How Do You Establish Your Target CPA?

By December 16, 2019September 25th, 2020No Comments

Arguably, the cost per acquisition goal (Target CPA), is the most important metric for you to go after for your digital marketing efforts. Too often, I have clients who get wrapped up in the importance of average cost per click, or the cost per lead, etc.  While these metrics are important to me (the guy running your account) to help optimize the campaigns and improve results, they aren’t the metric that you, the business owner, need to even worry about.

Definition: To break things down, your cost per acquisition is how much it costs you to acquire a new customer or sell a product.  Your Target CPA should therefore be your goal where you are able to sustain your current advertising efforts. 

EXAMPLE:  I sell a dog bone for $10 on my e-commerce site. If it costs me $10 in advertising to sell 1 dog bone then my current CPA (cost per acquisition) is $10. However, my ROAS (return on ad spend) is 1.0. I spent $10 to sell a $10 dog bone. HOWEVER, your real ROAS is actually worse than this, because you don’t make 100% profit margin on that dog bone. You have to factor in the costs to produce the product as well. So let’s say you have a 50% margin on your dog bones (you make $5 for every $10 bone sold). Now our true ROAS is the Revenue / Cost which = 0.5 instead of 1 like we initially thought.

So, to “break even” I need to actually sell one $10 dog bone for $5 in Ad spend. In my reporting, this means I need to shoot for a ROAS of 2 (in this example, we are factoring in all costs, including ad spend, marketing management, and costs to produce the product). For most of my clients, “breaking even” is the initial goal and typically falls within a 2-4x ROAS.

Why would I be okay with not making any profit on my Digital Advertising? Answer = average lifetime value.

What is an Average Lifetime Value?

For MOST businesses, your average lifetime value equals MORE than the initial purchase someone makes with your company. That person, as long as they bought a great product or had a good customer experience, will come back and buy again or multiple times. Then you have to factor in non-trackable value…like how many people will that person tell about your company who will then come purchase from you “organically” even though that revenue should be tied back to your Digital Advertising.

As Average Lifetime Value can’t be tracked perfectly, do your best to figure out what this number looks like. This allows you to say, “Okay, I’m breaking even on gathering a new customer via Google Ads or Facebook Ads…however, that person is worth 3-4x that! If you have an ecommerce site, there are great apps that help track these metrics for you.

Figuring out these numbers allows for more wiggle room for your advertising strategy. It allows you to justify increased budgets, expansion into branding platforms like Display ads, etc in order to continue to grow your business at a faster rate.

Back to your Target CPA Goal:

Once you’ve established your break even point + your estimated average lifetime value, you can then set a goal for your marketers to try and attain. This number is becoming more and more important from a bidding standpoint. Both Google and Facebook Ads, for example, are pushing their platforms to use “Target CPA” as their primary bidding strategies for success. This allows you to input the number you’d like your CPA to be, and the engines will adjust bids up and down based on buyer intent in order to try and get you as much volume at that Target CPA as possible.

Need help with any of this? That is what we are here for. We help companies identify what their Target CPA should be, and then we work to hit those goals and surpass them. Getting better CPAs + increased sales volume happens across your entire marketing strategy. Both with us pulling levers in Google and Facebook Ads or other platforms, as well as split testing your site experience, email followup, etc. The higher your average lifetime value, the more room you have to drive volume within an acceptable CPA (cost per acquisition) range.

John Thuet

John Thuet

John is passionate about helping businesses grow through digital advertising. With over 7 years of agency experience, John has helped hundreds of clients succeed, managing millions in ad spend. Outside of work, you’ll find him with his wife & 3 children or kiteboarding if the wind is favorable.

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