Understanding Cost Per Acquisition

Understanding Cost Per Acquisition

Julian Frachtman
Julian Frachtman

Chief Executive Officer, Airtory

Published on: 30 Nov 2023

Reading time: 3 minutes

In digital marketing, clicks and impressions form extremely crucial performance metrics that are vital for advertisers to track. Using online digital ad platforms, it has become very easy for advertisers to track such metrics. However, when it comes down to it, despite clicks being very important, all they can tell you about is how many people arrive at your landing page via your ongoing ad campaigns. In order to actually understand the impact and effectiveness of one’s digital ad campaigns and to understand whether the ads resonate well with the target audience, in digital marketing, cost per action (CPA) or cost per acquisition (CPA) can prove to be more helpful. The cost per acquisition formula can provide important insights regarding whether a campaign is engaging and resonates emotionally with the audience to persuade them to stay and convert into a sale.

What is the Cost Per Acquisition?

CPA is a pricing model that is commonly used in online advertising. When using the CPA model, an advertiser pays for each successful customer acquisition generated by an ad campaign. Acquisition here may refer to any particular action, like form submission or closing a sale. Another form of CPA is cost per action, where the entire acquisition process is generally broken down into multiple actions leading to it, forming a more detailed performance KPI. CPA is a preferred choice for advertisers as it allows them to set their definitions of acquisitions or actions before they make their campaigns live. They also only have to pay when a customer acquisition happens, or if a user takes the desired action (in cases where CPA cost per action is being used as the payment model for a paid campaign).

This pricing model is commonly used across various marketing mediums, like:

  1. Display Marketing
  2. Affiliate Marketing
  3. Email marketing
  4. Content marketing

Formula for Cost per Acquisition (CPA) Calculation 

The CPA or cost per acquisition formula involves two key elements that can help you calculate the CPA for an ad campaign: total ad spend and the number of acquisitions, both of which can be tracked easily using online advertising software or platforms.

The CPA formula in digital marketing campaigns is as follows:

Cost per Acquisition = Total Ad Spend / No. of Acquisitions

By using this simple CPA formula, you can get a better idea of the final customer acquisition cost for your campaigns.

How to Lower Your Cost Per Acquisition

Although the cost per acquisition can vary from one brand to another, 3:1 is the ideal cost per acquisition (CPA) ratio that advertisers aim for. In order to remain profitable, you must ensure that your CLV (customer lifetime value) is approximately three times the customer acquisition cost.

However, it can be a little challenging for advertisers to achieve that ratio every single time. Here are some actionable tips that can help you reduce your CPA:

Optimize Ad Copies

Creating compelling ad copies is one of the most important steps in order to achieve an ideal cost per acquisition.

Use Dynamic Creative Optimization

Dynamic Creative Optimization (DCO) is known for being one of the most effective ways to improve ROI. Here, personalized and highly targeted ads are served to the users using real-time user data. As a result, these ads are highly relevant to the users and undoubtedly can leave a good impact.

Focus on Customer Retention

Gaining new customers is an expensive affair. Apart from this, it is extremely time-consuming as well. As a result, businesses should focus more on retaining their existing customers.

Conducting Regular Market Research

To ensure the success of your ad campaign, it is important to have certain insights about your target audience, such as who these users are and what their requirements are. The best way to gain insights into things like the needs, preferences, and behaviors of your potential customers is to conduct detailed market research every once in a while.

Optimize Your Landing Pages

By creating compelling landing pages with engaging content, concise information, and optimized user journeys, you can easily maximize your brand’s reach with a lower CPA.

Leveraging CRM to Prioritize Leads

Using dependable customer relationship management (CRM) software can streamline your sales cycle and help reduce acquisition costs.

Use Rich Media Ads

As compared to traditional static ads, rich media ads are known to offer better opportunities for a brand. A rich media ad can include several interactive elements such as videos, games, quizzes, etc. As a result, it can keep users engaged for a longer period of time.

CPA, or cost per acquisition, is one of the key determinants of an ad campaign’s success. Using the CPA marketing formula and leveraging the insights you gain to optimize future campaigns, advertisers can easily achieve lower CPAs while also maximizing their profits.

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