Google Adwords CPA-Cost Per Aquisition – What It Is & How To Calculate CPA
Also known as cost per action, CPA or cost per acquisition advertising is focused around measuring an advertiser’s CPA against the cost (and profit margin ideally) from beginning to end of a given period.
In the early days of Google Adwords, both agencies and advertisers alike were often blinded by the excitement of being in a top position on Google and having lots of clicks. However the reality is that CPA is the holy grail of advertising metrics, and we believe that without this target and analysis, Google Adwords and any other advertising platform can be quite dangerous.
Setting Up CPA
On Google Adwords it’s possible to set up campaigns with CPA targets, however this is only feasible when you, the advertiser, has the whole sales process structure right up until the end. In other words where we can see the amount invested in advertising, the financial results in terms of sales and the number of sales. This is more common in online retail, and may not always be possible with some service offerings.
Even when it is not possible directly on Google Adwords, your agency should be able to work in partnership with you to track this, on a weekly or monthly basis.
Google Adwords CPA-Cost Per Aquisition Retail Example
Retail CPA Cost Per Acquisition
Retail CPA Example
Let’s say an advertiser is selling a product which retails at £100, and the advertiser invests over a period of the month £2000 into Google Adwords, and at the end of the month the advertiser has had a total of 50 sales, then his cost per acquisition would be £40 per sale.
Depending on what the profit margin is of the retail product, this may or may not be profitable. If the retailer has a profit margin of let’s say 70%, then based on each product retailing at £100, he has made a profit margin of £30, after his cost per acquisition of £40 has been taken into account. So his profit is £70, and from this we need to take his advertising cost (agreed CPA) of £40, leaving him with a clear profit of £30 per acquisition. As he made 50 sales, his profit from Adwords alone was £1500.
Service Industry Cost Per Acquisition Example
CPA - The Holy Grail Of Advertising
Cost Per Acquisition Service Offering Example
Another advertiser offers a service which is worth £300 when purchased. This advertiser has a budget of £900 available to her to invest each month on Google Adwords, and the service that she offers takes on average two hours of her time as a consultant. Her hourly consultancy rate is £50. Before investing in Google Adwords, she has defined her desirable CPA to be £60.
She reached this calculation by taking into account her clear profit, whilst being realistic about advertising investment costs, and her own costs of two hours per service purchased. This means that if she reaches her desired CPA, her clear profit having paid for her advertising and time investment is £140 per service sold. Therefore her monthly target is to sell 15 service offerings for her £900 Google Adwords budget.
CPA For Capturing Leads
Lead Generation Cost Per Acquisition
(CPA for leads – also known as the CPL – cost per lead)
The same principle applies if an advertiser’s aim is to get leads, which may be converted into a % of retail sales further down the line, or a % of service offering customers, or repeat sales and customers. Depending on the advertiser’s business model, the value of each lead will be different. However once a desirable CPA or CPL has been established, then all elements of the advertising campaigns can be focused on achieving or surpassing this.
How To Calculate CPA
CPA Calculation Example
How to calculate your desired CPA
Regardless of whether it is a service or a product that you’re offering, this way of assessing the profitability of your advertising and business in general, needs to be entirely realistic.
Assuming you’ve been in business for a year or two at least, the most specific way to calculate your desired CPA is to assess all your costs, including office related costs and staff related costs, if applicable, against your sales. This will establish the actual profit margin of the given time period, and this way you can forecast an ideal, yet realistic budget per acquisition of customers or sales driven by Google ad words advertising.
A simple example:
To keep the figures simple, let’s assume you have a small operation that for the moment gives you costs of £4000 per month, including your own salary.
You sell a retail product for £1000 that you buy at a wholesale price of £500. This means that purely to break even and pay your costs you need to sell eight of these products.
8 x 500 (profit only) = £4000
In terms of keeping this example simple, let’s assume that these eight sales come from the reputation you’ve already built possibly combined with the unpaid part of Google – the organic or natural listings.
If you can double these sales by advertising, this would then mean that without calculating into the equation your advertising costs there is another £4000. If by doubling your sales you don’t need to take on any extra staff, and therefore your costs are still the same, then what that means is your target is to have a budget and a cost per acquisition that per month can bring you these 16 extra sales (8 to pay original existing costs and 8 for profit and advertisining costs).
So let’s look at it this way – to only break even on these new 16 sales via Adwords we need to divide £4000 by 16 = £250 CPA with no profit or loss
Then the next step is to look a the cost per click and other patterns, such as competitors with your agency, and target a realistic, CPA.
Depending on the industry, this may fall around £100 to £150 – of it could be different, but let’s play with the upper level of these figures.
So with a CPA of £150, you would then aim to invest no more than £2400 per month on Google Adwords, leaving a clear profit of £1600 on those extra sales.