Measurability drives modern marketing. And if you ask any marketing professional knowledgeable in paid search advertising, they will tell you that cost per acquisition (CPA) is one of the most important metrics there is.
CPA tells you how much it costs on average to generate a conversion. Take your total advertising spend on a pay-per-click (PPC) campaign and divide it by the number of conversions generated, and you have your CPA.
What counts as a conversion? Your company’s goals will define that, but usually it’s a contact form submission, a completed purchase, a download, or a subscription.
In the simplest sense, cost per acquisition tells you if your marketing efforts are even worth the trouble. If you’re spending $100 to get a $10 sale, your advertising program is not sustainable.
In practice, of course, it’s more complicated. PPC might be one aspect of an omnichannel marketing campaign with both sales and brand awareness goals.
All of this raises an important question: What is a good CPA?
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Why the Right CPA Matters
A good CPA will drive new business while maintaining a competitive budget. If your CPA is too high, it will affect your gross margins. But if you set your PPC budget too low, you will miss out on opportunities with high-converting keywords.
Ultimately, CPAs largely vary depending on the industry. The legal services industry, for example, has the highest average CPA at about $73. But, considering a law firm’s potential revenue from a single case, this cost per acquisition is pretty reasonable.
In contrast, pet service companies had a CPA of less than $15 in 2021, but dog walking or grooming will have a lower average ticket price than hiring an attorney. It makes sense that these businesses would bid less for relevant keywords.
So, what’s the right CPA for your company? Fortunately, modern digital marketing tools make finding the target cost per acquisition for your company a breeze.
Ad platforms such as Google Ads use Smart Bidding to help users optimize their bids to achieve their ideal cost per acquisition. Google uses past performance and machine learning to pinpoint the right bid amount while staying within the user-set budget. Ask yourself:
- How aggressive is my growth strategy? Am I willing to lose money in order to increase market share?
- How many new leads convert into paying customers? How can I improve my sales process once I have a qualified lead?
Even if you use a feature like Smart Bidding, though, you should consistently monitor CPAs for every paid search marketing campaign your company runs. Unlike other paid search metrics such as cost-per-click (CPC) and cost-per-mille (CPM), CPA directly ties to the revenue your website generates. Controlling your CPA ensures you get the most out of every campaign.
But what happens if your CPA gets too high?
How To Decrease Your CPA
Maybe you started with an aggressive marketing strategy and now you need to reel it in. Or, perhaps you’re just spending too much with too little return. Here are proven ways to lower your CPA.
Target the Right Traffic
Smart marketers know the dangers of casting too wide of a net. Every company has a subgroup of potential customers whose lifetime value is not lucrative enough to justify a high cost per acquisition.
Instead, companies need to gather intel on who their customers are and the sites they frequent while online, and target their marketing campaigns accordingly. Google Ads integrates with your Google Analytics account, allowing you to get a glimpse into information such as the age range, gender, and geographic location of users who engage with your advertisements. It should be noted that this data paints an incomplete picture of your customer base and should be supplemented with data your company collects from sources such as customer surveys.
With this data at your disposal, you can adjust your ad copy to draw in leads who are more likely to convert and lower your cost per acquisition. You can also use geographic data for more precise campaign location targeting. Consider the differences between generic terms like attorney and the specific hire a personal injury attorney in Los Angeles.
Better Landing Pages
A potential customer seeing an ad and clicking on it is only part of the equation. The page they land on needs to move them closer to a conversion to keep your cost per acquisition low.
When building a landing page, there are a few things to keep in mind. To start, you can’t ignore page performance. Forty-seven percent of customers expect a page to load in two seconds or less. Unsurprisingly, pages with slow load times tend to have higher bounce rates.
Page structure and content also cannot be overlooked. Effective landing pages include catchy headers and subheaders. Landing page copy should also be convincing, yet succinct, to capture the page visitor’s attention and compel them to convert, thus lowering your target cost per acquisition.
Below is an exemplary landing page from DoorDash. It succinctly states why someone would want to work as a DoorDash driver and makes it as simple as possible for them to sign up.
There are a few tools you can use to assess your landing pages and plan improvements. Heat mapping services such as Hotjar give you insights into how visitors interact with the page, from how far they scroll down to the areas they frequently click on the page. You can use your findings to plan experiments on the page, such as whether moving the call-to-action to the top of the page improves page conversion rates.
From there, you can use an A/B testing tool like Google Optimizer to assess whether the proposed change has a statistically significant effect on the number of conversions the page generates. A good landing page works in conjunction with your ad campaign by keeping customers moving down the marketing funnel, and, in turn, minimizing your cost per acquisition.
Cross-Selling and Upselling
Your online store is a treasure trove of customer data. You can use this data to recommend products or services to prospective customers based on the activity of previous website visitors.
Most online store providers include either built-in or third-party upselling modules. These modules are viewable by visitors to your website’s product pages, and they recommend higher-priced versions of the item they are currently viewing, add-ons, or upgrades. This increases the purchasing frequency for some of your higher-margin products and, as a result, increases your average order value (AOV). While AOV doesn’t directly impact your cost per acquisition, a high AOV could justify a slightly higher target cost per acquisition for your company.
Relatedly, cross-selling targets prospects who are among the most likely to convert: previous customers of your business. A number of email marketing tools allow you to send customers recommendations based on their purchase history and the purchase history of all previous customers. Given how much cheaper it is to retain a customer than acquire a new one, a cross-selling strategy can have a meaningful impact on your company’s cost per acquisition.
Of course, CPA is only one of several performance indicators you should measure to assess the effectiveness of your marketing efforts.
Getting the Full Picture: Other Metrics To Follow
CPA is a great way to measure the efficiency of your marketing campaigns, but it doesn’t give you much insight into what happens afterward. Modern marketing professionals don’t consider a sale the conclusion of their relationship with a customer; oftentimes, it’s only the beginning.
Here are a few more marketing KPIs you can include alongside cost per acquisition to achieve a comprehensive understanding of how well your marketing team is performing.
Customer Retention Rate
We mentioned it earlier but it’s worth repeating: It’s much easier to retain customers than it is to attract new ones. By keeping track of your customer retention rate (CRR), you can gauge how well you’re promoting repeat purchases. Repeat customers typically cost much less to acquire, as well, which lowers your cost per acquisition.
It’s important to keep industry benchmarks in mind; unsurprisingly, retailers such as Amazon are going to have higher CRRs than law firms. But, if you find your CRR is not meeting the mark, there are a few simple measures you can implement to boost it while also impacting your cost per acquisition.
- Customer loyalty programs promote repeat purchases by letting customers earn points every time they buy an item from your business.
- Periodically sending out discounts to past customers using your email marketing platform.
- Collect customer feedback and use it to inform changes to the customer experience.
- Create a referral program to reward customers for recommending your products and services to someone they know.
Here’s an example of how Uber One attempts to retain customers by offering free delivery for those who sign up for a four-month subscription through email marketing:
Repeat customers cost less to acquire, which lowers your cost per acquisition. And, since they are familiar with the quality of your products and services, they are more likely to order multiple items at once or seek out your premium offerings.
It’s worth examining these larger and more lucrative orders more closely. Average order value (AOV) allows you to do that.
Average Order Value
Average order value gives you a sense of how much revenue your company derives from a single customer purchase. When paired with cost per acquisition, you’re able to capture how much it costs to acquire a customer and how much an acquisition is worth to your business. Both metrics can serve as a guide when determining your target cost per acquisition.
As always, it’s important to know industry benchmarks before deciding whether your company’s AOV is too high or too low. Industries in which orders typically include multiple items as well as those that sell primarily high-priced items will always have higher AOVs. For instance, the jewelry and luxury vertical has the highest industry-wide average AOV at $188, while consumable home goods has a smaller one. The differing AOVs between industries largely mirror the variance in cost per acquisition across verticals.
If you’re hoping to increase your company’s AOV, here are a few initiatives you can quickly put in place.
- Offer free shipping to customers who meet a specified order minimum.
- Provide bundle deals to customers.
- Extend discount offers to customers whose order value meets or surpasses a certain amount.
- Implement a flexible return policy.
Here’s an example from Harry’s on bundling together complementary products to increase their AOV.
Most small and medium-sized businesses operate on a tight budget. A healthy AOV allows your business to grow by ensuring you always have the revenue you need to cover expenses while also having enough left over at the end of the month to put some into savings for a rainy day.
Healthy CPA, Healthy Business
The amount of data modern marketing professionals work with daily can at times be overwhelming. Sometimes, it can be hard to parse out what’s important and what is just noise. Rest assured, cost per acquisition and the metrics it comprises are always worth tracking.
If your company has not yet started tracking marketing key performance indicators (KPIs), it’s never too late to start. Start by assessing what tools you already have at your disposal. If you use an online storefront site such as Shopify, for example, these KPIs are available with only a few clicks. Even if you don’t use such a service, though, you can easily find these data points with free tools like Google Analytics.
Once you have a reliable source for the data you need to calculate KPIs such as cost per acquisition, AOV, and CRR, you can incorporate them into your broader marketing team strategy. As you plan tactics that your team can use to execute your strategies, consider how each of these KPIs aligns with your efforts. For example, CPA is an ideal indicator of success for paid search campaigns, while CRR fits better with email marketing campaigns and customer loyalty programs.
Then, after you decide on your goals and tactics, periodically review your KPIs to ensure you’re hitting your target on KPIs like cost per acquisition. If you find you’re not making the expected progress, re-visit your plans and make changes as needed.
And, if you want a second opinion, contact Coalition Technologies for a free strategy review. Our marketing experts can discuss your plans for both PPC and organic search to sustainably grow your business.