Calculating Your Cost Per Acquisition

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One of the most important aspects of your business that you can track in order to achieve financial effectiveness is the cost per acquisition (CPA). This is also known as the cost per customer (CPC), and when paired with other metrics such as Lifetime Value (LTV), it can become a key element of your ROI evaluation for marketing and sales spending. In this article, we help you to calculate your CPA, and take you through each of the steps that can help you to achieve this.

The CPA Formula

It’s a very simple metric, but behind it is a lot of power. The formula itself is very simple, and it goes like this: CPA = (marketing costs + sales costs) / £ of new customers. To put that into perspective, if you are running a retail store and spend £100 on advertising and £20 on a sales rep that brings in 20 new customers, your CPA is £6.

Starting the Process

The first thing you need to do is gather the data listed below for the time period that you have chosen to measure:

  • The costs of all your marketing efforts, including salary and benefits for your marketing team, any operational costs, outside agency fees, creative costs, as well as advertising and spending.
  • The costs of all your sales efforts, including salary and benefits for salespeople, commissions, expenses, and any other relevant costs.
  • The number of new customers you have gained for that time period. However, do not include new sales with existing customers, the costs of materials for existing customers, or customer service costs.

CPA is usually calculated on a monthly, quarterly, or annual basis. This is because if you use a timeframe that is too small, you could end up seeing a lot of variation in the measures that obscure your trends.

Running the Numbers

Now that you have totalled up the costs and determined the number of new customers, you can use the formula mentioned in the introduction to calculate your CPA. This part is easy, it’s the actual gathering of the information that is difficult.

If you divide your marketing costs by the number of new customers, you are also able to determine a marketing cost per acquisition says Paul from PWD one of fastest growing construction companies in Oxford UK. 

This can help you to isolate variations in your marketing spend from your sales spend, as well as give you a more detailed look at how your marketing efforts are performing over time.

Figuring Out the Results

With your CPA calculated, you can now compare it to previous timeframes to see if it is trending up or down. This also means that you can compare it to the average lifetime value of your customers to make sure that you are acquiring customers in a manner that is profitable.

If your CPA increased:

  • This could mean that your marketing and sales costs rose, but you have not had more customers as a result.
  • It could also mean that your marketing and sales costs remained the same, but the number of new customers declined. This might mean that your marketing and sales efforts are becoming less effective or need to be reviewed. In the case of B2B businesses, this usually occurs during holiday periods like the summer and Christmas.

If your CPA decreased:

  • This could mean that your marketing and sales efforts are becoming more effective, and your previous investments are starting to pay off. This is the best-case scenario.
  • You should watch it because it could be an outlier or a one-time event. Use this time to look back on previous timeframes or to see if it is a general trend.
  • It is possible that you have cut spending on marketing and sales, and that the number of new customers has not yet declined. Make sure you look closely at your marketing and sales measures, including your generated leads to see if you are able to predict any future declines in new customers.
  • If your CPA drops too much, it could mean that you are leaving money on the table says Ciaran Woodcock marketing manager at one of UK largest contractor accounting firm in the UK. You could use this opportunity to boost your marketing and sales spending so that you can bring in new customers. Just make sure your company is able to handle is first.

To Conclude

Hopefully, this has helped you to not only better understand the concept of CPA, but also how to calculate it. Now that you know what to do, it is important that you make the plan to track it over time. It is a key performance indicator for your businesses, and you should be reviewing it on a monthly, quarterly, or annual basis – although we recommend that you do all three to keep on top of everything and for added efficiency.

 

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Monday, 19 November 2018
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