What is CPA
Cost Per Acquisition, or “CPA,” is a metric that measures the marketing cost to acquire a paying customer on a campaign or channel level.
You can have a CPA to a form submission, phone call or sale, etc.
However, in this post I’m going to focus on the CPA for a sale. In other words; how much it costs in marketing, to get a boiler on the wall.
Working out a CPA
CPA is a simple calculation:
CPA = the total cost of a campaign across a set period of time / number of sales generated from the campaign activity
So, if you spend £1,000 on a campaign and installs 6 boilers as a direct result of the campaign. The CPA is £166.
£1,000 spend / 6 sales = £166 CPA
Calculate CPA at the right time
It’s a common mistake for business owners to work out their CPA at the end of the month, but the leads generated that month haven’t had time to be nurtured. For instance, some of the leads wouldn’t have even been called, let alone surveyed and sold.
It’s for this reason that CPA should be calculated mid-way through the following month – at the very earliest. Sometimes it can take months for a campaign to come to maturity – the longer a company can track, the more accurate their results.
Calculate CPA on the right data set
If you spend £1000.00 on marketing between 01/01/19 and 31/01/19, generating 50 leads, then a true measurement of CPA will only measure sales directly related to those specific 50 leads generated during that time period.
Another common mistake is for small businesses to measure CPA by taking simply “Marketing spend in January”, and dividing it by “Number of sales made in January”.
This method ensures inaccuracy in the data and negates the potential benefits of measuring in the first place. The measurement must only account for sales made that were generated from that months marketing spend, on a given campaign.
Use a CRM (Customer Relationship Management)
In order to be able to accurately measure the CPA of a campaign, a company needs to be able to manage a lead and track the outcome of each customer contact.
A CRM is essential to this end.
A customer management system enables a business to manage a customer from lead, right the way through to sale, recording what successes they have, and where things are falling short.
When a lead is created in a CRM, it’s important that its tagged with the source e.g. “Google Ads”, “Checkatrade”, “Boilerguide”, “Worcester”, and that the date of creation is included. This allows us to track trends in performance across both lead source, and time.
The importance of CPA
Without an understanding of CPA, you risk overpaying for each sale, or even paying more to acquire a customer than what they’re worth to your company – not a great position to be in.
Calculating CPA is central to any campaign and critical to the long-term sustainability of a company.
CPA gives a true measurement as to whether a marketing campaign is/was successful.
When deciding where to invest marketing budget, it’s easy for a business to fall into the trap of buying the cheapest leads. However, lead cost isn’t the be all and end all – a businesses should instead be taking an objective look at the overall CPA and comparing lead sources head to head.
It doesn’t matter how cheap a lead might be to acquire, if they’re not selling, it’s all just wasted time and money.
Breaking down CPA
When running a boiler installation company, it’s a good idea to at least break CPA down into the following stages;
1. Cost per lead
Description: What does it cost in marketing spend to receive either a row of customer data (usually a name and number) or perhaps an inbound phone call or email enquiry.
Cost Per Lead = Marketing Spend / Leads Generated
Example: (£1000 spent, divided by 50 leads generated = £20 Cost per Lead)
2. Cost per survey
Description: What does it cost for someone to agree to a survey (either a home visit, video survey, or photo quote). This is driven entirely by how effectively a company can convert its leads into surveys. In the example below, we calculate based on 33% conversion to survey, 1 in 3 leads.
Cost Per Survey = Lead cost / Conversion Rate
Example: (£20 lead cost, divided by 0.33 = £60 Cost per Survey)
3. Cost per sale (AKA CPA)
Description: How much does a company spend in order to get someone to agree to an installation? This element is driven entirely by how effectively a company can get customers over the line once they’ve provided them with a survey, aka “Conversion to Sale”.
In the example below, we calculate based on a 33% conversion to sale, 1 in 3 surveys.
Cost Per Sale = Cost Per Survey / Conversion to Sale
Example: (£60 cost per survey, divided by 0.33 = £180 CPA)
Breaking things down in this manner gives a more granular view of a CPA and helps highlight what’s going well, and what needs improvement.
If the cost per acquisition is too high for a given campaign, before pausing it’s important to first figure out whether there are stages in the sales funnel can be improved, and what direct actions can be taken;
1. Is the lead cost too high?
- Change lead supplier
- Change marketing agency
- Set a lower volume target
- Lower bids (if a cost-per-click campaign)
2. Is the conversion to survey too low?
- Improve the sales pitch
- Improve the persistence with the leads are contacted
- Try from more than one phone numbers, landline / mobile
- Improve availability for surveys
- Advertise a lower starting price
- Analyse competitor behaviour in the region
- Offer an online booking system
- Use different communication channels to reach out
- Increase the geographical area of the service
3. Is the conversion to sale too low?
- Look at competitor offers and behaviour – build an arsenal that combats their effectiveness
- Improve the sales process in house – rapport is so important
- Leave the customer with a quote on the day, 100% of the time
- Improve the follow up process – polite persistence is the goal – not pestering
- Be prepared and willing to negotiate confidently
- Juggle installer availability – there’s always a way
- Draw out customer objections – what’s stopping them from saying yes today
- Ask for the sale when the time is right
You will often have a hunch as to where the problem is, but it’s important you don’t jump to conclusions. Instead, analyse what data is available, and objectively decide what it is that needs to change.
If the change required is within your control, put it in to action, then measure the change in performance over time. All too often, change is made without any sensible method for deciding whether it was a positive one, or not.
If you have exhausted all efforts and a campaigns cost per acquisition is still too high, it would be sensible to switch off that particular campaign and redirect the budget into the sources that yield better results.
LTV, also known as lifetime value, is another important metric to consider when deciding whether a campaign is a success.
With lifetime value, we are essentially looking at how much the customer is worth over the lifetime of the relationship with your company.
Consider products such as servicing and maintenance contracts. If a customer signs up to a 10-year servicing agreement at £80 per year, there’s another £800 of revenue in that customer.
Installation margin may be tight for a given campaign, but when you take the customers LTV into account, it may still be worthwhile to continue running the campaign.
Bake in the CPA
It’s imperative that you bake in the cost per acquisition into your quotes, otherwise you’re at risk of eroding margin, or even losing money.
Bake each individual CPA in to your quotes.
This means you can quote the same boiler across two different lead sources and have different prices, and that’s ok.
Alternatively, a business may decide to work out their average CPA across all campaigns and bake it into their quotes – this method allows for less control in the long run but might suit a smaller business who have less capacity to drill into their data.
What is a “good” cost per acquisition?
CPA varies drastically. In a nutshell a good CPA is one that is financially sustainable or achieves a specific goal within the business (for instance, if the company goal is long term customer acquisition rather than short term margin).
When it comes to buying leads, or running paid marketing campaigns, if you can bake its CPA into the quotes, and still maintain a strong conversion to sale, you’ve got the beginnings of a marketing machine that fuels itself. Every £ you put in, returns a greater value out.
As companies grow, their average CPA tends to increase.
This is because as they seek greater volume, they cannot be as selective as to which campaigns are on and off.
If leads were unlimited, naturally everybody would put all the marketing budget into the campaign with the lowest CPA.
It’s also because you’ll need to hire a surveyor, and bake his commission in to the quotes, which typically lowers conversion rate and further increases CPA. For this reason, it’s important you continuously monitor your cost per acquisition.
There are many nuances between companies and there’s certainly no “one size fits all” number, but a rough and ready measurement you might like to use would be to consider CPA as a percentage of AOV (Average Order Value.)
For example, if Joe Bloggs plumbing has an AOV of £2200.00 + VAT, and a CPA of £176.00, then his marketing CPA is 8% of his Average Order Value.
CPA as Percentage of AOV = (CPA / AOV) * 100
If Joe Bloggs runs a tight ship, has decent rates with his suppliers, and doesn’t pay over the odds for other business running costs, there should be plenty of margin left in his jobs with this CPA.
If however, Joe Bloggs runs a sloppy show, pays over the odds for his materials, and frequently overspends on business costs, this cost per acquisition % could leave him with little to no margin.
The devil is very much in the details.
Cost per acquisition takeaways
- CPA is important to companies of all sizes.
- It’s imperative for companies to accurately measure their CPA.
- It’s crucial to be continuously exploring ways to reduce CPA.