What is Cost per Acquisition (CPA) and How to Use it for Ecommerce!
In the world of online advertising, there is always a bottom line. In this article, we’ll answer three important questions: what is cost per acquisition (CPA), how do I calculate it, and how can CPA make my eCommerce more profitable? This will help you to understand exactly what it is you’d like to achieve with your ad campaigns, and to check whether the money you invest is fulfilling the objectives you want to achieve.
For your campaigns to be effective, and to make sure your hard work promoting your products pays off, it is essential to define the structure your campaigns are going to take. The first step is to decide what the objectives you want to achieve with your ad campaigns are. For example, maybe you want to make people recognize your brand, or maybe you want to sell more products. Either one is good. But if you define the objective, then you’ll be able to measure the results the money you spend has had, and avoid spending money without being able to check whether the return on the investment is what you wanted.
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What is Cost per Acquisition (CPA)?
CPA stands for Cost Per Acquisition, or – the same – the cost per sale or cost per conversion, as it is known and referred to in Google Ads and other paid media channels. This cost indicates how much each sale that is created by your online ad campaigns took from your investment.
For example, if you have spent €500 in your digital campaigns, and you have achieved 5 sales or conversions, then your CPA will be €100. This is the result of the CPA formula:
Total Cost / Number of Conversions = CPA
How to use CPA to grow an online store
Through your CPA you’ll gain a reference point for how much each sale that you achieved has cost you through your online advertising, and you will be able to see whether the amount you are spending is profitable or not. Let’s look at an example:
Suppose that the price you pay for a sale of one of your products is €100 and that your net gain for that product, taking away all costs (fixed and variable) is €50.
If your CPA is €100, as in the previous case, that means that each sale you achieve through digital advertising is costing you €100. If you add the costs that went into the product (€50) to these €100, you’re spending €150 to get €50 of gain. Conclusion: you’re losing money.
If the current CPA were the same or less than the net gain you make for all your products, you would be sure that you were making back your money, or making a profit on the sales generated by your online ad campaigns.
Knowing your CPA allows you to know whether the money you are investing in online advertising is being well invested or not, and allows you to adjust the costs of your campaigns accordingly.
How to align your business objectives and your CPA
To know what your CPA should be, you need to find your own Objective (or Target) CPA. That is the amount you are prepared to pay in advertising costs to get a sale.
The simplest way of calculating this is the following: once you know the net gain for your product, you need to think about how much of this gain you want to invest in advertising to achieve a sale.
Following on with the previous example, in which we established a net gain of €50 per product, you’ll need to decide how much of those €50 you want to reinvest in order to get another sale. If you are a risk taker and you want to reinvest everything you gained in getting another sale, your Objective CPA would be €50. In this way, you would neither gain nor lose anything from your investment, and you would reinvest all the gains you have achieved in getting more conversions – that is – more sales.
If, however, you are feeling a little more conservative and you want to hold on to 50% of your net gain and only reinvest the other half, your target CPA would be €25. In this case, you would be ready to pay €25 for each conversion that your digital ad campaigns bring you.
It is possible to have a different CPA for each type of product you have, or even for each and every product you want to sell. The level of detail you want to achieve in creating your objectives will depend on the depth and extent of the campaigns you want to create. If you want to make generic campaigns and not advertise individual products, you can set a single target objective that takes into account the total costs of your business and the average net gain. On the other hand, if you decide to advertise each product separately, you can calculate a more specific target CPA for each product, using its own individual costs and net gain.
How to improve the CPA for my eCommerce
While it is logical to suppose that the more budget you reinvest in your ad campaigns the greater margin you have to achieve more sales or conversions, it is essential to keep in mind that for each market, product, and business there are going to be differences in costs and benefits – which means that there is no magic CPA number that will work for everyone.
To understand a little better, let’s look at two hypothetical eCommerces – A and B – both of which sell fashion accessories, like belts and watches. Ecommerce A is a business that buys watches from China and imports them to Spain. But their belts are made by hand by their workers in Spain. The sales price for the belts is €15 and €50 for the watches.
As the watches have a very low manufacturing and import cost (€10 per watch), their net gain is €40 per watch. However, as the belts are handmade in Spain and require a lot of resources, the associated cost is higher (€12 per belt), making the net gain only €3 per belt. Therefore, each product has a very different CPA, each of which could vary according to how much of the gain the business wants to keep for itself, and how much it wants to reinvest in more advertising.
Ecommerce B, on the other hand (which also sells watches and belts) is just one worker who makes all the products on their own. Their price points are €50 for the belts and €200 for the watches. The belts only take 2 hours to make, while the watches take 20 hours to build.
In this case, the cost of each product will depend on how this business owner wants to remunerate themselves per hour of work, but you could say that – apart from the material that is used for each product – the rest is all net gain. From this gain they would need to take out what they want to keep as profit, and then decide how much to reinvest to gain more sales. This amount will be the Target CPA of Ecommerce B.
How to increase sales with CPA
As you can see, there is a bit of work to be done to arrive at a target CPA which is aligned to your business strategy, as establishing a number to work towards can depend on several factors. But, as you should also now see, it is essential to define as exactly as possible a target around which you can focus your online ad campaigns, as there is no other way of effectively measuring how much of the money you invest in advertising is creating return for your eCommerce (and how much isn’t). Once you have established this you can scale your advertising in a way that guarantees you are creating the value your business needs.