Cost Per Acquisition for Commerce Brands
What Is Cost Per Acquisition?
Cost per acquisition (CPA) is an essential commerce KPI that shows you the average cost to gain one new customer. Cost per acquisition is different from cost per order, another marketing metric that shows the average marketing spend to acquire any customer (both new and returning customers).
CPA is an extremely important metric to track in order to understand how your marketing budget is performing, where your profitability is likely going to be, and how quickly you can scale up your brand.
What Is an Acquisition?
Getting an acquisition usually refers to gaining a net new paying customer.
What Should My Cost Per Acquisition Be?
Your cost per acquisition will be dependent on a number of variables, such as what you sell and how many customers you have, and it will likely be cyclical. If you sell expensive products, such as high-end kitchenware or furniture, you may have a cost per acquisition well over a hundred dollars, but if you sell inexpensive products, such as food or beverages, it may be a fraction of that.
Something to keep in mind is that, depending on your average order value (and other metrics, such as repurchase rate), you may have some freedom to spend more to acquire customers if you know that you'll be able to generate strong profits over time.
How to Calculate Cost Per Acquisition
To calculate cost per acquisition, divide your variable marketing cost (over a certain time period) by the number of new customers who have placed an order at your store (in the same time period): variable marketing cost means the money spent on a particular ad platform.
Here's a visual of the formula:
For example, if in September 2021, your variable marketing cost on Google is $22,000, and you acquire 1800 new customers, your cost per acquisition would be $12.22 in that month for Google.
CPA vs CAC
Although CPA and CAC are often used interchangeably, they are technically different marketing metrics:
Cost per acquisition refers to the variable marketing cost to acquire a new customer.
Customer acquisition cost (CAC) refers to the variable marketing cost and other costs such as:
-recurring costs of marketing/commerce tools used
-ad vendor cost
-costs to create ad creatives
-agency costs (if applicable)
Customer acquisition cost is a component of the metric LTV:CAC ratio, which is the direct relationship between customer lifetime value and the total cost around how much it costs you to acquire a customer.
Many commerce brands use these numbers interchangeably to represent the marketing costs associated with acquiring a new customer.
Why Cost Per Acquisition Is Important
CPA allows an commerce brand to get granular in their analysis of how expensive it is to actually acquire a new customer: from your marketing budget, how much can you afford to continue to drive growth from your brand?
As you continue to grow your business, and as customers get more expensive to acquire, you should expect your CPAs to rise. However, if your CPAs are dropping, and you can afford to spend more money, that's a great opportunity to go in and grow your brand faster.
Additionally, it's important to understand that CPA serves as a marketing channel efficiency metric. Higher CPAs can indicate that your performance in a marketing channel is becoming less effective, while lower CPAs can indicate that your performance is becoming more effective.
Track CPA Over Time
Make sure that you check your cost per acquisition at the same time every week (at Daasity, we have found that the most successful commerce brands work hard to maintain a schedule to check and analyze their metrics). There are many factors that will affect your brand's cost per acquisition that are vital to understand.
By maintaining a consistent cadence on metric tracking, you'll start to notice patterns around when metrics may change and the factors that may cause those changes. Your cost per acquisition may predictably change by month or season. If it is lower in the summer, for example, that's a great time to spend more money to acquire new customers, work to retain them, and set them up for your best BFCM or holiday deals.
For even more information about cost per acquisition (and related metrics), head over here.