They say money makes the world go around, and in business that is undoubtedly true. In this hack, we’ll discuss how to benchmark your cost per acquisition target, so you know exactly how much you’re spending on each customer.
What is it?
They say money makes the world go around, and in business that is undoubtedly true. In this hack, we'll discuss how to benchmark your Cost Per Acquisition (CPA) target, so you know exactly how much you're spending on each customer.
If you're a smart cookie or an eager learner and have spent time raising Venture Capital (VC) financing or studying SaaS marketing, you'll be very aware of the term Cost Per Acquisition, or CPA if you're hip. If you haven't heard of CPA, fear not, as we're about to explain all. Your CPA is the amount of money you spend to gain a new customer. With this hack, we're going to teach you how to calculate your CPA, to ensure you don't have to spend £40 acquiring a customer who is only worth a measly £8.
CPA can be used to measure the effectiveness of different marketing channels, compare campaigns and determine other marketing opportunities, so it is a great thing to know. By successfully tracking your CPA, you can sleep easy at night, knowing that you're focusing on marketing channels that provide you with new and profitable customers. You can also look at the CPA as a very, very major chain between your marketing department and the company's bottom line.
Time to Hack it:
- Estimate the Lifetime Value (LTV) of your typical customer. If you have a repeated revenue, you can use this to estimate the number of cycles a customer will stay with you. Or, you can guess how many times a customer will repeatedly buy from you.
- Once you have a figure of how much a customer will make for you, use your margin calculation to estimate the lifetime profit of the customer. We'll give you an example: If the LTV is £100 and you have 50% margins, your LTV profit is £50.
- Now it's time to set your CPA ceiling, which is 1/3 of your LTV profit. If you refer back to our previous example, if you're LTV profit is £50 this makes your CPA ceiling £16.66.
- Your CPA ceiling now tells you how much you have to spend to acquire a new customer and still be in profit.
Up your game:
There are lots of impressive business people out there that set their CPA ceiling at one-third of the LTV revenue. Ignore these people; they are wrong. They are spending way too much. Instead, we suggest you set your CPA ceiling off of LTV profit.