How much does each new customer cost your business? Businesses love to dump money into Google AdWords campaigns, but then they ignore what the results are telling them. A lot of companies are spending more on a acquiring a new customer than that customer is giving them in return. Cost per acquisition is a valuable statistic for understanding whether you’re actually getting something for all the money spent in advertising.
Cost per Acquisition (CPA)
Cost per Acquisition (CPA) is a measure of how much is spent to get a sale (conversion). Take the amount spent on a campaign over a time period and divide it by the number of sales. Ideally this number is less than the average amount purchased. If your CPA is $25, but your products are only sold at $10, you’re losing $15 on every transaction made through that advertising channel.
Customer Lifetime Value (CLV)
Remember Customer Lifetime Value (CLV) from yesterday? It could be that your CLV is much more than your cost per acquisition (CPA) and so maybe you’re spending $25 to acquire a customer who will spend $100 or $200 with you eventually. This certainly changes the equation and shows why it’s important to understand CLV.
Cost per Action (CPA)
CPA can also stand for Cost per Action. If you’re advertising in order to get people to do something that isn’t directly a sale, think in terms of Cost per Action. For example, let’s say you’re running a Google AdWords campaign in order to increase your newsletter subscribers. Cost per Action in this case would be how much you’re spending for each new subscriber.
CLV is still important in this case, but you’d want to know what the CLV is of your newsletter subscribers. How many subscribers actually purchase from you, how much do they purchase from you and how long are they customers? Now you can start to understand not only the value of your newsletter subscribers, but also how much you should spend on acquiring new subscribers.
What to Improve
CPA provides more data on what may need to be improved. In Google AdWords if you get caught up in your click through rate (CTR), you may miss whether you’re spending too much for each new customer. If you’re spending money to increase the number of newsletter subscribers, how much are you spending versus the payout of those customers?
How do you use CPA?
(image by Daniel Borman)