Use your CPA to win

Posted by Hedley Swann on 15 May, 2014 in Small Business Strategy

How much does it cost you to get a customer? It’s a question that many small business owners haven’t asked themselves. Sure, you know how much you spend on individual advertising and marketing campaigns and channels, but can you reliably predict how much you’ll need to spend to get a new customer? Let’s talk about CPA: Cost Per Acquisition.

The problem

There are a lot of metrics, statistics and actions clouding our vision as to what’s the most important factor of our small business marketing; especially online. Is it:

  • number of social media followers?
  • Google search engine position?
  • AdWords position?
  • cost-per-click on advertising?
  • number of email opt-ins?
  • number of enquiry form submissions?
  • number of visitors to your website?
  • your site’s conversion rate?

Now, previously I’ve discussed goal completions, and how everything you do online should be geared towards achieving goals. The problem here is that all of these metrics are important to achieving our online marketing goals. They can all play a big part in generating leads, driving sales, and growing an audience around your business. We need something to help us steer the ship, and to keep us focused. That’s why I love looking at CPA.

What is your CPA?

Your CPA is your cost per acquisition. The great thing about your CPA is that it’s directly linked to your goal. For most small businesses their goal revolves around getting more customers, and so our CPA becomes “how much does it cost the business to get a new customer?” Here’s an example.

Jeff runs a consulting business and is using Google AdWords to drive potential customers to a landing page with the goal of signing them up for a complimentary consultation. Each client that decides to work with Jeff from that consultation has an average value of $1,500.

Jeff’s AdWords campaign has a cost-per-click (CPC) of $5.00, and for every 100 visitors to his landing page 10 sign up for his complimentary consultation. For every 10 people Jeff meets with, 6 of them become paying clients.

Right, so let’s break this down.

100 clicks through to his landing page costs Jeff $500 (5 x 100), and by the time he’s been through his new qualified leads he has acquired 6 new customers. Therefore, Jeff’s CPA is 500/6 = $83.33. It costs Jeff $83.33 to get a new customer.

In our example, I made a point of highlighting the average value of a customer for Jeff. This is important as it helps us identify if our CPA is feasible. In Jeff’s case, he spends a little over $80.00 to get a customer that’ll be worth $1500 to his business. I’ll take that deal any day of the week. However, what if the average value of your customer was much lower? Say $100.00. Suddenly, having to to part with $80.00 to get $100.00 mighten be so attractive.

Just a quick note: Generally, when we’re discussing the average value of a customer, we’re talking in terms of revenue. When balancing your CPA with your average value of a customer, remember that your CPA is part of your overall expenses and should be considered when evaluating whether you’re reaching your target profit margin. In the case of Jeff, where his CPA is $83.33 and his average customer value is $1,500, if his target profit margin is 30% ($450) then his CPA + “other expenses of completing the work” must be under $1,050.

How can we use our CPA?

Our CPA is truly a powerful benchmark to help us guide our online marketing efforts. It shifts our thinking and approach in a much more constructive direction and, I find, provides a lot of clarity. By combining our CPA with the high measurability of the web, we’re able to:

  • See what online marketing channels are working
  • Discover parts of campaigns that should be scaled up, or down
  • Gauge the effectiveness of online marketing channels relative to our goals, rather than expenses or volume
  • Keep laser focused on achieving our online marketing goals, and not get distracted

Work out your CPA today

I hope that you can see the value in working out the CPA for each of your marketing channels, both online and off. The information available to us from online methods definitely makes working out CPAs easier. CPA really is a powerful metric for getting down to brass tacks and figuring out “is this working?”.