What is Cost Per Acquisition (CPA)? Examples, Formula & More!

As a marketer, you have a lot of items to keep in mind.

You are writing copy, optimizing keywords, writing copy, planning events, establishing partnerships - in short, you are very busy. But probably that’s what attracted you to the marketing world in the first place! No matter if you’re working at a startup, an agency, or an established company, most of your day is probably spent on digital channels.

As a matter of fact, there are many acronyms to remember in online advertising, but one of the most vital measurements you must know and understand is Cost Per Acquisition (CPA).

Without a thorough understanding of CPA, you may risk overpaying for your customers or paying more to acquire a customer than what they are actually worth to your business. Therefore, in this guide, you’ll learn everything related to Cost Per Acquisition, including its definition, importance, calculation, and how to optimize it to put your marketing dollars into the right channels.

Buckle up!

What is Cost Per Acquisition (CPA)?

Cost Per Acquisition, also called Cost Per Action or CPA, is a marketing metric that measures the aggregate cost for acquiring one customer on a specific campaign or channel level. While the conversion event often refers to a sale, it also can be a form submission, a request for a callback, an app download, etc.

This metric is generally used to measure paid marketing media results, including pay-per-click (PPC) advertising, display advertising, affiliate marketing, content marketing, and social media marketing. It can also be used for SEO, email marketing, and other platforms without direct advertising costs but still require overhead (i.e., labor, indirect costs such as content production, etc.)

Ad networks often give you the option of choosing between CPA, CPC (Cost Per Click), and CPM (Cost Per 1000 impressions) bidding. The reason that makes CPA a relatively low-risk digital advertising technique is that you only pay the advertising platform when you’ve got a verified lead, conversion, or sale. Businesses can set the price they’d like to pay for an acquisition when they launch their campaign. They only payout this price once the acquisition actually occurs.

CPA bidding in Google Ads and Facebook

CPA auctions are not like your typical auction for antiques. Some advertising platforms, like Google Ads, want to level the playing field. Instead of the highest bidder winning the auction, the bidder with the highest Ad Rank always wins.

AdRank on Google is calculated by multiplying your maximum CPA bid with the quality score of your ad. This score is calculated by measuring your page’s relevance to the keyword, user experience, as well as click-through rate. This means businesses can’t acquire the top ranking just because they have the biggest ad budgets. Their content needs to be engaging.

Google wants to incentivize the best users to advertise the best content on the search engine results pages, so it rewards ads that have high-quality scores with higher rankings and lower CPA.

To generate as many conversions as possible within your advertising budget limits, you should consider using Google’s target CPA bidding. You just need to provide Google with a CPA you want to hit. Then, it analyzes your campaign’s historical conversion data, uses advanced machine learning, recommends an optimal average target CPA, and automatically optimizes all your eligible bids to meet your target.

Some of your conversions might cost more than others due to your quality score or the competition in your ad auction might fluctuate. However, Google will try its best to keep your CPA as close to your target CPA as possible.

On Facebook, you can also bid on a CPA basis (Facebook calls it “Cost Per Action” rather than “Cost Per Acquisition.” With this versatile tool, you can combine Facebook’s advanced targeting, while only paying when you reach the desired action. To start, navigate to Business Manager. Then, set your Campaign Objective and select an Ad Set optimization.

Why does Cost Per Acquisition matter?

Cost Per Acquisition is a vital financial metric. Unlike some indicators such as conversion rate or the number of visitors, CPA directly measures the revenue impact of marketing campaigns.

As a matter of fact, Cost Per Acquisition reveals how much your advertising would cost in converting a visitor. It doesn’t matter how many clicks you got on your ads; if it’s not converted into sales, it means nothing. So, with CPA, you’ll get an estimate of how much new customers are costing you and determine whether your ad strategy needs to be modified.

By considering data such as Customer Lifetime Value (CLV) and Average Order Value (AOV), you can determine a target CPA for your customer acquisition campaign to make sure that you aren’t only getting new customers but staying profitable.

How to calculate Cost Per Acquisition?

The mathematical formula for calculating CPA is:

Cost Per Acquisition (CPA) = Total advertising spend / The number of acquisitions generated 

Now let’s take a practical example. Imagine you run a Facebook campaign for your online store that sells handmade crafts. Your total budget for the campaign was $1000. When the campaign ended, you calculated that it’s brought you 50 sales.

So, your CPA for that campaign is: CPA = $1000 / 50 = $20

On average, it costs you $20 to acquire a single new customer.

Remember that CPA can also be calculated for businesses that don’t directly sell a product - a conversion can be demo signup, lead capture, or one of many other indicators.

What is a good Cost Per Acquisition?

The answer is: it depends.

There is no clear, one-size-fits-all answer when defining what a good Cost Per Acquisition is. While you should try to lower your CPA as much as possible, the exact value depends heavily on your industry and campaign goal.

However, you need to be sure that your digital ad campaign actually enables you to make a profit (or at least break even). A “good” CPA is the one that maximizes your profit while reaching as many as possible.

The general rule is the more you scale (you realize an increase in your volume of conversions), the higher your CPA will start being. Your CPA will increase exponentially at a point, so controlling (or reducing) it becomes more important than ever. You want more conversions, but the rise in conversions becomes more expensive than you’d like.

In fact, you can try comparing your CPA to others in your industry to see where you stand. Remember, this may not be a perfect science, but it can give you a reasonable range of results to accomplish.

According to Instapage, the average CPA in Google Ads across all industries is $56.11 on the search network and $90.80 on the display network.

Besides, the average CPA on Facebook across all industries is $18.68. Instapage also emphasizes that only campaigns with the conversion objective were considered when calculating average CPA.

Once again, the definition of “acquisition” will depend on each company and campaign. A CPA campaign that uses the action of making a purchase, for instance, will be more expensive than a campaign that uses that action of signing up for a mailing list.

Cost Per Acquisition (CPA) vs. Cost Per Lead (CPL)

Cost Per Lead (CPL) refers to the amount of money that you need to spend to generate a new lead for your business. For more information about this metric, please read this blog.

So, what are the differences between Cost Per Acquisition (CPA) and Cost Per Lead (CPL)?

Instant gratification vs. Long-term relationships

With a CPA model, the conversion occurs immediately. The sale is made, then the advertiser or affiliate gets paid. This works well if you’re advertising a high-volume low-cost product or service.

With a CPL model, the first actual sales could be many months away. However, when it converts, it’ll probably be a very profitable conversion.

Plus, switching to CPL helps build a stronger relationship with the potential customer, and create leads that are packed with lots of long-term value. Even with low-ticket items, CPL can sometimes be the better option, just because repeat sales compounded can eventually become a strong source of income.

In short, with a CPL model, you’ll likely generate a slow-growing, but loyal stream of revenue.

One-way vs. Two-way communication

When you run a CPA campaign, you’re essentially bombarding prospects with messages until they either buy something or bounce off your page. They have almost no input on what these messages say, and it’s a very one-way communication method.

However, with a CPL campaign, you will be opening up a channel of real and two-way communication. Feedback from your prospects not only helps you build a targeted prospect list but also find out more about which they like and dislike. This allows you to tweak and fine-tune your products, services, as well as your overall marketing strategy.

So, which approach is better?

It sounds like we are saying CPL is better, but no. Each model has its own merits, and both have their moments to shine. We also found that using a mixture of CPA and CPL can really boost your campaign results if you know how to optimize them.

In the next section, we’ll show you 10 expert-backed ways to optimize your Cost Per Acquisition. Let’s explore!

How to optimize your Cost Per Acquisition?

1. Zero in on your audience targeting

You can lower your CPA by refining your audience segmentation to attract visitors that are most likely to convert. For instance, identify and exclude geographic locations where low-converting clicks come from.

In order to get the data, access your website’s Google Analytics dashboard the select Audience > Geo > Location. You will view conversion rates based on each region to see where your customers are located. Adjust your Google Ads audience targeting to double down on high-converting locations, while stopping ads for users in lower-converting ads.

2. Improve your quality score

As we mentioned earlier, Google determines CPA based on your quality score.

You can improve your quality score with a better ad structure, which will lead to lower ad spending. For example, you can use single keyword ad groups (SKAGs) to make sure that each ad group targets the most relevant search terms and high-performing keywords.

Plus, you should pause keywords with a very low click-through rate and almost no conversion.

3. Optimize your ad copy

Take a more in-depth look at your present ad copy. Make sure that your business message is well-aligned with the ad objective. This will not only attract more clicks but also deliver a cohesive user experience that drives conversions.

You can increase the effectiveness of your ad copy by tapping into your audience’s emotional triggers, such as the fear of missing out (FOMO). Besides, focus on your unique selling points, as well as use statistics to add credibility (i.e., how many customers you have helped).

4. Build simple yet convincing landing pages

Just because you have attracted someone with your ad doesn’t mean your work is done. You still need to design compelling landing pages that clearly convey the value of your offer.

Make sure your call-to-action (CTA) buttons are prominently displayed and positioned close to the top of pages to minimize scrolling on mobile devices. Also, use high-quality images and easy-to-scan copy (e.g., utilize bullets). You can try testing out videos, which are able to explain your values in a more engaging way than text can.

Furthermore, consider piquing your audience’s curiosity with intriguing headlines, as well as scrapping any external links from your landing page, so that visitors can only leave your paid acquisition funnel if they convert or exit the page.

Read more: 12 Tips for Optimizing a Landing Page to Boost Conversions

5. Adjust your bids regularly

Keep in mind that your bidding strategy can have a significant impact on your CPA, so it’s essential to monitor and fine-tune your bids regularly. By reviewing your campaign dashboard, you’re able to get insights into your target audience’s behaviors and preferences, then make necessary improvements.

You can also use Google Ads’ bid modifiers to get granular control over your campaign’s performance. The most common bid modifiers include devices, location, and scheduling. You can also explore other advanced options such as remarketing list, targeting method, call adjustments, and demographic.

6. Test your ads

A/B testing is undoubtedly an effective method to ensure that you’re using the best copy for each audience segment. You should set up at least 2 different ads in each ad group to find out what works best. By consistently testing, you can make incremental improvements that will add up to significant gains.

You can actually test your headline copy (e.g., whether to include the search term), the description (e.g., which feature and value to highlight), as well as the CTA, to find out what works for your audience and what doesn’t. Remember to change only one element at a time to yield meaningful insights.

7. Improve the mobile experience

As more and more consumers are searching and making purchases on mobile phones and tablets. You should optimize not only your landing page but also the entire user experience (e.g., the checkout process) to maximize conversion.

Make sure that your landing pages load quickly on mobile devices to prevent impatient visitors from clicking away. Moreover, test it on popular devices and browsers to ensure that your content is appropriately rendered and legible on small screens. CTA buttons should be clear, easy-to-click, and placed close to the top to minimize scrolling.

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8. Use retargeting techniques

Retargeting lets you reach out to potential leads who visited your website before by showing relevant ads on other sites they visit. You can motivate them to go back to your website to convert into a paying customer.

You should never miss the ones that abandoned your shopping cart. They are a critical retargeting segment because they have a strong inclination to buy something from your business. That’s why you should find ways to remind them of their abandoned carts and help them come back to your store.

Related topics:

• Best Shopify Abandoned Cart Apps
• Mageplaza Abandoned Cart Email - Save Your E-commerce

9. Implement conversion rate optimization (CRO) strategies

As your conversion rate is a part of the CPA, you can lower your CPA by increasing the number of conversions. You should optimize the entire user experience that leads up to the conversion event by implementing the latest CRO best practices.

If the conversion event is making a purchase on your store, you need to reduce friction along the checkout process. For instance, by optimizing the checkout process on one page only, offering multiple forms of payment options, making it mobile-friendly, and including live chat to provide visitors with assistance when needed.

Read more: 36 Ways to Optimize Conversion Rate & Boost Sales Instantly

10. Experiment with target CPA bidding

With Google’s target CPA bidding, you can maximize conversions for your target CPA. This AI-driven technology analyzes real-time and contextual signals, such as browser, device, location, time of day, and sets bids across all campaigns to achieve an average CPA to a preset target.

You can find out if it works for you by setting a lower target CPA than before. By doing so, you can see if you still achieve the same result with a reduced ad spend. This method’s effectiveness varies across industries, so you should monitor your campaign’s metrics and keep the whole performance picture in perspective.

The final verdict

Understanding CPA is essential in the field of digital advertising. By knowing how it works and optimizing it, you can build more effective campaigns and get more conversions for less cost.

Besides, many factors can impact your CPA. What works for others might not work for your industry or business. That’s why you need to experiment diligently and systematically so that you’re able to reduce the cost of acquiring customers with high lifetime value while maximizing conversion rates.

We hope this guide of Cost Per Acquisition (CPA) has helped you a lot. If you have any questions, feel free to contact us. We’re always here to help you with your marketing journey!