- November 18, 2016
- Posted by: Sean Tibor
- Category: Marketing
Your businesses’ cost per acquisition (CPA), also known as Cost Per Customer (CPC), is one of the most important measures you can track for the financial effectiveness of your marketing and sales efforts. When paired with other metrics like customer Lifetime Value (LTV), it is a key component of your ROI evaluation for your marketing and sales spend.
This post will help you:
- Understand how to calculate your CPA
- Interpret CPA trends
- Break down your CPA into constituent measures
- Use Excel to track your CPA over time
First things first: What is the CPA metric?
Hint: it’s not a Certified Public Accountant
CPA stands for Cost Per Acquisition, and it refers to the average marketing and sales cost of each new customer for your business. For example, if I am running an ice cream stand and spend $100 on advertising and $20 on a part time sales rep that bring in 20 new customers, my CPA is $6.
Here’s the formula:
CPA = (Marketing Costs + Sales Costs) / $ of New Customers
Seems simple, right? The most powerful metrics usually are!
Step 1: Getting Started
First, you need to gather the data below for the time period you’re measuring.
- Costs of all marketing efforts (including salary and benefits for marketing team, operational costs, outside agency fees, creative costs, and advertising spending)
- Costs of all sales efforts (salary and benefits for salespeople, commissions, expenses, etc)
- Number of NEW customers
Note: Do NOT include new sales with existing customers, costs of materials for existing customers, or customer service costs.
Generally, CPA is calculated best on a monthly, quarterly, or annual basis. Too short a timeframe, and you could see a lot of variation in the measure that obscures your trends.
Step 2: Run the Numbers
Once you’ve totaled up all of the costs and determined the number of new customers, you can use the formula above and the Excel worksheet to calculate your CPA. The hardest part is gathering the information: the calculation itself is simple.
Bonus Points: If you divide just your marketing costs by the number of new customers, you can come up with a marketing cost per acquisition, which can help you isolate variations in your marketing spend from your sales spend and give you a more detailed look at how your marketing efforts are performing over time.
Step 3: Interpreting the Results
Now that you have your CPA calculated, you can compare it to previous time periods to see if it is trending up or down. You can also compare it to the average lifetime value of your customers to make sure that you are acquiring your customers in a profitable manner.
If your CPA went up:
- Your marketing and sales costs rose, but you haven’t seen more customers as a result. For example, if you started a new marketing campaign in the month, but the timeframe for a purchase decision is 3 months, then you will see a higher CPA until your new customers are realized.
- Your marketing and sales costs stayed flat, but your number of new customers fell. Your marketing and sales efforts could be losing effectiveness or need to be refreshed. You could also have a seasonal decline in new customers. In B2B businesses, this often occurs during common vacation times like the summer and the end of the calendar year.
If your CPA went down:
- The best case scenario is that your marketing and sales efforts are becoming more effective and previous investments are bearing fruit.
- It could be an outlier or a one time event. Keep an eye on it for several time periods or look back further in time to see if it’s a general trend.
- You could be cutting spending on marketing and sales, and the number of new customers hasn’t dropped yet as a result. Look closer at your marketing and sales pipeline measures like number of leads generated or contacts attempted to see if you can forecast a decline in new customers.
- If your CPA drops too far, you could be leaving money on the table. This could be a good time to increase marketing and sales spending to bring in more customers if your company can handle it!
Step 4: Next Steps
Now that you have your CPA calculated, plan to track it over time. This is a key performance indicator for your business and you should be reviewing it regularly. This could be monthly, quarterly, annually, or all three.
You can also look at these other related metrics to expand your understanding of your marketing and sales performance:
- Marketing CPA – just the marketing costs per new customer
- Sales CPA – just the sales costs per new customer
- Marketing % of CPA – Marketing CPA / Total CPA. This will help you track if you are spending more and more on marketing and identify if additional sales investment is required
- Marketing and Sales % of LTV – (Marketing Costs + Sales Costs) / Customer Lifetime Value. This is a great way to make sure that you are not spending too much to acquire each new customer and becoming unprofitable. A general rule of thumb for marketing is that your costs should not exceed 10% of your customer revenue. Remember, you still have the costs of servicing that customer or manufacturing the products for them.
Knowing your cost per acquisition is a key step towards making more strategic marketing decisions. Your CPA is calculated the same way no matter how your sales and marketing approach evolves. Whether your business starts with paid advertising and transitions into Inbound Marketing, or moves straight to the next key marketing and sales approach, this business metric will help you evaluate how well your marketing is working.