Conversion is an Acquisition
If you run ads with conversion objectives such as email sign-ups, joining webinars, social shares, etc. These are not the same as acquiring a new customer. They might eventually lead to that, but when improving your CPA you need to understand the type of conversion to track.
3- Optimize conversion rate
As we have explained before, more conversions mean lower CPA. Conversion rate optimization includes many steps like optimizing the homepage, product categories, product filtering and search, product pages, website structure, cart page, checkout, and even more. Don't miss out on our complete guide on Conversion rates optimization.
4- Use personalization
Whenever you are investing money in any marketing channel, remember to create personalized ads and personalized landing pages, and funnels that fit each prospect's interests and stage. Personalization boosts conversions and consequently reduces CPA. Find here everything you need about personalization.
5- Utilize Retargeting
Retargeting is basically not giving up too soon. Try to retarget prospects who visited the website and checked some products. More importantly, retarget those who added products to their carts and didn't complete the action.
6- Use Customer segmentation
Customer segmentation is an essential step in marketing. It paves the way for your to create targeted and personalized ads. Start with customer segmentation and automating personalized ads by using Converted.in. Book your demo now.