How much should it cost to acquire a new customer? Is my Cost Per Acquisition (CPA) lower or higher than my competitors? Am I calculating my CPA correctly? If these questions keep you up all night, know that you are not alone. Calculating customer acquisition costs is vital in the ecommerce industry to measure the success of your advertising efforts and your overall business.
While still necessary, calculating the metric of your CPA itself won't tell you much. But when used with other metrics, such as CLV (Customer Lifetime Value), and benchmarking it within your industry with a tool like Varos, which we use at Shoelace, it'll open the doors to complete campaign analysis.
Stick around to learn more, and we'll have you back to sleeping like a baby in no time!
What exactly is CPA?
You've probably seen and heard over a million contrasting definitions of CPA in ecommerce.
At its highest level, CPA is a marketing metric measuring the cost of acquiring one paying customer. More often than not, this metric is used to assess media spending specifically. This granularity distinguishes it from overall CAC (Customer Acquisition Cost) calculations, which tend to be more general and include a more comprehensive array of metrics (e.g., labour costs and product costs).
CPA is a financial metric that differs from other common KPIs because it is used not only to determine the success of a single campaign, but also to give the business perspective to gauge and determine what success for that business looks like. CPA helping you determine a company's success is especially true when other metrics, such as LTV and AOV, are brought into the analysis.
Lastly, it's also important to note that there isn't one perfect CPA out there that all marketers should aspire to obtain. Determining your ideal CPA will vary based on your margins and operating expenses, your advertising budget, and where you're advertising.
Calculating CPA and why you should compare it to CLV
At its most superficial level, CPA is calculated by dividing total marketing campaign costs by the number of conversions. This can easily be further broken down to calculate a specific campaign's CPA by only using numbers relating to that particular campaign.
Furthermore, the number alone won't tell you much when calculating CPA, so it's important to consider other secondary metrics to put it into perspective within your business, particularly CLV.
CLV stands for Customer Lifetime Value. CLV measures the total worth of a customer for a business over the whole period of their relationship. Comparing this metric with your CPA shows how successful your business' advertising efforts are. The lower your CPA is compared to your CLV, the higher your profits will be.
Benchmarking to assess CPA
Another effective method to assess your business' CPA is to compare it to your competitors and other players in your industry. This is known as benchmarking. Generally, when benchmarking with other players in your industry, you first need to select the KPI you want to compare. In this case, it'd be Cost per Acquisition.
Then, it would be best if you decide where you will source your data from. There are a lot of websites and software out there with the ability to analyze tens of thousands of businesses and develop benchmarks specific to your brand. At Shoelace, we use Varos, the world's largest eCom and SAAS data co-op, but countless others are out there.
Doing this will allow you to compare yourself with other players in the industry and identify internal opportunities for improvements.
Cost Per Acquisition Summary
Cost per Acquisition (CPA) is a vital metric that will allow you to determine the success of your advertising campaigns. Furthermore, when used with other metrics, such as CTV and benchmarks from your industry, you'll be able to gain insights into your overall business health and implement changes as required.
If you're still unsure about calculating CPA or determining a campaign's success, our knowledgeable Growth Partners are happy to answer any questions! Connect with us here to learn more about how we can help.