For our small businesses to grow, we need to find sustainable strategies to acquire new customers. The single most important rule to grow sustainably is to have the revenue you make per new customer greater than the cost to acquire each new customer and this leads to the most important metric that every business should know inside out: Cost Per Acquisition (CPA). In this article you will find out how to compute this and most importantly how to lower it too.
Cost Per Acquisition is a term which has risen to prominence due to our digital lives. The growth of digital advertising has forced a paradigm shift in the way we advertise. It has created greater transparency throughout the entire marketing and sales channels. It has opened up new ways to acquire customers and, most importantly, it has raised the importance of metrics such as the CPA due to the ease with which it can be computed.
What does the CPA mean?
As used here, I mean the entire cost required to acquire a customer via any marketing channel. This does not mean the cost to acquire a lead or a click, it is the cost to make a sale of your product or service. And there is a big difference between the two and here’s why.
When we advertise online, on TV, on radio, in a magazine, in person or however we do it, there is always a cost involved to reach a potential client. After reaching the potential client with your message, you may be able to convince them to take a closer look either via visiting your website, your store or reading your catalogue. At this point the potential client has become a so-called lead.
This lead is what you hope will turn into a paying customer.
Cost Per Lead
Carrying out this entire process incurs a cost. This is your Cost Per Lead (CPL). This is often simple to calculate. In the world of Google AdWords, the cost per lead is usually equated to the cost per click on an ad. For a radio campaign, the cost per lead will be the cost of running the campaign divided by the number of people who take the next step to either visit your store, visit your webpage or perhaps even give you a call.
Cost Per Acquisition
So what then is the CPA? The Cost Per Acquisition is the CPL plus the final cost required to turn this lead into a paying customer. This could be as simple as the cost of a special offer to turn the lead into a sale. However, more often than not, the CPA is found by figuring out by multiplying the Cost Per Lead by the number of leads needed to acquire a customer.
So if a Google AdWords campaign costs $5 per click, and one in 10 people who click become customers, then the CPA is $50 ($5 times 10).
So why do we compute it this way and not just divide the advertising spend by the number of acquired customers?
Because often we know the Cost Per Lead (e.g. cost per click on an ad) but we often don’t know the final conversion rate of these leads into paying clients, i.e. what percentage of leads become clients.
This last step is typically determined empirically by running tests on different marketing channels to test the quality of the leads coming through and knowing how good your team is at closing deals.
How to lower my CPA?
This then answers our question: How to lower the CPA and increase our profits? From the above discussion we are able to identify two different ways.
One is to have better conversion rates from lead to client, i.e. how good are your sales people at closing a deal? How targeted are your marketing campaigns? We want high-quality leads and good deal closers.
The second way is to reduce the cost of getting a lead (assuming a fixed conversion rate), i.e. to find a new, cheaper marketing channel. Do you know the cost per lead for a Facebook ad? A door knocking campaign? An email campaign? Choose the cheapest channel for the same quality lead.
What is your CPA?
So what is your CPA? How well do you know it? It is probably the most important metric for your business as it determines your bottom line and this determines whether you grow or fold.
Dr Evan Shellshear, CEO, Simultek