CPA

CPA
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CPA is a classic metric metric every marketer should know for their product. The Cost per Acquisition details the direct marketing costs to create a new user. The objective is obviously to have a CPA lower than your LTV in order to operate at a profit.

CPA Formula

The simplified formula for CPA is;

Costs / New users = CPA

or if you are using direct online marketing

Average Cost per Click / Conversion Rate = CPA

Spending $10,000 and receiving 5000 new years would be an CPA of $2. The cost per acquisition of a project is a metric I would strongly encourage anyone to know for their product. From an auditing perspective I actually recommend marketers make a effort to evaluate their marketing channel’s effectiveness through comparing the cost per acquisition of different acquisition platforms. Unless there are major reasons not to, I recommend marketers enable marketing channels which are providing conversions and new customers are the lowest cost per acquisition.

Effective CPA

The eCPA is an expansion of the CPA by adding the k factor to provide growth expansion. There are some important caveats to explain about this but for the time being, the formula is as follows

CPA * (1 + k factor) = eCPA

Say if you had a CPA of $10 and a k factor of .25

10 * (1 + .25) =  $8.00

another way to show this would be to go through the actual root CPA formula. If the previous formula was confusing than hopefully this will explain.

CPA = Budget / New Users

The effective version of this would be

eCPA = Budget / (New Users * (1 + k factor)

If we’re spending $10,000 and we gain 1000 users we’d see

10,000 / (1000 * (1 + .25))

10,000 / (1000 * (1.25))

10,000 / (1250)

= $8.00

The eCPA is factoring in the fact that a user will create some ratio of viral growth to other users (the k factor). By including this into the equation we’re able to increase the volume of users gained for the same budget spend. I love using this for projects to show the difference in performance between the two metrics as it shows how much your own community is being put to work for you! Now for the caveats! I would never recommend using the eCPA as your final evaluation metric to make decisions on. I always recommend your user LTV be 20% higher (minimum) than your CPA so there is always positive cashflow in a given time period. The eCPA will act as icing on the cake. It’s dangerous to try and balance your eCPA and your LTV mainly because of the time delay which may be present in having your user refer your project. Combined with the fact that you’re “best case scenario” means you break even instead of making money.¬†

 

 

 

 

 

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