Cost Per Acquisition - Explained
What is Cost Per Acquisition?
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Table of ContentsWhat is Cost per Acquisition?How does Cost Per Acquisition Work? Marketing ChannelsFactors Affecting Cost Per AcquisitionMethods of Tracking Cost Per AcquisitionAcademic Research on Cost per Acquisition (CPA)
What is Cost per Acquisition?
Cost Per Acquisition concerns the cost of acquiring a new business client or user. It is a marketing measure for the effectiveness of a customer acquisition effort (marketing campaign).
Back to: MARKETING, SALES, ADVERTISING, & PR
How does Cost Per Acquisition Work?
At its basic level, cost per acquisition refers to an advertising marketing model that serves as a metric in measuring the cost of attaining a consumer who can take action that leads to a conversion (sale or purchase). This transition can be one of the many things that will contribute to a sale, a click, as well as a form of submission. The CPA can determine coupled average order value as well as customer lifetime value, the success of most online businesses. Conversion rates also mainly indicate marketing success.This metric is detailed in a way that a company can use it to measure the steps it takes to bring a new customer and make them loyal.
CPA can be used in the following marketing channels:
- Pay Per Click- This is an advertising channel that marketers use to drive traffic to their website, with the intention to ultimately convert them into clients. Pay Per Click advertising with various social media platforms such as Facebook as well as LinkedIn enables a brand, in this case, a company, to reach their prospective target audience based on particular interests as well as more interactive ways of purchasing visits to a business site.
- Affiliate Marketing New customer acquisition is an essential marketing strategy for many brand ambassadors. The affiliate channel has presented this in proof by leveraging its ability to drive new clients at an affordable cost. With more retailers taking over the online marketing initiative, affiliate networks are now in a position to highlight the original volumes of clients as they can now deliver through their affiliate partners. This increased reach provided by affiliates paves up a new way for merchants to access a broader customer base.
- Display- Digital display advertising enables a brand owner to track and analyze progress in ways that may not apply to traditional advertising media. These displays can also be priced in various unique ways. As such, advertisers are in a position to track when their ads are being clicked and the actions that have been completed when the ads have been clicked.
- Social Media Marketing- Social media marketing feeds into the discovery of a new idea posted on the channel such as stories or development in search activity. Social media can also assist brands owners to build links that may end up supporting Search Engine Optimization efforts. Many users have performed searches on social media sites to identify media content. Social connections can also have an impact on the relevance of various search results.
- Content Marketing- Over the past few decades, companies have invested mainly in marketing analytics engines directly from predictive analytics to performance management as well as visualization tools. Such tools have enabled users to surface from substantial quantities of data. Content marketing is focused on creating, publishing, as well as leveraging content for a targeted audience on various online marketing platforms. The primary objective of content marketing is to: Attract the attention of clients while generating sales; Increase brand awareness as well as credibility; and Expand a companys client base
It's essential for businesses to invest in effective CPA advertising since it has a direct impact on the number of new customers acquired. When an advertising campaign is efficient, it implies that the cost per acquisition is at a low rate. That also means that more visitors are converting into consumers than usual. This means that the paid inclusion advertising is an excellent choice because it entails paying less for paid acquisition. Since the cost per acquisition is focused on measuring the number of conversions from a visitor to a customer, even if it's efficient, this advertising model is still subject to search engine optimization.
Factors Affecting Cost Per Acquisition
With that stated, most companies have concluded that there is no standard platform for measuring a good CPA. However, some factors can impact the efficacy of a CPA model and its impact on brand marketing.
- Business stage- It's important to understand the step of business an individual is at. For instance, an emerging business is still on the verge of growing. Therefore, it requires a lot of support from the owner and staff. This implies that revenue can't be spent in developing other marketing models. But, a growing business can sacrifice profits to invest in additional marketing methods and models.
- Budget Besides the direct advertising spends, a company pays for outbound emails, salespeople as well as any other additional advertising requirement that may go into obtaining a new client. All these factors that add to the process determine the budget of implementing the CPA model of marketing.
- Advertising Medium-There are different ad channels for CPA, and they come with different costs. They will add up to a company's total cost per acquisition. Your choice of advertising medium highly relies on the platform of advertising including what one aspires to achieve in the long run.
- How "Acquisition" is defined- All too often, companies use customer per acquisition as their marketing and advertising metrics intended to help them garner more clients. In other cases, this may change as the same method of marketing and advertising may be used in secondary advertising.
Every business has for decades, struggled with deciding which channels to focus marketing spend on as well as how much return the initial capital spent returns. This is not a simple question because a lot is at stake. Marketing channels have vastly evolved since the television and radio days. For CPA users, tracking the efficiency and contribution to the marketing model is the primary objective of making the right choice.
Methods of Tracking Cost Per Acquisition
Regardless of advanced technology as well as ad platforms, the question of how to spend money is still the main agenda even for advanced marketing operations. Thats why its vital to track the CPA model through the following methods:
- Utilize UTM parameters to generate link codes for social or affiliate marketing- Marketers strive to become data-driven individuals. They base their conclusions on various statistics while using traffic analysis software to analyze their website. This must be Google Analytics, which is a free version that provides its users with sufficient information so that they get a clear picture of where the traffic comes from and where it goes to.
- Exporting PPC campaign data from AdWords- Exporting pay per click campaign information and data from AdWords may seem complicated in the beginning. But this is one of the best ways to track the performance of the CPA model and its efficacy in attracting more clients to the site.
Academic Research on Cost per Acquisition (CPA)
- Dynamic cost-per-action mechanisms and applications to online advertising, Nazerzadeh, H., Saberi, A., & Vohra, R. V. (2007). (No. 1450). Discussion paper//Center for Mathematical Studies in Economics and Management Science. This paper highlights the impending benefits of cost per action in business particularly when it comes to allocating one type of resource progressively to a given number of sales agents over a given period. It was discussed that before an agent takes up a docket, they may not be aware of the issues underlying, which may often be caused by a keyword auction. The challenges of resource allocation are often ubiquitous in different sectors such as economics and operations research with the core question being how to evenly distribute them in the same measure of general utility, as well as social welfare. For instance, the value of a vehicle to an agent in charge of delivery is often determined by the additional revenue they can obtain through the vehicle.
- The Atlas Rank ReportPart II: How Search Engine Rank Impacts Conversion, Brooks, N. (2004). Seattle: Atlas Institute. The paper discusses the tremendous growth and popularity of search engine marketing and its use in creating traffic on a website. Usually, the SEO community is helpful as it is always willing to lend a helping hand to learners interested in understanding the ropes. While it may not seem essential at first since if one can't rank at the top, they're bound to see more conversions, searchers of various keywords on ranks aren't as engaged in finding their preferred item as much as keyword clickers. Therefore, if the cost to move up the search engine outweighs the prospect revenue brought in, maybe it's best to hang out at a different spot and devote the efforts of the brand elsewhere.
- Do display ads influence search? Attribution and dynamics in online advertising, Kireyev, P., Pauwels, K., & Gupta, S. (2016). International Journal of Research in Marketing, 33(3), 475-490. This paper addresses the need for online marketing in the ever-growing tech sector. Research shows that companies are progressively relying on content marketing to garner clients. To be successful in its quest, management is using various elements such as marketing metrics including click-through rate as well as cost per acquisition to obtain new clients and retain the old ones. The article dives deep into a look at some of the metrics companies utilize to attract more clients and investigate the relationship between paid search as well as display ads by applying information garnered from online ads to present the dynamics that can improve their effectiveness. It's more about putting out great content through digital marketing, and if it's not regarding the frequency, then it's about the quality of the content.
- Real-time bidding for online advertising: measurement and analysis, Yuan, S., Wang, J., & Zhao, X. (2013, August). In Proceedings of the Seventh International Workshop on Data Mining for Online Advertising (p. 3). ACM. This article analyzes the impact of real-time bidding on online advertising where inventory is often purchased and sold on the impression basis through an instantaneous programmatic auction that's similar to financial markets. When it comes to real-time bidding, advertising buyers will bid on a particular impression whereby if it's won, the ads are displayed on the site of the publisher. Real-time bidding allows advertisers to manage and optimize their ads from numerous ad-networks through granting the user access to many networks that will enable them to establish and launch ad campaigns. Real-time bidding is a suitable technique that's proven to be more effective than any other statistic auctions.
- Bid optimizing and inventory scoring in targeted online advertising, Perlich, C., Dalessandro, B., Hook, R., Stitelman, O., Raeder, T., & Provost, F. (2012, August). In Proceedings of the 18th ACM SIGKDD international conference on Knowledge discovery and data mining (pp. 804-812). ACM. In this article, researchers establish that real-time bidding technology has completely revolutionized the way digital inventory is procured by introducing per-impression basis online auctions. Currently, advertisers, as well as publishers, can bargain and trade media buying process. Real-time bidding auctions are not only fast but efficient as well as cost-effective for programmatic deals. With that said every digital advertiser dreams of delivering ads that will resonate with the target audience. Such ads not only need to raise brand awareness but build customer loyalty too. A high intuitive program will facilitate this.
- Marketing's new key metric: engagement, Haven, B. (2007). Marketing. This paper disintegrates the confluence of marketing funnel as a significant marketing tool in today's world of digital marketing. The research analysis indicates that there remain substantial similarities between the marketing as well as sales funnel and the general functions of each unit. Corporations are therefore spending thousands of dollars on marketing tools to assist integrate sales as well as marketing functions while at the same time improving a company's ability to communicate with various prospects. Most of these tools span the proposal as well as the pitch stage of the purchasing process. The research established a graphic that depicted the available connection between the two while at the same time showcasing the tools that may be used at every marketing stage of the sales funnel.
- US interactive marketing forecast, 2011 to 2016, VanBoskirk, S., Overby, C. S., & Takvorian, S. (2011). BCAMA, Marketing Association of BC. This paper disintegrates the future of the US interactive marketing industry and the impact of this type of marketing on the growth and development of various brands. It was discovered that over the last three decades, marketing has had to always keep up as well as content with different leaps of new technology in the industry concerning the existence of human beings. Although the sales era witnessed the creation of the telephone quickly followed by the rise of the television and e-marketing, the sector evolution of marketing saw an arguably more significant change in marketing history. It's essential for a company to understand how, when, and who the visitors are in order to create a digital marketing strategy to move the business forward.
- Customer acquisition via display advertising using multi-armed bandit experiments, Schwartz, E. M., Bradlow, E. T., & Fader, P. S. (2017). Marketing Science, 36(4), 500-522. This article gives the statistical engine behind the operation of Analytics Content Experiments. Analytics uses a multi-armed bandit approach to manage various online experiments. Therefore, a multi-armed bandit refers to a type of analysis whose objective is to find the best or the most profitable action and the randomization distribution can be updated as the experiment progress. The term multi-armed describes a major hypothetical experiment where one faces several slot machines with potentially different expected payouts. In this case, a company should select a slot machine with the best payout rate. The paper starts with some background analysis based on the application of multi-armed bandits in their analytics. Then it goes ahead to present examples that have simulated experiment through a multi-armed bandit algorithm.
- The importance of database marketing in social network advertising, Gregurec, I., VRANEEVI, T., & Damir, D. (2011). International Journal of Management Cases, 13(4), 165-172. This article seeks to acknowledge the use of database marketing in social network advertising. It was discussed that the advancement of technology has allowed brands in this era to grow while imposing improved marketing strategies on them. Individual companies have therefore adapted to emerging technological trends. This profoundly presents many opportunities for such brands. The findings of the analysis stated that about 57 percent of brands in the US do not use a centralized database to track as well as analyze their marketing campaigns. The statistics present peculiar advantages to particular brands that may be willing to use data to improve their market reach. The use of data in social media marketing is, therefore, one of the most reliable marketing methods in the current era.
- Applied e-commerce metrics for small-to medium-sized enterprises, Griffin, M. P., White, D. S., & Shea, T. P. (2008). International Journal of Business Information Systems, 3(4), 374-390. This article discusses the benefits of e-commerce to a business. The most successful e-commerce business tends to make decisions based on their metrics. They understand the state of their store's performance in all instances and comprehend which levers to push in order to grow their visibility in the market. There are thousands of metrics that an individual can track. However, only a few of these hundreds can directly represent the state of a business and can be turned into actionable insights that will help a brand to grow. The first aspect of using a fundamental metric is its statistical significance where this is the likelihood difference in the conversion rates between one given variations as well as the baseline. This is a way to measure the value of a brand to its consumers.
- Comparing predicted prices in auctions for online advertising, Bax, E., Kuratti, A., Mcafee, P., & Romero, J. (2012). International Journal of Industrial Organization, 30(1), 80-88. This paper looks into the slight comparison of prices in auctions when it comes to online advertising. It was noted that online sales have become popular in recent years. Therefore, there's a growing body of empirical research based on the topic. Most of the study treats data from online auctions as cross-sectional thereby ignoring the revolutionary dynamics that take place during a sale. In this article, the researcher makes a specialized look at online auctions and proposes to study auctions' price evolution as well as associated price dynamics. Dynamic forecasting was developed to predict the price of the ongoing sale.