CPA (cost per acquisition) is one of the most common pricing models in online ads. In this article, we’ll discuss everything you need to know about CPA advertising: what CPA is, how CPA works, the difference between CPA and other pricing models, and how to optimize your CPA costs.
The growth of digital advertising shows no sign of slowing down, and for many businesses, digital ads have become their preferred form of self-promotion. This should come at no surprise, given that 87 percent of consumers now begin their product searches online.
According to research firm eMarketer, 2019 will be the first year in which U.S. digital ads will overtake traditional advertising. U.S. digital advertising spend will rise by 19 percent to $129 billion, while traditional ads will fall to $110 billion.
With such a crowded digital ad landscape, businesses need to stand out by running the best and most effective ad campaigns. To do so, of course, you first need to be familiar with the terminology, and the CPA metric is a great place to start.
What is Cost Per Acquisition (CPA)?
Cost per acquisition (CPA), also called cost per action, is a pricing model for digital advertising that charges advertisers based on the number of converted prospects.
The meaning of “acquiring” or “converting” a customer depends on the specific digital ad campaign. Companies may consider customers “acquired” if they have taken one of the following actions:
- Making a purchase on the company’s website
- Signing up for the company’s mailing list or waitlist
- Downloading the company’s mobile app
- Sending their contact information to the company
In the absence of an explanation, however, CPA generally refers to the action of acquiring a paying customer.
This makes CPA a relatively low-risk digital advertising technique since you only pay the advertising platform when you have a verified conversion, lead, or sale. Businesses can set the price they want to pay for an acquisition when they launch their campaign and only pay out this price once the acquisition occurs.
How to Calculate CPA
The CPA metric has a well-defined formula that every advertiser should know by heart. Simply put, the CPA formula is the cost of the campaign divided by the number of conversions.
For example, if you spend $2,000 on a campaign to acquire 20 new paying customers, the CPA of this campaign would be $2,000/20 = $100. On average, it cost you $100 to acquire a single new customer.
Knowing this CPA formula result helps you determine the return on investment (ROI) and the profitability of your digital ad campaigns.
CPA vs. CPC vs. CPM: What’s the Difference?
When bidding for ads on platforms such as Google and Facebook, you may have seen CPA compared with other digital ad pricing models like CPC and CPM. So exactly what is the difference between CPA, CPC, and CPM?
Cost per click (CPC) is a pricing model in which the ad publisher charges the advertiser a fixed rate for each person who clicks on a digital ad. The lower your CPC rate, the more clicks you can get for the same budget.
Cost per mille (CPM), also called cost per thousand, is a pricing model in which the advertiser is charged a fixed rate for every thousand people who view the ad (i.e. every thousand impressions). In addition to digital ads, the CPM model is used for traditional advertising channels such as newspapers and TV, which calculate their advertising prices based on the estimated number of viewers or readers.
Wondering whether CPA, CPC, or CPM is better for your digital ad campaign? The answer will vary based on your industry, audience, and campaign:
- CPA rates are typically higher than CPC and CPM; however, they come with the guarantee that your campaign has actually converted someone into a lead or customer.
- CPA is likely better for niche topics and audiences than CPM, since an advertising platform may not be able to guarantee that your ads are shown to the niche you want to target.
- CPA is best for ad campaigns that
What is a Good CPA?
The question “What is a good CPA?” heavily depends on a variety of intersecting factors: the business, the campaign, the audience, and the advertising platform.
First, all else being equal, it’s always better to have a lower CPA than a higher CPA. A CPA of $5, for example, allows you to get 200 customer acquisitions on an advertising budget of $1,000—twice as many as a CPA of $10, which would give you 100 acquisitions. However, it may be worth having a higher CPA if it results in customers who generate a higher lifetime value (LTV).
Next, you need to be sure that your digital ad campaign actually allows you to make a profit (or at least break even). A “good” CPA is one that maximizes your profit while reaching as many people as possible.
For example, suppose that you pay a CPA cost of $30 for a campaign advertising a product that costs $100. However, costs such as labor, materials, and manufacturing overhead total of $80. In total, you’ve spent $110 to make a $100 sale. Selling products at a loss is generally not a good idea, although it might be acceptable if your primary goal is to break into new markets and build long-term profitable customer relationships.
According to the search marketing company WordStream, the average CPA for Facebook ads is $18.68. However, these figures have a large range, running the gamut from $7.85 for education to $55.21 for technology. The full list is below:
- Education: $7.85
- Apparel: $10.98
- Healthcare: $12.31
- Fitness: $13.29
- Real estate: $16.92
- Retail: $21.47
- Travel & hospitality: $22.50
- Employment & job training: $23.24
- B2B: $23.77
- Beauty: $25.49
- Legal: $28.70
- Consumer services: $31.11
- Industrial services: $38.21
- Finance and insurance: $41.43
- Auto: $43.84
- Home improvement: $44.66
- Technology: $55.21
WordStream also finds that the average CPA for Google AdWords is $59.18 for search ads and $60.76 for display (banner) ads. The full list is below:
- Advocacy: $37.31 (search), $86.49 (display)
- Auto: $63.00 (search), $49.37 (display)
- B2B: $63.57 (search), $38.54 (display)
- Consumer services: $75.40 (search), $71.88 (display)
- Dating & personals: $6.91 (search), $43.90 (display)
- E-commerce: $46.07 (search), $30.21 (display)
- Education: $42.13 (search), $80.00 (display)
- Employment services: $105.79 (search), $129.69 (display)
- Finance and insurance: $51.74 (search), $41.14 (display)
- Health & medical: $126.29 (search), $48.05 (display)
- Home goods: $86.68 (search), $31.96 (display)
- Industrial services: $77.52 (search), $68.18 (display)
- Legal: $135.17 (search), $61.22 (display)
- Real estate: $41.14 (search), $59.06 (display)
- Technology: $69.80 (search), $19.23 (display)
- Travel & hospitality: $60.31 (search), $45.28 (display)
The Facebook and Google CPAs given by WordStream above likely correspond to lead acquisitions, rather than acquisitions that directly generate revenue (which would be more expensive). Once again, the definition of “acquisition” will depend on the company and the campaign. A CPA campaign that uses the action of making a purchase, for example, will be more expensive than a campaign that uses the action of signing up for a mailing list.
3 Tips for Optimizing Your CPA Costs
While the figures above offer some guidance on CPA, it’s always better to lower your CPA costs so you can make the most of your marketing budget. In this section, we’ll offer some guidance on how to optimize your CPA costs.
1. Switch to a different ad platform
Google and Facebook are the kings of online advertising, so they enjoy the privilege of charging higher CPA rates. Alternative ad platforms such as Instagram, Twitter, Bing, Pinterest, and Reddit are typically less expensive, but can be just as effective for CPA campaigns depending on the business, product, and audience.
2. Improve your Quality Score
If you’re advertising on Google, your Quality Score should be as high as possible. The Quality Score is Google’s assessment of the quality of your ads, keywords, and landing pages. The higher your Quality Score, the lower CPA you’ll pay.
You can improve your Quality Score with actions such as:
- Targeting the right audience and demographics.
- Researching the best and most relevant keywords.
- Creating high-quality, compelling graphics and copy for your ads.
- Building a clear, effective landing page that encourages users to convert.
3. Define your boundaries
You might assume that the more people who see your ad, the better—but in fact, the opposite can be true. Advertising to audiences who aren’t interested in your ads or products can actually make for a poorer-quality campaign and higher CPA rates.
- Make full use of negative keywords. These keywords prevent your ads from being shown to users who search for a certain word or phrase, which helps streamline your campaign and pinpoint the right audience.
- Consider temporarily putting a stop to campaigns that target a certain demographic or geographical area with little or nothing to show for it.
- Look at your analytics to see which hours or days of the week are getting you the most conversions at the lowest cost. Stop running ads at times that have the lowest return on investment.
Knowledge of CPA is an invaluable skill in the field of digital advertising. By understanding how CPA works and optimizing your CPA rates, you can build more effective campaigns and get more conversions for less cost.
Still, CPA is just one data point of a very big picture that involves identifying, targeting, and retaining the right customers. Here at ironFocus, we help clients big and small get the most out of their information, extracting priceless data-driven insights. To learn more about how we can help, get in touch with our team of data experts today.