With budgets being tight, economical growth moving into another round of recession, and competition right around every Ad Platform corner it becomes increasingly important for businesses to execute their marketing cost-effectively. One big pillar of doing so is understanding at what cost customers are currently acquired and how this cost will develop in the future.
While common marketing analytics tools like Google Analytics or GA4 are great for analyzing and optimizing web-page performance, they simply are not built for business or budget centered questions.
Having precise answers about customer acquisition cost and knowing which channel or ad platform to spend your marketing budget on in current times becomes a matter of survival.
What is CPA?
Before we dive into the nitty gritty of CPA analysis - let’s first recap how CPA is actually defined. In general, CPA stands for Cost per Action but you may also have come across it as Cost per Acquisition, Cost per Conversion, Cost per Lead, and many other alike expressions.
They all follow the same principle which is to indicate how much you pay for a specific desired business outcome. This could be anything from a customer acquisition through social media to an install of an app or an order in a shopify store.
The most basic formula works as follows: For a certain timeframe, sum up all costs and divide those by the sum of all conversions.
This results in the average CPA which simply answers the high level question: “How much does it cost on average to acquire a customer?” The average CPA indicates the general effectiveness of marketing. It is worthwhile to look at over time to understand whether it gets cheaper or more expensive to acquire new customers.
However, as you might have expected, calculating CPAs can and should get more complex and granular than this. A more detailed view on your costs will help you make informed decisions with regards to your marketing budget allocation.
How expensive is customer acquisition through different channels?
Looking at average Cost per Acquisition is worthwhile for understanding the long-term effectiveness of marketing. But it will hardly give you the right level of insight to make tactical decisions for the day to day budget allocation.
The average CPA includes conversions from both, organic and paid marketing activities and therefore underestimates - better yet “undervalues” - the actual cost your business pays to acquire a customer through paid activities.
To determine how expensive a conversion through paid channels is, a marketer needs to look at the incremental CPA.
An “increment” is an increase or an addition to something already existing. In the case of marketing, incrementality refers to any additional sales a business generates through paid marketing activities. These come on top of sales which are generated organically through brand-building and other not marketing related effects such as seasonality and trends.
The incremental CPA is calculated by summing up all costs and dividing them by the amount of conversions generated only through paid activities. The results give a more accurate view on cost for conversions from paid channels.
The incremental CPA makes sense to calculate on both levels: on an overall level (taking into account all sources / channels / campaigns) as well as on an individual media channel level (source, campaign).
Yet again, this is an average metric which refers to what happened in the past. Still, one of the marketer’s essential tasks is to allocate budget to the different paid channels such as Facebook Ads vs. Pinterest Ads vs. Google Ads… to generate more sales moving forwards. There are two ways to go about this:
- Rely on your gut feeling. (disclaimer = usually does not generate the best results)
- Understand exactly how much it costs to acquire an additional customer per channel and allocate the budget where the cost is lowest. (disclaimer = this usually generates the most cost effective results)
Undoubtedly, the second approach is the one worthwhile pursuing. In order to allocate your budget cost-effectively you need to look at the marginal CPA.
How to decide where to shift the budget?
The marginal CPA answers the following question: “At the current level of spend, how expensive is the next conversion I will make?”. This mostly makes sense to calculate for paid activities separately by source or channel.
The well known phenomenon of diminishing returns applies here. After exploring a new paid channel marketers usually experience that over time click through rates decrease and fewer conversions are coming in. This happens when the target group sees ads (too) often, already knows the brand and is educated enough about the product. This channel or target group fatigue can be described as “saturation”.
At this point, spending more money on the same target group will not produce more conversions. By this time every dollar spent will return fewer and fewer conversions. You know that this is the case when you’re observing an increased marginal CPA.
Screenshot from Adtriba's dashboard showing saturation curves for facebook-prospecting vs. facebook-retargeting.
Observing where you currently are on the saturation curve tells you how much money you need to spend to get an extra conversion. This metric is extremely useful to see what channels are already maxed out on their capacity to produce conversions economically (within your budget) and which channels potentially offer cheaper Cost per Acquisition. It is calculated in a more complex way, but to give you an idea here is a very simplified view:
Conclusion
To sum up, understanding the Cost per Acquisition for your particular business overall and being able to break it down by marketing activity is crucial for your business success.
Getting this right can answer which marketing campaigns are the most important in the marketing mix. In online marketing terms, this means that companies can allocate budget effectively to best placements and tactics while saving their resources on campaigns that don’t contribute as much.
In markets with high levels of competition and high ad prices, knowing where to place your bid can be a matter of survival. Exact understanding of the results you will generate with your marketing budget, therefore, becomes a strategic priority. .png?width=4000&name=2206_Blog_Table_CTA%20(1).png)
Tools like Google Analytics / GA4 or other session- or event-based tools are great at evaluating the performance of a webpage and serve great insights for optimization. However, they simply are not built to perform calculations like Cost per Acquisition, and specifically marginal CPA, which are crucial for your tactical moves and marketing optimization.
Want to learn how the CPA calculation will look for your marketing activities? Book a free call with one of our experts.