21 Feb Jargon Buster – Cost Per Acquisition.
Jargon Buster – Cost Per Acquisition.
From YMG – The Award-Winning Digital Marketing Agency in Chelmsford, Essex.
It’s not easy running a business. From leading team members and employees to managing business funds, business owners don’t have time to be messing around with overly complicated words and phrases. That’s why we invented the Jargon Buster series.
Taking words and phrases common in the digital marketing world and making them easier to understand, the Jargon Buster series is just another step we’re taking to become a more consumer-friendly digital marketing agency. Alongside The Pick & Choose Digital Marketing Store, of course.
So, without further ado, let’s get started. Today we’ll be looking at the term ‘cost per acquisition’.
What Does Cost Per Acquisition Mean?
Often shortened simply to CPA, cost per acquisition is the sum of how much your business is spending in order to generate a sale or create a new customer.
Many business owners and experienced marketers prefer to use this method, as it’s easier to set parameters and goals for the campaign ahead. For example, a business owner can set a target of earning £3 for every £1 spent on marketing. Cost per acquisition fits nicely into the phrase “you have to spend money to make money” – assuming your CPA is fairly low.
How Does Cost Per Acquisition Work?
Cost per acquisition is the best method or metric to use to measure how effective an advertising method or campaign is. To explain this best, we’re going to provide a theoretical scenario.
Imagine your business has been running a Facebook Ad campaign and has seen a CPA of £5. You change your advertisement and notice that your CPA is now at £3. This shows that the new ad campaign is resonating better with your audience in some way.
This is just a loose example of how cost per acquisition works, but the principle remains the same. The CPA of any advertising campaign can be used to measure how successful or unsuccessful it is in comparison to other campaigns.
Of course, every business will naturally want their cost per acquisition to be as low as possible. However, many other factors can affect the CPA of your campaigns, factors outside of your control. The time of year, competition, and even industry can affect your CPA. For example, if you’re working within an industry that sells bespoke designer handbags for a few thousand pounds per bag, you may see a higher CPA than a local picture framing business.
Ultimately, your profit margin from a product sale also plays a huge factor with your CPA. If your CPA on an advertisement campaign sits at £2.50, but on average your new customers are buying one product at £1 each, your business won’t last long.
Where Can I Apply Cost Per Acquisition to My Business?
Cost per acquisition is best applied to marketing campaigns and techniques. However, it’s not a method that’s suited best to a specific area of marketing. Different businesses require different methods to reach their target audience – luckily, cost per acquisition can be applied to any style of marketing campaign or method.
What Type of Businesses Should Look at Cost Per Acquisition?
It doesn’t matter which industry a business works in, nor does it matter the size or location of the business. All that matters is that the business is using some form of digital marketing.
If the business is using some form of digital marketing in the hope of earning new customers, a cost per acquisition can be applied.
How Can I Calculate My Cost Per Acquisition?
To calculate your business’s cost per acquisition, you follow a simple equation:
The total cost of the advertisement campaign.
The number of new customers.
= your answer.
To understand this better, let’s use a theoretical example. Imagine your advertisement campaign has cost £500, and you’ve earned 140 new customers, your sum would be:
= £3.57 CPA (rounded up).
When using this equation, you’ll need to decide how you round figures up or down.
This method can be used regardless of how high or low your numbers are. To show this, we will give two further hypothetical examples.
= £253.12 CPA (rounded up.
Looking at these examples, you may feel that example two shows a bad or poor CPA. And, to some degree, you could argue that it does. However, if this example comes from a business that sells designer coats at £2,000 each, it may not be as bad as it seems.
And there you have it, there are all the basics you need to know to understand cost per acquisition. If you’ve scrolled to the bottom of this blog in the hope for a quick summary, here it is:
Your CPA can only be applied to a marketing campaign you are/have been running, as this is the only place a cost per acquisition can be applied to. The term has been created to assess this specific area; in how much it’s costing you on average to earn 1 new customer. And, as we’ve previously highlighted, this isn’t something that should be used to indicate success in business. As, if the business is making a loss with each item sold, they may still have a positive CPA.
If you’re looking for more blogs focusing on the world of digital marketing, why not click here? We post new blogs regularly, all about the world of digital marketing.
YMG are an award-winning and full-service digital marketing agency based in Chelmsford, Essex, and home of the Jargon Buster series, helping business owners to understand the technical terms of digital marketing.