How to Calculate Acquisition Costs
Cost per acquisition (CPA) also known as cost per sale represents probably one of the most important metrics that you can track when running an online business or any business for that matter. This rings even truer if you, like many others, are utilizing multiple channels to promote your offers, whether that is PPC, SEO or some other form of advertising.
Do you know how much you are spending on each of these marketing channels? Do you know how to properly calculate your acquisition costs? If you’re like most, you will probably be guessing if you’re not calculating acquisition costs and measuring your CPA. This ultimately ties into the lifetime value of that specific customer, which is also an important metric for your company.
In this post we will tackle these topics:
- How to calculate your CPA
- Interpret the trends that you see
- Break down CPA into individual parts
- Use Excel to track your CPA over a period of time
- Understand other concepts in this paradigm
Tracking isn’t as accurate as you may think, and here are some reasons why:
- Tracking pixels are not set properly.
- If you’re using AdWords, your auto-tagging option is not turned on.
- You didn’t link your AdWords to your Analytics and you don’t get valid
- ROI on PPC.
- You get orders through the phone line.
- There are repeat sales.
- You sell more items when you make a sale.
- Sales take place offline, etc..
All of these factors and many more make tracking quite difficult, but you can avoid most of those issues by having a benchmark of sorts. This benchmark can be put in place by being able to calculate your CPA, and you can do this utilizing this formula:
- CPA = (marketing costs + sales costs) / $ of new customers.
How to start to calculate acquisition costs
In order to have valid data, you will need to collect it for a certain time period that you want to measure the data for, and this includes:
- Costs for marketing (including salary and other expenses of possible staff, operational costs, fees for marketing agencies, creative work by outside companies, spending on advertising, etc.)
- Costs for sales work (salary and other expenses of possible staff, commissions, other expenses, etc.)
- Number of customers
We would recommend to either calculate your CPA on a monthly or annual basis. If you make it too short, various measurements can obscure your data and show erroneous trends.
Figure out the numbers
Once you have collected all of the above data, you can use the formula above to calculate your CPA. We would recommend using spreadsheet software such as Excel so that you can track your calculations over time. This will enable you to tweak your work when necessary. Note: If you decide to simply divide marketing costs with the number of customers, you will know your marketing cost for each individual acquisition. This will enable you to distinguish marketing spending from sales spending which in turn enables you to track your marketing performance over a given time period.
What does it all mean?
Once you figure out your CPA, it is time to track it and compare it to previous periods in order to notice trends. An additional advantage of having your CPA is that you can compare it to your LTV (lifetime value of a customer). By performing these simple steps, you will grasp how profitable is a customer to you. If your CPA goes up, it means:
- You are spending more on marketing and sales, but you haven’t gained more customers. Keep in mind that if you are running a campaign which will have a call to action in 2-3 months’ time, the CPA will be higher until the purchase has been realized
- If you aren’t spending more on marketing and sales, then you have lost customers. Reconsider updating your marketing and sales efforts. Keep in mind that during summer vacations these numbers can fluctuate
If your CPA is going down:
- Previous investments are finally being realized, or your marketing and sales efforts suddenly became more effective.
- It could be a fluke, make sure to keep an eye on similar changes.
- If you have cut investments to marketing and sales, the number of customers could have not caught up on your negative trend and the numbers would have stayed the same
- If the drop is too big, you should reconsider ramping up your spending on marketing and sales efforts.
The next thing you should do is to track your CPA over time. This indicator will be key when it comes to your business. Helping you in multiple areas: foreseeing trends in your business, tweaking spending on marketing and sales efforts and changing your overall approach to your business if the numbers sway too much one way or the other. We would like to introduce the following elements to you if you are serious when it comes to tracking your spending and earning.
- Marketing CPA (which we mentioned above) – marketing cost for each individual customer
- Sales CPA– like above but for sales
- Marketing % of CPA – total CPA; enables you to see if your marketing spending is increasing over time and if that investment is justified.
- Marketing and sales % of LTV – (marketing costs + sales costs) / LTV; this formula will enable you to see if you are spending too much to acquire a new customer, which in turn will make your business go under. Don’t let your marketing costs go over 10% of the revenue you get from your customers. If you want to learn more about LTV and on lowering the acquisition costs for customers, go here.
To make a better-informed decision, you need better data. For marketing, the best data that you can have is the CPA. If you evolve your approaches to sales and marketing, the same formula will be efficient when it comes to calculating your CPA. If you start from inbound marketing approaches and move into paid ads or other forms of sales and marketing efforts, this key metric will help you gauge if your ship is steering in the right direction. Tie the CPA with the LTV of a customer and you will have a comprehensive approach and knowledge of your spending, your needs, and future plans. Spending can be strategic, measured, informed and specifically targeted to meet your needs.