This article doesn’t intend to tackle all the technical components needed to improve cost per acquisition and optimising your Digital Advertising campaigns nor that can be done in one go. All marketers wish it was as simple as that. Instead, this read challenges your approach, mindset and perspective regarding your strategy and execution of your acquisition campaigns – something a lot of marketers and business leaders often lose focus on.
Regardless of what business or industry you are in, the Cost per Acquisition (CPA) is how much you spend in sales and marketing combined, to acquire a new customer. The pursuit of effective CPA is perhaps one of the most important challenges you and your business will go through. It is science and art after all, and if there is one rule to live by, its that all rules change – which means your acquisition strategy is an ever-evolving dynamic problem that rewards those who got the answers before the rest of the population.
1. What is CPA and how to measure it??
Let’s say you run Ads campaign on Facebook and Google to bring visitors to your e-commerce website. You budget $20,000 a month on Ads and you end up with 1,000 customers who paid $100,000 in total, for your products. Your CPA in this example is $20 ($20,000 / 1,000) and your ROI is 500% or 5X. This is not a fully inclusive view of your CPA however, as its not counting other associated sales and marketing cost elements. For example, the cost of other non-directly related marketing activities such as overheads and perhaps awareness campaigns, etc. is not included. If a business were to fully calculate their CPA, that would look something like this
(Advertising Budget + Sales Cost + Agency Fees + In-house Marketing HR Costs + Other Costs) / Number of Customers
Another layer to this is the Sales & Marketing split contribution to the CPA. Take an example of a loan financing business that runs Digital Advertising to generate leads who are contacted by Loan specialists (Sales team) to hopefully convert them into customers. Your acquisition model here has two contributing factors: Marketing and Sales. In contrast, an e-commerce business will mostly have just the Marketing component. In this example, there is the CPA to acquire a lead and then the 2nd layer of CPA which is to acquire the customer aka the Sales conversions. These two performance metrics often lead to Sales and Marketing departments in a state of misalignment – as they debate which area needs more improvement or is contributing to the gap in their CPA.
2.How does your CPA relate to ROI?
ROAS, a subset of your Return on Investment (ROI), is inversely proportional to your CPA. The lower the CPA the higher your ROI is and vice versa. Being the focus of many – something we can’t encourage enough; your ROI is probably the biggest riddle in your business right now. If not, as you scale, the chances are it will be. How marketers go about improving the ROI is the million-dollar question and quite frankly, there isn’t one right answer. There are many digital channels, tools and strategies out there. In a perfect world, you would want to test every single option and possibility but that’s not realistic nor financially feasible. Instead, you want to ensure that most of your funds are in the right place as you endeavour to optimise and improve your performance with riskier and less proven approaches and channels.
3. Why is CPA becoming more challenging across many industries?
The concept of decline in growth tactic effectiveness over time is a key concept to understand in your pursuit of effective and profitable CPA. As explained by Brian Balfour in 2015, a new growth tactic goes through 4 main phases starting with the inception to being optimised by early adopters to then being adopted by the masses and finally reach the fatigue stage. A very good estimate of how cost-effective your Acquisition strategy is to plot your business tactics on this graph. Are you an early adopter or a late adopter? If you are a late adopter, you know you are running out of time before you need to upgrade or revamp your entire strategy.
Credit: Brian Balfour (www.coelevate.com)
The evolution of growth acquisition strategies is worth understanding if you want to know how the industry got here but also to better predict and see where we are heading and most importantly, make better decisions for your business as you go along.
You know most of your competitors if not all are probably leveraging the same digital channels as you are. Maybe some are allocating even bigger budgets. With the adoption of a similar strategy by the masses, what can you do to stand out and get the results you deserve?
3.1 Start by asking the right questions
Rather than putting pressure on your teams to hit the numbers you need which understandably is quite important, a better approach is to break down your strategy into micro parts and have engaging discussions with your marketing and sales teams and your digital marketing agency to address all angles.
To improve cost per acquisition, you need to ask the right questions. Some of those are
- What are the best ways to acquire customers in my industry?
- What are the industry benchmark figures for CPA?
- Are there any immediate adjustments we need to make to our acquisition strategy?
- Are there any new and emerging customer acquisition tools and strategies that fit well with our brand?
- How can we further optimize our landing pages and CRO?
- Are there any additional insightful metrics we need to measure?
- Are there more effective audience targeting methods than what we currently use?
- Are there territories we can expand in at similar or better CPA?
- Are there new ways to increase traffic and leads at the same or better CPA?
3.2 Go more micro with your campaigns
If you are running Google Search Ads, fragmenting your campaigns and Ad Groups to zoom in on your target audience and correspondingly the search queries can tremendously improve your performance. In many cases, breaking down Ad Groups have resulted in significant upside on CPA. Single Keyword Ad Groups is a great example of this strategy. With several studies and data around correlation between quality (influenced by going more granular) with improvement in CPA. In the example of Facebook Ads, breaking down your targeted audience by more specific attributes and personalising the Ads content and messaging can also improve your CPA.
3.3 Don’t put all your eggs in one basket
Being somewhat dependent on only one or two digital channels can make you vulnerable and expose your CPA whether in the long-term or in certain times of the year. Having a diverse presence across 3 – 5 channels that are bringing good results is perhaps easier said than done but completely worth it. Most marketers are in their comfort zone with one or two channels that are bringing good results. But what happens when competitors wake up the next day and decide to double or triple their spend, and suddenly, your CPA is taking a hit? Why not expand to other channels from day one which you may not necessarily heavily depend on but know you got them in your pocket.
3.4 Leverage Martech to enable your sales
According to Chiefmartec, the Marketing technology landscape has reached 6,829 players in 2018 vs. ~150 back in 2011. From Advertising channels to CRMs, Automation tools, Social Media management to Data, Analytics & Attribution, Sales Enablement and Influencers management. There is an enormous amount of options to consider when you think about what tools and channels to leverage.
Sales conversions are sometimes overlooked when it comes to improving your CPA. Enabling your Sales team to do a better job is a marketing responsibility also. From lead scoring to qualifying chatbots, there are a ton of things you could do to not only qualify your leads better but also provide a ton of data and information to your sales department that enables them to have a better and a more focused conversation with their leads. For example, imagine you can close the loop of sales and web analytics data with ad data so that your optimization is based on actual sales and not the top of the funnel noise? Here is how.
3.5 Final thoughts: Think outside your advertising CPA
If channel A drives leads at $50 and channel B get leads at $75, you would think channel A is more effective and profitable, right? Not necessarily. This goes back to your holistic view of CPA and ROI. I get that channel be is 50% more expensive but what if converts 70% higher? Having a top to bottom view on the performance of your campaigns is crucial to making the right decisions and ultimately, growth.
That aside, what if at the ROI level you have a lower performing channel, do you spend less on that channel? Well, this depends on your business objectives. Which financial KPI is more important? Is it your top-line (revenues) or bottom-line (profits)? If your business is adamant about profits, then maybe scaling the channel with lower ROI isn’t the best option.
A critical error some businesses make is straying away from higher CPA channels. However, when you look at that ‘economies of scale’ i.e. how much upside you are getting by tapping into additional growth and potentially saving on fixed cost elements of your business, acquiring more customers at a higher CPA can be a viable endeavour.