What is Cost Per Acquisition?

Any good advertising campaign starts with a clear goal in mind. That goal can vary from getting someone to give you their information, to subscribing to a service, or buying a product. The real question is, how can we reach potential clients in a way that not only makes more money, but more importantly, makes money profitably? When creating a campaign it’s important to do so with your end goal in mind and that starts with knowing the value of a new customer or client.

At the most basic level, your cost per acquisition is the amount of money it takes to get one person to sign up, buy, or subscribe to your product or service. For businesses whose advertising funnel continues beyond their campaign the cost per acquisition may not be the same as a ppc campaign cost per conversion.

It’s important to make the distinction that getting a lead from a ppc campaign does not necessarily mean the acquisition of a customer. Understanding this concept is essential in calculating the effectiveness and cost efficiency of any pay per click campaign. Within Google Adwords, you’ll be able to track your conversion rate and cost per conversion, but that often doesn’t tell the whole story. Let’s use two fictitious companies as an example:

1) Company A sells premium stand up paddle boards with an average customer purchase value of $1,000. Their ad campaign sends customers directly to their site where someone purchases the product. You look in their Google Adwords campaign and notice that they’re getting multiple sales per day and that they’re only paying $100/conversion.

2) Company B runs a pest control company that has an average customer lifetime value of $1,000. Their ad campaign is currently set up to collect interested searcher’s information which they then contact and have their sales team pitch to sign up. You look in their Google Adwords campaign and notice that they’re getting multiple leads per day and that they’re only paying $100/conversion.

In both of these examples the campaigns appear to be running efficiently and bringing in customers at a profitable cost per acquisition. Only paying a $100 for every $1000 sale sounds good to me! Without further information you might think that each company is doing well. This is where knowing what your actual cost per acquisition can make or break a campaign.

When you learn that the leads coming in for the pest control services aren’t quality leads you can see the problem. Despite a campaign bringing in a good number of leads Company B is only signing up 5% of those leads. This completely changes the evaluation of the advertising campaign and shows that Company B is actually losing money on their campaign.

Summary

Every campaign boils down to one very important metric. How much does it cost to get a sale and what is the value of that sale? This knowledge is what you will base your optimization efforts, bids, and budget on. That’s why it’s important to look at your business and determine a suitable cost per acquisition before you start. Knowing what it costs to get a sale or lead and what those sales and leads ultimately amount to in terms of profit for the company will allow you to gauge your advertising performance.

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