What Is Acquisition Cost? Understanding How to Use Cost-per-Acquisition to Optimize Marketing Campaigns
What is acquisition cost?
Acquisition cost is a metric that indicates how much a company spends to attain new customers. Acquisition cost is an important KPI for marketers because it allows them to prioritize different marketing channels and tactics. Acquisition cost also plays a major role in marketing profitability.
Acquisition cost is typically measured with the metric “cost per acquisition”, or CPA. CPA is a measure of the average marketing cost needed to acquire one customer.
How do you calculate cost-per-acquisition (CPA)?
The cost-per-acquisition formula tells you how much marketing investment, on average, it takes to attain a new customer. You can use this CPA calculation to determine which channel or marketing tactic acquires customers for the least amount of investment.
The CPA formula is calculated by dividing the total amount of marketing and sales investment made to acquire customers by the total number of new customers acquired from that investment. See the formula below.
Let look at an example. Suppose an eCommerce company spent $10,000 on a Facebook ad campaign. The campaign generated 400 new customers who made purchases on the company’s website. Our CPA formula looks like this:
To find our CPA in this example, we divide the acquisition investment from our Facebook ad campaign ($10,000) by the number of new customers we attained from that campaign (400). Thus, our CPA is $25.
How do marketers use cost per acquisition (CPA)?
CPA is important to marketers because it allows them to prioritize where and how they spend their investment for the highest return. Acquisition costs are also typically combined with other metrics such as lifetime value and cost metrics to understand total profitability of marketing investments.
Optimizing marketing investment using CPA
The CPA metrics allows marketers to compare acquisition performance across multiple marketing tactics. Let’s look at an example. Suppose a marketer is comparing three marketing tactics, each with different acquisition costs. See the scenarios below.
In our above example, paid search is generating customers at the lowest cost. This means that there is opportunity to improve the overall quantity of new customer acquisitions. (without increasing total marketing investment) by shifting money away from the other tactics and into paid search.
Note, there are sometimes differences in the lifetime value of customers who are acquired through different channels. Make sure to understand how customer value differs between tactics when making investment optimization decisions.
CPA trends over time
Monitoring CPA costs over time can also provide useful insights about the ongoing efficiency of your acquisition efforts.
If CPA goes up over time if could indicate:
Marketing costs increased but did not produce a proportional amount of new customers.
Costs stayed the same, but the effectiveness of the marketing tactic declined.
If CPA goes down over time it could indicate:
The effectiveness of the marketing tactics increased.
Note that short-term fluctuations of CPA could be outliers, so be sure to monitor CPA trends over a longer time frame when possible.
Identify budget strategy based on lifetime value (LTV)
Lifetime value (LTV) is a marketing metric that indicates the total revenue a customer will spend with a company during his or her lifetime. Since CPA reflects how much a company spends to obtain a new customer, LTV and CPA are often used in tandem. Knowing LTV of a new customer allows marketers to determine the total marketing acquisition investment worth spending to acquire the customer. For example, marketers may be willing to spend a higher acquisition cost to attain customers with higher lifetime values.
References:
www.themodernentrepreneur.com/about-cpa-cost-per-action-marketing/
www.shoutmeloud.com/cpa-marketing.html
www.clickcease.com/blog/how-to-calculate-cpa/
blog.redreefdigital.com/marketing-metrics/how-to-calculate-cost-per-acquisition
blog.useproof.com/cost-per-acquisition
www.shopify.com/encyclopedia/customer-lifetime-value-clv