Knowing Your Cost Per Acquisition is Essential

cost per acquisition for digital marketing

Metrics of Marketing Success - Calculate Cost Per Acquisition

Most entrepreneurs and business owners have no idea what their Cost Per Acquisition is. This is wrong. Not knowing this number is the fastest way to failure. It’s a one way ticket to a massive state of disarray.

Not knowing your Cost Per Acquisition is why you or your team have perhaps made some bad marketing investment decisions over the years. It’s why I hear phrases like, “we tried xyz campaign and it didn’t work for us”.

If you have a marketing manager or director on your team, the one question they need to be able to answer immediately is, ‘what is our current Cost per Acquisition‘? Because they should know it. If they don’t, then possibly you’ve got problems.

It’s why your Marketing budget seems to disappear into a black hole, and it’s why the perception of your marketing investment is that it’s something you need to cut.

And in periods of economic uncertainty it makes sense to cut uncertain costs. 

But what if I told you there was a different way? An approach that literally turns this on a 360. And turns marketing spend into marketing investment. And I used the word ‘investment’ purposefully. Because by following this approach, you will understand what it costs your business to ‘buy’ a new customer.

Once you know how much it is to acquire a new customer then the challenge is to maximize this return on marketing investment through Conversion Rate Optimization and Life Time Value extension. And I’ve covered these extensively here.

You can also hire us to do a full onsite marketing audit anywhere in the World. Learn more here

Cost Per Acquisition Is Used For:

How to Calculate Cost Per Acquisition for Marketing

A business cannot grow effectively without understanding the Marketing Cost Per Acquisition. Some people call Cost Per Acquisition, others call it Cost Per Customer, or Cost Per Client. 

The following approach is what I’ve applied to hundreds of businesses in the past 25+ years. And it’s an approach that any serious entrepreneur and business owner needs to know. Its remarkably simple in its purest form.

The Formula to Calculate Cost Per Acquisition is:

 

Step-by-Step Calculation:

  1. Identify Total Marketing and Sales Expenses: This includes all costs associated with marketing and sales efforts, such as advertising costs, website costs, salaries of marketing staff, cost of marketing tools, etc., over a specific period (usually one year). Make sure you include absolutely all costs that are absorbed by the Marketing department. Be careful not to use the Cost of Sales entry from your profit and loss accounts. We want to keep this specific to marketing as we’ll be diving deeper into this figure later.
  2. Determine the Number of New Customers Acquired: Count the total number of new customers acquired during the same period.
  3. Calculate the CPC: Divide the total expenses by the number of new customers.

 

Example CPA Calculation

  • Total Marketing and Sales Expenses: $50,000
  • New Customers Acquired: 500
  • CPA: $50,000 / 500=$100 Cost Per Acquisition

 

This means that each new customer costs the business $100.

What Can I Do Now I Know My Cost Per Acquisition?

Now you know, at a high level what it costs you to acquire a client or customer. You know what it roughly costs to ‘buy’ a new client.

You can either work on reducing your CPA or investing more in your marketing budget. I would recommend both.

In fact, once you’ve got this process down you’ll be desperate to spend more to acquire more.

Imagine going to a  grocery store and the shelves are stacked with new customers, and they’re a good price. How many would you buy for your business? How much would that affect your business valuation on whatever multiple is right for your industry? You’d buy loads. Which is great, but let’s optimize things first.

How to Optimize Cost Per Acquisition

Granular Cost Per Acquisition

As a business owner, once you understand your high level marketing Cost Per Acquisition it’s time to look at the super granular campaign specific level.

It takes time, and you’ll get some pushback from any marketing team that fears the oversight.

It’s intrusive into the mechanisms of what can appear to be opaque marketing spend. And it’s designed to be. 

The information you’re looking for on a Campaign level is what volume of new client acquisition can be accurately attributed to a specific campaign. These will vary. Some will be high, some will be low. If you’re able to track customers from a specific campaign then you’ll also be able to see overall lifetime value.

From here you’ll be able to identify what campaigns to pull immediately, what ones need work, what ones you can renegotiate and what ones you can increase.

When I hear people talking about ‘testing’ new channels, I often hope that they’re testing these channels, yet often, sadly, that’s not the case.

The importance of campaign tracking

For all direct response channels you should be tracking individual customer from touchpoint to purchases. If you’re not, then granular CPA tracking becomes much less of an exact science. Talk to me about setting up tracking across your Direct Response channels and I’ll get the team here to help out.

Multi-Attribution Tracking

Multiple attribution tracking is a method used in marketing to understand and attribute the value of different marketing channels and touchpoints that contribute to a customer’s decision to make a purchase or convert. Instead of attributing a sale or conversion to just one touchpoint, multiple attribution tracking acknowledges that several different interactions (such as ads, emails, social media, etc.) may play a role in the conversion process. This approach provides a more comprehensive understanding of how various marketing efforts work together and influence consumer behavior. Learn more about Multi-Attribution Tracking here.

If you have a Multi-Attribution Tracking setup then you’ll have a good handle on your rolling Cost Per Acquisition. Multi-Attribution Tracking provides the oversight and again, you’re looking to optimize each individual campaign on a champion / challenger basis. An example of champion vs challenger would be for each email campaign that goes out how can you be A/B testing to improve on the previous campaign. There’s more on Champion Vs Challenger Marketing here.

Where Does Marketing Cost per Acquisition fit within the Marketing Metrics?

Cost Per Acquisition is one of the big 3 marketing metrics you need to be on top of as a business owner. Businesses should be laser focussed on reducing their Cost Per Acquisition, increasing their Conversion and maximizing LifeTime Value.

These three key metrics underpin all good marketing decisions and should also be used as KPIs for your marketing team as they help define specific roles within the team i.e. Acquisition, Conversion, Retention and create competition within the environment.

With individual managers or employees responsible for each KPI your marketing director is then responsible for the overall marketing margin. If you’re looking to restructure your Marketing Team or need some help with recruitment simply reach out here.

But what about Branding? How can I get a CPA for my Branding?

Ask yourself if it’s truly Brand Building or Vanity?

Firstly, and probably contentiously, most branding is bullshit. Unless you’re doing Prime Time TV, large impact outdoor, online branding at scale, or Sponsoring a top flight sports team you won’t see a return. Branding usually doesn’t pay the bills. It’s Direct Response that drives your new customer acquisition.

No one cares that you sponsor your kids’ little league, or a local event. Or a celebrity bike ride. It’s pure vanity. You’re not going to move the dial so vanity expenditure doesn’t get included here. ‘Brand’ decisions like this need to stop. Period. Trust me. 

Another question to ask is whether it is actually a ‘Branding’ Campaign or an acquisition tool. TV still works. And the right campaign can light the touch paper under your valuation but how do you track it and other campaigns?

Some businesses allocate a percentage of their profit to branding without tracking. Others measure the impact ion Conversion rate rather than pure acquisition i.e. did Conversion Rates increase during a TV campaign? If so, to what extent? Did traffic to the website increase? Did you set up a dedicated Landing Page Microsite for the campaign and how was this tracked? Did call volumes of inquiries increase during your Campaign? As long as you have visibility over all the rolling numbers its simply a case of benchmarking and reporting. Comparing pre and post campaign variables. And then of course continually optimizing.

What’s a Good Cost Per Acquisition Figure?

That depends entirely on your business, your competition, your target market and your product. If you’re targeting Sophisticated Investors then you’ve got a small target market, a noisy advertising space and a relatively low conversion rate. In this instance your CPA or CPC figure may well be over $1,000++ Certainly for High Value products or services like Aesthetic Medical, Cosmetic Dentistry, Luxury Brands or Jewellery the CPA is going to be high. But that’s ok, it’s not a figure to be scared of. It’s your starting point. And it;’s invaluable knowledge to have.

Real Life CPA Costs

More Profitable Marketing (MPM+) has been helping businesses achieve huge growth for over 25+ years.

We can help any client, of any size, in any industry, as long as they are committed to achieve long term growth and exponentially growing the value of their business. MPM+ has experience in the most competitive markets and bring this battle-hardened experience to the table, each and every time.

  • Pure play retail you have a very broad target market, effectively reducing CPA to sub $30
  • If you’re an online casino for example, you’re looking at $150 – $300 CPA
  • If you’re selling SaaS it’ll likely be $90 +/- CPA
  • Addiction Treatment Centers will have a marketing CPA of $5,000+
  • Regulated Financial Services products will be between $600 and $3,000 CPA depending on the product i.e. a one off investment or a brokerage client.

 

Effectively, once you know your Marketing CPA and the value of your Clients you have a broad understanding of your Marketing Margin. And an exact oversight of what KPIs you need to focus on going forward, Especially when incentivising your Marketing Team and holding them to account.

About More Profitable Marketing

At More Profitable Marketing (MPM+), we have spent years mastering the art of effective digital marketing.

Our expertise lies in diving deep into your marketing operations, unraveling every layer to precisely assess and improve your marketing metrics. From enhancing your SEO to optimizing your paid search strategies, we’re committed to delivering immediate, impactful results.

Let us show you how our seasoned approach can transform your digital marketing efforts, leveraging our vast experience for your business’s success. 

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Alexander Bentley-Sutherland is the visionary founder behind More Profitable Marketing (MPM+). With a dynamic career spanning over two decades in the digital marketing and Financial PR sector in the United States, SE Asia and the UK. More Profitable Marketing help clients in all sectors at every stage of their business journey: from start up firms to large International businesses. Our growth-focused initiatives, bespoke media relations and content-rich campaigns. MPM+ powers significant growth and delivers exceptional Return on Investment.