Cost per acquisition or CPA is the total cost invested in promoting a website to achieve a sale. In online advertising, it is usually the most advantageous system for the advertiser, more so than other models such as CPC or CPM, because only one cost is borne for each sale made. The cost per acquisition or sale also applies to affiliate sales, although we can calculate the CPA for each strategy that we use in the promotion of our website: Google Ads, natural positioning, banner ads, e-mail marketing, etc.
The advertiser must be very careful to calculate the average profit per transaction as well as the total value of the customer’s life cycle, since the cost per acquisition will reduce the profit margin. If the cost per acquisition or CPA is higher than the profit margin for a given promotional strategy, it will not be profitable and we will have to resort to other means to promote our products.
If the cost per acquisition or CPA is higher than the profit margin, then such a strategy is not profitable.
To calculate the CPA in a campaign, the total cost of the advertising campaign is divided by the number of conversions. For example, in a campaign that has had a cost of 1.500€ 250 conversions have been obtained so the cost per conversion would be:
CPA = 1.500/250 = 0,60€.
In the case of Google Ads, there is a bidding strategy based on CPA. For this purpose, a target CPA value is defined and the system will make automatic bids to get the cost per acquisition of the campaign close to this value and thus make it profitable for the advertiser.
As a comparison to traditional marketing, cost per acquisition is what we are willing to pay for each purchase made in our store.
Example of CPA
Let’s suppose we want to promote an online store through a CPA-based campaign. We know that the average order in the store is €200. From this amount, after deducting the cost price of the product, shipping costs, VAT and other miscellaneous expenses, a net profit of 40€ remains, i.e. 20% of the sale amount.
For the CPA-based campaign to be profitable, the amount of cost per acquisition must be less than €40. If, for example, we wish to obtain at least 15% profit on the purchase price, the CPA should not be higher than 10€.
In this case, possible future sales by the user are not taken into account. To achieve greater profitability, it is interesting to try to lengthen the customer life cycle. To do so, we will try to offer the best possible user experience, so that the customer will come back without any incentive and thus be able to obtain a CPA cost of zero. We can also choose to incentivize the customer, for example, by sending offers in an e-mail newsletter, which will provide us with sales at a cost per acquisition very close to zero.
