Ever been in a work meeting where someone kept throwing around the term "CPA" like it was the punchline to a joke you didn't understand? Well, you're not alone. Cost per acquisition (CPA) is one of those buzzwords that gets thrown around in marketing circles like it's some kind of secret code. 

So in this article, we will demystify the concept by explaining what it means, why it matters, and ways you can use it to become a valuable contributor at your next marketing roundtable.

What is cost per acquisition?

Cost per acquisition (CPA) is a marketing metric that measures the cost of securing a new customer or user for a particular action, like buying a product, downloading an app, or signing up for a subscription.

The goal of CPA is to show brands how much they are spending on securing new business. It also provides insight that helps brands optimize their marketing efforts to achieve more results while spending less. 

How to measure cost per acquisition

Calculate CPA by dividing the full cost of a campaign by the number of acquisitions it generates. Here's a step-by-step guide to measuring cost per acquisition (CPA) effectively:

  • Determine your conversion goal: The first step is to determine what action you want your customers to take, like completing a purchase or signing up for a subscription.

  • Calculate your total campaign cost: This includes all costs associated with the campaign, like offline and online advertising spend, creative development, and other fees.

  • Track your conversions: Keep track of the number of times members of your target audience take the desired action, like buying or subscribing to a product.

  • Divide your entire campaign cost by the number of conversions: This will give you your exact cost per acquisition.

  • Monitor and adjust your CPA over time: Use your CPA as a benchmark for the effectiveness of your offline and digital marketing campaigns. If your CPA is too high, you may need to adjust your targeting, ad creatives, or budget to improve your results and achieve a more efficient CPA.

The cost per acquisition (CPA) formula

CPA = Total campaign cost / Number of conversions

For example, if a business spent $5,000 on a marketing campaign that generated 50 new customers, the CPA would be calculated as follows:

CPA = $5,000 / 50 = $100

Hence, the cost per acquisition for this campaign is $100 per customer. Note: You can apply the CPA formula to any conversion goal, from sign-ups to downloads and purchases.

What is a good CPA metric?

A "good" CPA metric varies depending on the industry, product, or service the company offers and the business's profit margins. It's easy to think that a lower CPA is better since it indicates that a business is acquiring new customers cost-effectively, maximizing its return on investment (ROI), and becoming more efficient in its marketing efforts.

However, what constitutes a good CPA metric also depends on a business's marketing goals and objectives. For instance, if a company focuses on acquiring new customers quickly, it may be willing to spend more on its campaigns, resulting in a higher CPA. But, if the business is more concerned with profitability and ROI, it may prioritize a lower CPA to ensure that its acquisition costs are not eroding its profits.

Ultimately, a good CPA metric is one that is aligned with the business's objectives and delivers a positive return on investment over time.

Why is cost per acquisition essential?

By tracking CPA over time, businesses can understand which marketing channels, campaigns, and targeting strategies are most effective at driving conversions, growth, and profitability.

1. Helps businesses measure marketing effectiveness

Cost per acquisition is an important metric for measuring how effective marketing campaigns are. By tracking CPA over time, businesses can gain insights into which channels, campaigns, and targeting strategies are most effective at driving conversions. 

These insights can help businesses allocate their marketing budget more efficiently and make data-driven decisions about where to invest their resources.

2. Enables businesses to optimize their campaigns

By understanding their cost per acquisition, businesses can identify areas to optimize their campaigns to achieve a more efficient CPA. For example, if a brand spends a lot of money on ads that aren't generating many conversions, it may want to adjust its targeting or ad creatives to improve results. 

Alternatively, if a particular campaign drives a high volume of conversions at a low CPA, the business may want to invest more heavily in that marketing strategy or channel.

3. Maximizes ROI

Ultimately, businesses want to maximize their return on investment (ROI). By focusing on reducing their CPA, these companies can improve their ROI by acquiring more customers or users at a lower cost. 

As a result, businesses’ marketing efforts will have more revenue impact while they keep their spending as efficient and effective as possible.

4. Provides a benchmark for competition

Another reason why CPA is vital is that it provides a benchmark for competition. By comparing their CPA to industry averages or competitors' performance, businesses can determine whether they are performing well or falling behind in their marketing efforts. This knowledge helps companies to identify areas where they need to improve and stay competitive in their market.

The difference between cost per acquisition (CPA) and customer acquisition cost (CAC)

Cost per acquisition (CPA) and customer acquisition cost (CAC) are financial metrics used to measure the cost of acquiring a new customer. And though people sometimes use them interchangeably, there is a subtle difference between them:

  • Cost per Acquisition (CPA): CPA is a metric that tracks the cost of acquiring a new customer or user for a particular action, like paying for a subscription, making a purchase, or downloading an app. You can calculate CPA by dividing the full cost of a campaign by how many acquisitions the campaign generated.

  • Customer Acquisition Cost (CAC): CAC is a broader metric that calculates the amount a brand spends on securing a new customer over an extended period. It accounts for all marketing and sales expenses associated with securing a new customer, including salaries, commissions, advertising spend, and overhead costs. You can measure CAC by dividing the total cost of sales and marketing by how many customers you acquired in a given period.

In other words, CPA is a more specific metric that focuses on the cost of acquiring a new customer for a particular action. Meanwhile, CAC is a more comprehensive metric that looks at the overall cost of acquiring a new customer over a more extended timeframe. While the two metrics are related, they serve different purposes and may be more appropriate for different types of analysis.

Improve your cost per acquisition by leveraging SMS marketing

Cost per acquisition (CPA) is a crucial metric for brands looking to optimize their marketing spend and maximize their results. By adding SMS marketing to your customer acquisition strategy, you can streamline campaigns, automate messaging, and personalize messaging to improve CPA and drive growth and profitability.

SMS marketing software like Emotive offers a range of benefits for ecommerce brands, including advanced segmentation and targeting, customized messaging, automated campaigns, real-time analytics, and integrations with other marketing tools. 

Ready to create targeted, relevant, and timely messages that reduce CPA, increase conversion rates, and boost revenue?  Try Emotive today.