Marketing today is all about return on investment. Marketers want to make sure they are getting the most bang for their buck, which means they are constantly looking for new or better metrics to help gauge their success. One metric that has grown in popularity is cost per acquisition (CPA), which helps marketers understand how much they are spending on media per conversion.
CPA is a great tool, but it has drawbacks. Namely, that it treats all customers as if they carry the same value. Marketers who are courting the affluent know that this isn’t true and that certain audiences have different levels of financial capacity. That’s why CPA shouldn’t be used as a success metric on its own.
To get the most value out of measuring CPA, marketers may want to examine average customer lifetime value (CLV) at the same time. This combined metric – CLV-CPA, if you will — allows marketers to adjust their audience targeting strategy, spending less on the consumers with lower CLV and devoting more resources to acquiring affluent customers with estimated greater overall lifetime value.
Many marketers already have access to CLV or equity scores that associate a potential dollar amount with each kind of consumer. This number isn’t necessarily tied only to estimated financial capacity, either. CLV may be determined differently across every industry and advertising vertical; when combined with CPA, it makes it much easier to determine which audience segments to invest in.
Consider a hypothetical high-end outdoor equipment retailer that offers a variety of products, including lower-cost entry-level items, as well as more expensive products and services targeted at more affluent customers. If this advertiser invests heavily in a broad-ranging acquisition campaign, they may find themselves getting lots of customers who visit the retail locations only once to purchase lower-tier products. This may result in a high number of acquisitions, and an overall low CPA, but the campaign can’t be deemed a true success unless the advertiser continues to examine those customers over time. After all, how much will it benefit the advertiser to have a low CPA if the lifetime value of a customer is less than $25?
It may be relatively easy to get lots of customers for a low CPA, but if they also have a low CLV, there may be less chance for the business to grow. While campaign results may have immediate, measurable return on investment, the brand may have to continue to spend at the same levels for a longer period of time to maintain revenue.
Rather than look for volume, advertisers should consider focusing on the quality of the conversion itself. In this instance, the brand could take a closer look at the kinds of customers making purchases, and segment that into audience pools based on estimated CLV. The advertiser can then adjust its marketing strategy, perhaps focusing more attention on the top 10% and investing less in proactive outreach to the lower 10%.
It’s important to remember that a low CPA may look good on a report, but it may not be the most effective measure of a marketing effort. It may realistically take more money to reach a more affluent customer with a higher lifetime value, resulting in a higher CPA. Marketers should consider implementing a measurement system based on CLV-CPA and the possible long term return to determine which audience segments will deliver the most revenue over time. Even if the immediate CPA may be higher, if this is still a fraction of the amount the customer will spend on a product or service over their lifetime, then that is a net positive for the brand.
Not every customer looks the same, and most marketers already understand that. They execute their plans by picking audiences, but focusing only on a lower CPA is the wrong approach. By devoting the time and resources toward reaching the customers who carry the greatest estimated lifetime value, and factoring that into their cost per acquisition strategy, marketers stand to grow their business over the long term.