Last updated on 07/13/2022
This article is for you if you have active ad campaigns on social media, Adwords, or any online advertising platform and are not profitable or want to optimize your cost per acquisition to be even more profitable.
If you are an e-commerce brand your cost per acquisition is usually the cost per purchase, as it is the cost per customer acquisition.
Summary
- Define your Target CPA (calculation)
- Analyze attribution
- Reduce CPA with retargeting
- Change targeting
- Change elements in your campaigns
- Optimize your acquisition funnel and A/B test
Why does CPA increase?
Sometimes your Cost Per Acquisition (or CPA) will increase during a campaign. It can be translated to: the ad campaign is doing less conversion and therefore you have to spend more to acquire a customer.
The cost per acquisition is specific to your business, your industry, the price of your products and the type of campaign you have launched. There are no universal CPA benchmarks. Nevertheless, you should calculate your maximum CPA.
Define your Target CPA (calculation)
The total marketing budget for the campaign in a given period/new customers acquired in the same period = Cost per acquisition
Example: I spent $1000 on advertising and I got 10 conversions. Therefore, my CPA $100
Your target CPA will be different depending on the business model you have. Let’s take an example in e-commerce.
You only sell one product, so your target maximum CPA is the selling price of the product. Knowing that if you sell your product for $100 and your CPA is $100, you will not make a profit because the product costs you money. So target CPA is equal to your operating profit margin to cover your costs.
You sell several products, have complementary products, or better yet, consumables products or a monthly subscription offer. In this case, your CPA will correspond to the average LTV (lifetime value) of your customers that you will have calculated. If you don’t know how to calculate it, do not worry, it is explained here.
If you sell a single product or a product that does not have recurring purchases or subscriptions you need to define the maximum amount you are willing to pay for each conversion without making losses.
If you sell a recurring product or with a subscription business model, you can have a CPA higher than the selling price of your products. You will need to focus on customer retention.
Analyze attribution
Attribution is the identification of a set of user actions that contribute in some way to the desired outcome and then assigning a value to each of those actions.
If you only have campaigns on a single attribution channel, without SEO, 100% of the attribution should be on that attribution channel source.
However, things get more complicated when you have a multi-channel acquisition strategy.
That’s why you need to look at your attribution system and see if one channel is contributing to the conversion more than others.
The attribution models on Facebook and Google are different. Facebook gives attribution systematically to its campaigns on 7 days clicks and 1-day view (it is the default attribution by Facebook, you can change it), and Google has different attribution models. By default, Google attributes it to the last click before conversion.
You can then calculate your average CPA from all the channels of acquisition.
What changes have I made to my website recently?
Ask yourself this question before looking to optimize your CPA, maybe it has increased because you recently made a change to your homepage or product pages that resulted in a worse user experience.
Your changes should be noted somewhere every time you make them, if your conversion rate changes or your key metrics are different after that change and you’re not sure why, that’s not a good thing.
What major changes have I made in my campaign recently?
If you’ve made optimizations, cut ad sets, or a campaign with a non-conversion objective, it may directly impact your conversion campaigns and CPA.
You should be able to determine the cause then reactivate a campaign that was an acquisition lever. Even if you didn’t find it beneficial, it was.
Example:
You have a brand awareness campaign in Reach on Facebook ads that spend 30% of your ad budget. You notice that the cost per result (CPM) has tripled, without you having made any changes.
This is logical because audiences can lose momentum, ad fatigue increases so Facebook increases your CPM, or more competitors are targeting the same audience.
You decide to cut this campaign and put more budget in the conversion campaign.
One week after this change, your CPA goes from $20 to $40 in retargeting. You don’t understand what’s going on. Well, your brand awareness campaign was a great support to your sales funnel. Your top of the funnel was boosting the middle and bottom of the sales funnel, or a brand awareness ad was appealing to the target audience, so you had interested people to retarget.
Now you just need to reactivate your brand awareness campaign and launch new audiences and new ads to reduce ad fatigue.
Reduce CPA with retargeting
Retargeting for non-buyer leads who follow you on socials, visitors to your website, watch your video until the end, are on your email list and those who have abandoned the add-to-cart usually deliver better CPAs than the audience that does not know you.
Retargeting should therefore be an important part of your budget.
Customer retargeting, as part of your retention strategy, is even more important. Because a customer will have a lower cost per purchase.
Change your ad targeting
To optimize your CPA, after an analysis of your data on Google Analytics, and if you know your persona, you can try to reduce the target audience.
Targeting in the city
Target the cities where the most people have purchased. If you are targeting multiple countries in your campaigns, separate the campaigns and allocate more budget to those that convert better.
Narrow age targeting
After analyzing your data, it may appear that one age group is more likely to buy or cost less to target and provide better ROAS. You can run ad sets only on these age groups to test if your CPA is better. If this test works, you can duplicate it on the other ad sets. But make sure the ad set size is wide enough.
Change elements in your campaigns
Optimizing CPA is also about cutting out what doesn’t seem to work and focusing on what does.
Here are 3 rules used by experienced media buyers
○ Cut keywords that do not convert after spending at least your AOV
○ Cut ad sets that spent 2 times your AOV without converting
○ Cut the creatives that are far below your average CTR in the ad set and launch others
If you don’t understand CTR and AOV, go read their definition in our dedicated article here.
Optimize your acquisition funnel and A/B test
A/B test advertising
To optimize CPA you will need to optimize your entire acquisition funnel, which starts when the customer sees your product or company for the first time until their first purchase.
When the user sees an advertisement from you. If the CTR is not great, nor the quality criteria, you must change your images, videos, texts, description.
Do A/B tests or try the Dynamic Ads on Facebook.
Find the audience that converts
Audience targeting in advertising could be the subject of a long article on its own.
The mistake you should not make is to be convinced that you know your customer by heart. Fortunately for you, there is no one typical customer.
So try different audiences, different interests, use lookalikes to get smaller audiences that look like your customers.
Example: You sell baby toys and target young parents. Maybe by targeting older people who are grandparents, who are also on Facebook or Instagram, you will have a lower CPA, because these people are less targeted by your competitors.
Overlapping audiences, similar interests, or not excluding audiences can also increase your CPA.
Keywords research and optimization
Keyword research and optimization like audience targeting is extremely long to explain.
Shortly, you want to find keywords that are profitable for you and cut out those that don’t convert.
Negative keywords also allow you to narrow your targeting and exclude people who may not be interested in making a purchase from you.
A/B test your landing page
The landing page can be tested and optimized endlessly. However, don’t conduct random, undisciplined testing.
You need to A/B test to see what looks like it will work best by making minor changes (changing button color, testing different types of images) and major changes (redesigning the site, changing blocks, changing all images, adding a pop-up).
Use heatmaps and a/b testing landing pages to make your life easier.
Have one clear action-oriented objective for the user journey with your landing page, not 2 or more.
A/B test your product page
The product page is where the visitor will add to the cart. You can integrate or remove many elements, to speed up.
Example: You can A/B test by adding or removing
- A video in the product images
- Change the description
- Add customer reviews with photo
- Add your Instagram feed
- Add images in the description
- Minimize the page to speed up the loading speed
- Add secure payment icons
- Add reassurance logos
- Add a product FAQ
You test one element at a time or split the pages by sending traffic from the same source to 2 pages at a time.
These elements have an impact on your CPA because they have an impact on the conversion rate of your website.
A/B test the bidding strategy (advanced)
If you have a senior media buyer in your team or you have knowledge about digital advertising platforms, you can change your bidding.
On Adwords: CPA below your CPA max or try Smart Bidding if you have enough conversion.
On Social Ads: In a conversion campaign a cost cap below your CPA max.
If the budget is not spending enough, you can increase the bid slightly or change the bidding strategy. Keep in mind that this is for people who already have experience. Otherwise, stick to automatic bidding.
Be patient
When you start optimizing your CPA to reduce it, you need to do incremental testing and isolate your variables as much as possible.
Reducing CPA is difficult because advertising costs on platforms vary from month to month.
Alternative to be more profitable
You have other methods to improve the profitability of your business.
You can focus on the lifetime value of the customer by launching a new product and cross-sell or upsell and retarget your clients, if they were satisfied with their first purchase they will be easier to convert again. So your CPA will decrease.
As a general rule, it is viable when the LTV of your customer is at least twice as much as the Cost of Acquisition.
The secret to lowering your Cost Per Acquisition in a sustainable way is to do more of what works and cut what doesn’t.
This requires analysis and discipline, just like managing your advertising campaigns.
Many people who are not used to online advertising campaigns are struggling with emotions.
Don’t be overwhelmed, write down everything you change or get help from an agency or a freelance expert if you are too emotional.
Great article