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  • Writer's pictureAdam Yourist

The Right Way to Calculate CPA


The Right Way to Calculate CPA on Media Intercept

The CPA formula is one of the most commonly used metrics in digital marketing. And yet, it's also one of the most misunderstood. It seems simple enough: you divide your cost per acquisition by the number of customers that you acquired. But there are so many factors that go into this equation, and each can have a dramatic impact on your business's bottom line. In this article, we'll explore some common errors when calculating CPA as well as how to avoid them so that you can make smart decisions using this metric going forward.


The CPA formula is not as simple as it appears to be.

You may think that CPA is a simple equation, but it's not. It's not even one number! In fact, there are many different kinds of CPAs for different products and customers and channels.

For example:

  • If you sell a $100 product through Google Adwords to a customer who has never purchased from you before, then your CPA is going to be lower than if you sell an expensive SaaS product through Facebook Ads to existing customers who already know and trust what they're getting themselves into. The latter scenario involves more risk on the part of the buyer (and thus higher costs), and so the seller will have to charge more per ad click or pay more per lead in order to make up for those additional costs.

  • If your product costs $10 but can save potential customers thousands of dollars over time—for example, by helping them avoid car accidents or preventable diseases—then they'll be willing by default because they see value in what you offer; whereas with other products whose benefits aren't as clear-cut (such as weight loss supplements), people might need some convincing before making purchases based on past experiences with similar purchases gone wrong (think: Acai Berry).


The CPA formula does not always dictate business decisions.

You may have heard that the CPA formula is a "golden rule" for marketing, and if you follow it, you'll always be making good business decisions. But here's the thing: CPA is only one metric in your arsenal of marketing metrics — and even then, it might not tell the whole story.


CPA cannot take into account many other factors that matter when deciding whether to pursue a lead or not. These include lifetime value (LTV), average revenue per user (ARPU), cost of acquisition (COA), customer lifetime value (CLTV) and so on.

What's more? Even if you could somehow calculate all of these things (and make sure they were accurate), there are still plenty of other factors to consider besides just how much money each deal will bring in over time. For example: Is this person going to help my company reach its goals? Do I know who she is and why she's calling me? Will this person become our best customer ever?


You need to evaluate the cost of each customer acquisition channel on an individual basis.

You need to evaluate the cost of each customer acquisition channel on an individual basis. This means that you need to know exactly how much you're spending on ads, and then consider whether or not those ads are actually paying off. For example, if an ad campaign costs $100 but only gets you one new customer, then it's obviously a waste of money. But if that same ad campaign gets you 10 sales and only costs $10 for each sale? Then it's worth keeping around!


This is why calculating CPA is so important—it lets us get a sense of whether our advertising efforts are successful or not by measuring the success rate against our total number of sales (or other metrics).


Track every cost associated with your CPA.

You need to know the cost of each customer acquisition channel, product or service, marketing activity, and other costs.

In order to calculate CPA:

  • Calculate your average revenue per user (ARPU). This is a straightforward calculation that involves dividing your total revenue by the average number of users for a given period (monthly/quarterly/etc.). You can use this figure as a baseline number for later calculations with other metrics like ROAS or LTV. You can also use it as a rough estimate of sales productivity from month to month when looking at sales data from prior periods, since ARPU will generally increase over time as your business grows larger and more efficient in converting leads into customers.

  • Calculate lifetime value (LTV). This metric takes into account both how much money someone spends on an initial purchase as well as any additional purchases they make later on down the road—a lifetime value might include all receipts generated within an entire year after signing up for membership services at one price point offered by a subscription-based business model like Netflix or Spotify."


Don't neglect your price mix in a CPA calculation.

You need to include the cost of each product in your CPA calculation. If 99% of your sales are one product, that’s fine—just use that as the denominator and be done with it. But if you sell a mix of products, you have to take their average price into account because they’ll affect your overall CPA.


Your target audience will vary depending on what you sell—so if your customers tend to buy higher-priced items or lower-priced ones, then make sure to calculate separate CPAs for each group (or else just assume everyone spends an equal amount on all items).


Calculate your CPA correctly if you are using a subscription model.

While calculating the CPA is a necessary evil, it can be done without causing your eyes to glaze over.


Let's say that you're selling something for $199 and you want to know what your CPA should be. Before doing any math, let's consider how much money your customers are going to spend with you over their lifetime as well as how much it costs for them to become a customer (the cost of customer acquisition). The amount that each customer spends over their lifetime is called "lifetime value" (LTV). You could also calculate LTV by asking customers how often they plan on purchasing from you before making any purchases—this helps with forecasting revenue in advance so once again: DO IT!


If you sell multiple products, calculate your costs per product.

If you sell multiple products, calculate your costs per product. Costs can vary depending on the product. For example, if you’re selling a $10 shirt and a $50 dress, your CPA will be drastically different for each item.


Calculate the cost of one unit of each item sold by multiplying the price by how many units were purchased during that period. Then divide that number by total sales for that period (total revenue divided by total units).


It's important to know the true costs of advertising and to set realistic goals

You are not going to be able to get a CPA of $100 by placing one ad on Craigslist. If you want to earn a reasonable profit, it's important to know the true costs of advertising and set realistic goals.


How do you define "reasonable"? That depends on your business model and financial needs. For example, if you have no working capital and need money for rent next month, then your goal might be something like doubling your web traffic from its current level in order to attract more customers by making use of social media ads or SEO (search engine optimization). If your goal is simply to make more money than you're currently earning from selling products or services at a low margin, then setting higher CPA targets would probably make sense for this situation as well—but these days it's often smart business practice to offer discounts on big purchases by taking advantage of discount codes or coupons that customers can find online through their own searches rather than relying solely on paid advertising efforts alone when trying new methods like viral marketing campaigns or email marketing campaigns."


Conclusion

Calculating your CPA can be a tricky business. It's important to understand the complexities and pitfalls of this formula so that you can make better decisions going forward. We hope this article helped clarify some of those issues for you, but if not then we encourage you to reach out and ask us any questions that may still remain unanswered!







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