A marketing CPA is your Cost Per Acquisition. Simply put, this is the amount you spend on an ad or keyword in order to achieve one attributed sale. If you spent $100 on the keyword “red sneakers” and your tracking shows 4 conversions for that keyword, you’re CPA is $25. The goal is to get the most sales with the lowest CPA. The principle is simple enough. The tricky part is figuring out how to determine the correct “target” CPA for your products over time. This post will discuss the key factors to consider, and point you in the direction of having the right CPA for your level of aggressiveness in marketing.
An important note: This post is geared toward a marketer running campaigns to sell a specific product. This post is not geared toward a large online retail store with hundreds of products, who is hoping to get a customer who returns to buy all types of different products. That topic is for a different post.
Analyze Your Product to Guide Your CPA Advertising
There are quite a few factors that go into selecting the right CPA to target with your ads. Some of these factors will change over time, as you learn things like repeat order rates and lifetime value of a customer. However, you won’t have that time-driven data when you are just getting started. So, you start with the concrete facts that you do know, and combine them with your best-guess assumptions. You’ll adjust the time-driven factors, well… over time.
A primary consideration: Is your product a one-time, high-ticket item, or is it consumable. This is one of the key factors to consider. I only market products or services that are one or the other. A product either has to be high priced enough, where you can make a decent profit on the first sale, OR it has to be the type where customers need it every month or two, and thus place repeat orders (This includes subscription orders). I won’t market a product that is low cost, and only needs to be bought once. Look at your product, and decide which type it is.
Note: Some products might be BOTH. That’s great. Consider both sets of factors if that is the case.
Your Product is a High-ticket, One Time Purchase
Calculate your profit on the initial sale, NOT counting the marketing spend. Include everything you can think of, into your overall product cost. Here are some of the obvious ones to include:
- The cost of the product itself
- The cost of storing the inventory (on a per unit basis)
- The shipping cost you paid per unit to get to your warehouse
- The cost of any damaged units in your inventory
- The cost of shipping you will pay to deliver it to the customer
- The cost of providing customer support, if any
- The cost of packaging materials
- Credit Card Processing fees
Once you have your sum of all these expenses, just subtract them from your selling price. Let’s say the expenses per unit are $19. You sell the product for $109. Your gross profit per sale of a single unit would be $90.
So, we know that you would break even, if you spent $90 to get a sale on marketing. Thus, anything less than a $90 CPA will yield you some profit.
Setting your TARGET CPA requires some other considerations, which we get to a bit further in the post.
Your Product is Consumable, and/or Creates Repeat Orders
In this case, you are going to follow the same profit calculation guide as the first example. PLUS, you have to consider some extra factors.
This category would include subscription based businesses, and also products that do not force a subscription but are logical to create re-orders.
Many of these products will be lower priced, and therefore lower profit per sale. But, they bring the wonderful benefit of rolling in month after month. For subscription based models, you can even see your reports that show the projected sales for the active subscriptions.
Ok, so onto the extra factors we must consider. These have MUCH less guess work when you are forcing a subscription, rather than letting clients manually purchase:
- Average number of sales per customer
- Average amount of time between orders
- Cancellation rate (of subscription) or never-return for normal purchases.
- Lifetime value of customer (for as much time as you can examine)
As time goes on, you will know with certainty the things like chargebacks, lifetime value, and average number of sales. When you have built up the data, you should ALWAYS come back to it and see if you need to re-adjust your CPA.
Since you are just getting started, however, we are going to have no choice but to make some assumptions. Make them safe, and conservative.
An Example for a Monthly Re-order or Subscription Product
You are selling a product that you calculated (using the math above) has a $30 profit per sale. You are going to assume that an average customer orders at least 3 times. You will also assume that they order every 30 days or so. Again, if it’s a subscription product, you will already know the days between orders. Of course, there will be some customers who end up ordering 20 times. But let’s just use 3 sales as our assumption when getting started, for this example.
OK, what do we know? We know that each customer will generate us $90 in profit, but it will take approximately 90 days for us to actually receive that profit.
You could set your CPA to anything lower than $90 to break even in 90 days. However, let’s make it worth our while. If we set our target CPA to $40, we know that we will be investing $40 in advertising per initial sale, and profiting $90 in 90 days.($30 a month for 3 months)
Must Consider: the Time Factor
The recurring order considerations we just discussed sound simple. However, the time it takes to get your money back, and the steps along the way, can be vital. Don’t forget, if you achieved a $40 CPA, and you were able to get 10 sales per day, you will be spending $400 per day in advertising. For a month, that’s $12,000 in advertising spend. In that month, you will only be recovering the $30 profit that each sale generates. So, that’s $300 a day, or $9000 a month. At the end of month one, you are DOWN $3000.
Of course, the lower your CPA, the more of that $90 you can keep as profit. To get started, set a target CPA that you think can actually generate sales, but leaves you enough profit to be worth your while. For me, in this situation, I would start with a target of a $40 CPA.
But, there are other things to consider, so keep on reading.
The Leverage Factor
So, in the above example, we spent $12,000 in advertising. You might be saying to yourself, “OK, well I am going to need $12,000 cash in order to spend $400 a day in this case.”. That’s wrong. Remember, you are getting BACK $300 in the orders’ profits every day. So, you really only NEED $100 per day for a month in order to “survive” month 1. In summary, you need $3000 starting cash, in order to spend $12,000 over the month, if you are able to get that $40 CPA.
Breakdown for This Example after Month 1
OK, based on what we stated above, you have your $3000 cash in play, and have spent $12,000. You got $9000 back from the profits of your sales. At the end of the month you are down $3000.
Breakdown for This Example after Month 2
The same thing as month 1 happens in month 2, in regard to the INITIAL sales. So, you are going to lose $3000 acquiring the 300 (10 per day) first-time customers you get each day during month 2. BUT, don’t forget… you are going to get the “second” orders that you earned the month prior. So, you are going to pick up the $30 from each of those. That’s $30 x 300 orders, or $9000 extra cash. So, you actually go positive in month 2, because the profits from the “second” orders cover the investment on THIS month’s initial orders. At the end of month 2, this is the deal:
-$3000 balance from month 1
+$9000 from month 1’s customer placing their second order
-$12,000 spending on month 2’s initial orders
+$9000 profit on month 2’s initial orders
Net after month 2: You are UP $3000.
So, based on this example, you need $3000 to start the ball rolling. At the end of the 2nd month, you get it all back, PLUS a profit of $3000. Note* You may have to invest a little new money in month 2, to bridge you until the “second” orders start coming in.
Breakdown for This Example after Month 3
Now, we are re-investing the profits from the prior months, so NO new investment is required at the beginning of the month. You are still going to invest your $12,000 in advertising to get your 300 INITIAL sales, and the $9000 in profit that comes with it. BUT, you are going to pocket a lot. You are going to get the “third sales” profits from the original month, plus the”second sales” profits from the second month, plus the profits of this third month’s initial sales.
In month 3, we are no longer investing in the customers from month 1 and month 2, but they are still paying us off.
It looks like this:
+$9000 from the original month’s customers reordering for the 2nd time (3rd order overall)
+$9000 from month 2’s customers reordering for the 1st time (2nd order overall)
+$9000 from this months’s initial orders’ profits
-$12000 from this months’s investment in getting initial orders (remember, at that $40 cpa we started with)
Net after month 3: You are up $15,000 from this month, plus the $3000 from month 2, for a total of $18,000. All of this off the original advertising cash requirement of $3000.
It’s time to reflect a little. Did you struggle with waiting the 2 months to get back your $3000 initial cash requirement to start all this? If you can stretch it out a little more next time, you know you can set your CPA advertising goal a bit higher, and get some more customers.
NOTE: *** The above is a simplified example, for the purpose of this post. There are going to be things like declined charges, chargebacks, product returns, and refunds which will effect that “Profit per sale” assumption we made. However, as you learn those factors through your reporting, you can accurately adjust the “profit per sale” assumption number, and adjust your CPA to match, if needed.
Re-examine Your Data and Adjust your CPA Advertising
Now, it’s time to take a look at our assumptions, since we have 3 months of data to examine. Since we assumed we would get 3 orders out of each customer, we assumed our profit would be $90 per new acquisition. But now that you’re entering month 4, see if any of the 3-month-olds are still ordering. If they are… if MOST of them still are, you can increase your CPA to allow you to earn MORE new customers each month. You will have to digest the waiting period to get that ROI, but by now you’re already flush with the 3 months of profits you got. If the customers stop ordering after their third, or worse, maybe their second order, you will need to lower that CPA to cover it.
What does it Mean to Raise or Lower Your CPA?
OK, nobody intentionally says, “Let me pay more per conversion”. What it means is to sort of “open up the gates” more, when it comes to the targeting on your ads. When I start a campaign, I usually set my cost per click pretty low, and narrow down the audience as much as possible with demographics or interests. If you can achieve your initial target CPA, and it’s working, you might want to see what happens if you loosen the reins a little bit. If you are running CPC bids, like Adwords, you could raise your bids. You could also widen your demographics. You could open up the targeting on campaigns like Facebook. Whatever the type of campaign, you can find a way to widen the audience. Usually, the wider the audience, the more traffic, and the higher the cost of CPA advertising. Sometimes, you widen the audience, and the CPA stays the same, and you just get more sales. That’s awesome. If that’s the case, keep on widening, until you see the CPA start to go up. Then, try to hold at that level and wait until the next time you analyze the date to make further decisions. Of course, if you widen the audience, and the CPA shoots past the profitable point, then you move back towards what you had set up originally.
If you start off the campaign, and you can’t achieve your target CPA, start narrowing the audience and lowering bids. You may find that you have to narrow so much that your number of sales becomes very low. That’s OK. Take a sale or two per day if that’s all you can get at the target number. You’ll find other projects to rake in money, but for now, you are profitable at a slower pace. It’s better to make a little profit each day slowly, than to be losing money.
When it comes to PPC (pay per click) keyword campaigns, like Adwords, I have my own process. Essentially, I look at each individual keyword as a campaign. So I might have, say, 1000 keywords running for a project. If I have my target CPA calculated at $90, I will let every keyword run until it spends a bit more than my CPA. The keywords that do much better than my target CPA, I make sure the bid keeps me at the top of the search results. The keywords that don’t get any sales, or that hit a CPA much higher than my CPA, I will just pause. But the ones that are sort of “close” to my CPA, but a little too high, I pause too (for now). That last group of keywords are the first ones I will re-enable, if my project is working and I decide I can raise my CPA a little bit.
Do You See a “Direct” Relationship Between CPA and Acquisitions?
What I mean by that is this: If you widen your audience, and your CPA goes up X percent, does the number of new sales go up X percent too? Does it go up MORE than X? Or, does the number of new sales stay the same, or slightly rise, but less than the X percent extra you are spending?
If you are getting at LEAST the same percentage increase in CPA to New Sales, then raise it on up. I believe in being a “gas pedal” not a “brake pedal”. This attitude is what makes rich marketers. I will continue to push and push my CPA until I max out. I continue to try new campaign after new campaign and go through the same process. If I had the cash to spend a Million a day, I would be doing it. You should have the same attitude. But when you see that you are not getting an equal, “direct relationship” between opening up your CPA, and the number of new sales, then stop it. Set your cap at the best possible percentage, and stay put. Re-evaluate again after a few more months.
Utilize Your Reporting to Make the Right Decisions
In order to make the decisions we have been discussing, we need to be able to easily SEE reports like these:
- Lifetime value of a customer by campaign
- Number of sales per customer by campaign
- Adwords Keyword by customer lifetime value
- Cancellation Rate by Campaign
- Meta Data Variables by customer lifetime value
Your imagination can steer you to more reports that will help you in your CPA decisions. For the purposes of this post, and my own personal experience, I can make almost all decisions with the reports I just mentioned. Did you notice the main thing they all have in common?
It’s the fact that the tracking has to go PAST the initial purchase. Simply using Adwords tracking or campaign tracking up until the point of the initial purchase will NOT let you make the decisions that you need to. You need tracking that is embedded in your e-commerce software, which attaches the attributed campaign to the customer for life. That way, you can know that the customer who came from X campaign, eventually make 6 purchases, worth $900. Without that, you are stuck at the point of the initial sale, and you only know how much you paid in advertising, and how much the customer paid on that first sale. That’s not enough, obviously. If you use the best sales software or the best subscription billing software, you will have this information at your fingertips with their reporting features. Make sure you don’t use a software that can’t attribute campaigns or meta data to a customer for life.
What Should I Know About the Author?
I’m Brad Markin. I have been a “CPA Hawk” for over 20 years, and have made millions of dollars in decisions based on the math we discussed in this post. I know how important every penny is, when it comes to investing in online marketing campaigns. Formerly, I relied on weak reporting when it came to “after the initial sale” data on my campaigns. I had to guess a lot. It was one of the reasons I went on to found RevCent, and made sure it had deeply embedded reporting that would let anyone take action based on “post initial sale” information. I hope you enjoyed this post, and I hope it helps your decision making, regardless of the online sales software you use.