The concept of Cost Per Acquisition (CPA) or Customer Acquisition Cost (CAC) seems incredibly simple – but there is often more to it than meets the eye.
What is the difference between CPA and CAC?
Nothing! These terms are used interchangeably. For simplicity I’m going to just talk about Cost Per Acquisition (CPA).
What is CPA?
We can define Cost Per Acquisition as the total costs associated with customer acquisition divided by the number of new customers in any given time period.
One important consideration is whether you are calculating for all transactions or customers, or differentiating between costs associated with first time customer acquisition and reacquisition/retention marketing.
This will be more important in some business models (eg occasionally repeated purchases like travel or clothing) than others (like subscription products). Splitting costs in this way can be tricky but is important if you want to compare your (new customer) CPA with Customer Lifetime Value.
What to include when calculating CPA
Each business I’ve worked with has calculated CPA in a different way – and it is key to understand what is included/excluded before drawing any conclusions from trends or comparisons. In general, you should include all costs associated with customer acquisition, which will vary based on your business model but might include:
Media costs – both digital (like Paid Search or Paid Social spend) and traditional media (like TV or events).
Agency costs – all of the various agencies you may work with from digital agencies, creative agencies through to PR and translation.
Technology – you should be factoring in the costs of technology that plays a role in your customer journey – your website, ecommerce platform, email or marketing automation tool, CRM, conversion rate optimisation tool, ad serving, bidding and analytics platforms.
Partners / affiliates – this could range from channel partners, marketplaces, intermediaries through to influencers and ambassadors.
Content creation – the cost of producing content – copywriters, imagery, video production
Personnel – the fully loaded costs of your marketing and sales teams, including the value of any commission based incentives.
An important aspect of CPA is that it is an aggregate measure, typically analysed at a segment level which corresponds with how you make decisions on marketing costs, for example for a particular product/service or single marketing channel. Revenue allocation between channels will typically come from your attribution model. You will likely have to make some assumptions about how to allocate costs between these segments, but using common sense and following a simple volume or revenue based allocation will normally suffice.
It isn’t particularly helpful to calculate CPA for a specific customer as this look artificially low as it ignores the ‘wasted’ spend on customers who didn’t convert, but which is an unavoidable consequence marketing activity.
Some costs make more sense to factor into Customer Lifetime Value than CPA as they are more related to the transaction or product/service than the acquisition itself, for example bank fees. As a rule of thumb, only include costs associated with getting to the point of transaction in your CPA – anything directly associated with the transaction should be captured in Customer Lifetime Value.
One of the most powerful uses of your CPA metrics is the LTV : CPA ratio, which I’ll cover in a separate article soon.
How to reduce Cost Per Acquisition (CPA) / Customer Acquisition Cost (CAC)
There are three levers to consider which can help you to reduce CPA:
Change the mix: any analysis of marketing channel performance will show you where you have the highest CPA, potentially unprofitable at a customer level. Reducing your spend in this area is the simplest way to reduce overall CPA.
Lower the cost per lead (or click): examine where your leads / website traffic is coming from and how you might be able to increase cost efficiency at a channel level. Common tactics I’ve used are increasing your Quality Score in Google Adwords, or renegotiating partner/affiliate agreements.
Increase your conversion rate: often the most effective lever to reduce CPA, use a test and learn approach to improve each stage of your customer journey, both online and offline. This process is often best informed by conducting primary research with your customers (and ideally lost prospects) to understand where they found points of friction in your customer journey. One of the most common tactics is to increase the speed with which you respond to inbound enquiries, which I’ve always found to be highly correlated with conversion rate.
Lower your cost to convert: this is particularly relevant if you have sales teams, for example shortening your sales cycle, reducing the number of interactions or using automation to encourage more self-service. For example, I’ve worked with an insurance business which progressively built out their online journeys to reduce the number of telephone calls and consequently reduced cost to convert.
Although most businesses will be able to use these levers to reduce CPA, most Management teams will care just as much (or even more) about driving growth. It is very difficult to pursue both growth and marketing efficiency, even though I’ve seen many business plans promising both. The most successful businesses I’ve worked with have been able to balance out efforts to reduce CPA with driving growth – consider carefully what assumptions you use in your business plan.
The reason for this is that as you grow your marketing budget, you will typically see diminishing returns – in other words, the more leads you try to drive, the higher the cost per lead. There are two drivers of this:
Many paid channels such as Google Adwords operate a bidding model, to secure more traffic you need to place a higher bid.
If you’ve fully optimised your CPA, to grow leads you will need to start looking at more expensive ways of generating traffic or leads, e.g. starting to run paid digital marketing if you’re not already doing so, launching in countries with lower conversion rates.
The most successful businesses I’ve worked with have been able to balance out efforts to reduce CPA with driving growth – consider carefully what assumptions you use in your business plan.
Cost Per Acquisition may seem like a simple metric, but spending time analysing how it is calculated and how it can be optimised is a key part of growth acceleration. It is a key part of creating your own marketing flywheel.
If you’d like to discuss how you can better understand and use Cost Per Acquistion in your business, please Contact Me.
All views expressed in this post are the author's own and should not be relied upon for any reason. Clearly.