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September 22, 2020
1 min read
What is Cost per Action and How Is It Calculated?
Cost per action refers to the amount a company spends on a conversion on average.
This means the cost of getting a consumer to both click your advertisement and perform a desired action. This action might be completing an email list signup, opening a customer account, or making a purchase.
Cost per action might refer to the amount an advertiser has agreed to pay a publisher, or an amount calculated after the action has taken place to see how much the advertiser spent for each action.
In this entry, we’re focusing on how you as a company should think about and calculate your CPA.
Keep in mind that CPA is commonly used interchangeably with “Cost per Acquisition” or “Pay per Acquisition” (PPA, meaning “Pay per Action” sometimes too). This is because the Action that typically involves a sale, registration, or sign up, that is an Acquisition.
Each company will calculate its own cost per action slightly differently, and the formulas for calculating them can become very complex and detailed.
However, in most cases, cost per action can simply be calculated by taking the total marketing spend for a given period of time and dividing it by the number of customers who carried out the desired action.
For example, if your company spends $1,000 on advertising in January and gains 50 new customers, your CPA for that period would be $20.
You can calculate this for your total advertising spend, but you can also break it down by channel, to see which performs best.
It’ll probably come as no surprise to hear that the average cost per action varies a lot.
Among many other, factors which might influence your CPA include:
To highlight how disparities crop up in cost per action between industries consider how companies in the hobbies and leisure industries will have an average CPA of around $35.43 on Google Ads, while companies in the business and industrial sector can expect to spend £152.03 on average.
To know what you should be expecting to spend on a CPA, do your research focusing on your specific industry, markets, and customers.
Cost Per Mille (CPM) is another advertising pricing model similar to Cost Per Action. However, instead of requiring consumers to carry out an action for the advertising to pay, instead the advertiser pays a fixed sum for every 1,000 impressions of an ad.
An impression is an instance of the ad being displayed to a potential customer, meaning that basically CPM is paying for every 1,000 customers who see an advert.
CPM is not affected by how many clicks an ad receives, or how many users convert.
Pricing of CPA and CPM are related in as far as if advertising prices are high or low, both CPA and CPM will be high or low respectively, no matter the advertising model.
However, depending on the business model, the market and other factors, some models can be much more useful in specific situations than others.
For example, CPM could be a good option if your primary goal is exposure and not particularly to make a transaction.
Alternatively, you may have found a very well performing ad that people click on a lot. The price of so many clicks on a CPC or CPA model could be more expensive than paying for ‘just displaying’ the ad thousands of times with a CPM model.
Cost Per Click (CPC) is another pricing model related to CPA.
Effectively, with a CPC model, the advertiser pays for each click made on their ads, regardless of whether that ad was seen one or 10,000 times.
CPC may be preferable over CPM when you think that a smaller percentage of people who see your ad will click on it. This way, you’re not paying for exposures that aren’t creating any value.
You may choose to use CPC over CPA when you think that your click to action conversion rate is going to be relatively high. Since costs per click tend to be lower than costs per action, you can maximize your conversions while only paying for clicks.
While CPA is a measure of cost rather than success in terms of marketing effectiveness, in combination with other metrics, it can be used to gauge which marketing activities are the most valuable.
For instance, if you know what your average customer is worth (both in terms of their average order and lifetime values), you can calculate a reasonable amount to pay to acquire a new customer.
The difference between the CPA and the lifetime value of a customer represents your profit margin. The lower your average CPA relative to your customer value, the more successful your campaign has been.
The best marketers are constantly in the process of optimizing their campaigns to lower their CPA. While each company is unique, and will have its own approach to optimizing their CPA, there are a few general practices that you can undertake:
For instance, you should set a goal for bounce rate, time spent on-page, and how many other pages users visit on your website. Optimizing these metrics will take you step by step towards your larger goal.
At the very least you need to know your current CPA, average order value, and average customer lifetime value. However, you really want to build as full of a picture of possible of your marketing performance.
Not only is it important that you properly communicate the value of your product or service in the ads you make, but you should also be sure you’re serving them to the right target audience.
Testing ad performance and honing in on the best graphics, messaging, channels, and audience will all help drive down your CPA.
Make sure users are shown effective messaging on your landing pages, your site is easy to navigate for them to find more information, and that there are as few steps as possible between them landing on your site and making a purchase.
Remember, CPA is a cost, not a success metric in its own right. However, thinking of a lower CPA as a metric of success will certainly help guide your marketing efforts.