In business, one of the most important questions you can answer is: how much does it cost to acquire one customer? That metric is called cost per acquisition (CPA).

It's important because it's the number that tells you if you even have a viable business model (as it currently stands, anyway).

If your CPA is so high that it doesn't leave you with enough money to pay salaries, utilities, and other business expenses, then you're on the road to bankruptcy. On the other hand, if you have a healthy CPA, you're generating enough free cash flow to finance further growth.

The one thing all digital marketers must do this year is determine their CPA strategy. If you have not done this, and have done this for each channel, you have no idea how much you are willing to spend in each area. Thus, you have failed.

Let's talk about it...

1. How to Calculate CPA

If you've never calculated your CPA before, now is the time to do so.

Before you begin, though, it's important to remember this acronym: GIGO. That stands for "garbage in, garbage out."

It basically means that if you use the wrong input values in an equation, then you're certainly going to get the wrong output value.

That's true of CPA. If you don't make sure that you've got the correct input values, then your output value will be useless.

So what are the input values for calculating CPA? There are two of them: campaign cost and conversions.

Conversions are fairly easy to track. That's the number of people who became paying customers after visiting your website.

Campaign cost is a horse of a different color. It's not as easy to calculate as you might think. We'll revisit that in a bit.

For now, though, just understand the formula. When you divide the campaign cost by the number of conversions, you have a dollar value that tells you how much you spent to get exactly one customer.

But you're still not done.

2. A Couple of More Metrics

The CPA number in a bubble is meaningless.

If you're selling toothpicks and you spend $10 to acquire one customer, you're probably spending way too much. On the other hand, if you're selling luxury yachts, then you're doing just fine.

So you need a couple of more numbers before the CPA can actually tell you anything. You'll also need your average order value (AOV) and customer lifetime value (CLV).

Those numbers are fairly self-explanatory. The AOV tells you how much a customer spends in a single order. The CLV tells you how much a customer is worth over his or her lifetime.

For example, if a customer averages $20 per order and places one order per month for 10 years on average, that customer's lifetime value is $2,400 ($20 x 12 months x 10 years).

With that information, you have a way to evaluate your CPA.

3. Evaluating Your CPA

Now that you know your CPA, AOV, and CLV, you can determine how well your business is performing.

For this effort though, you might need the assistance of the other CPA: your accountant (and assistance from your digital marketing company). That's because your accountant knows all about your operating costs, debt service, and cash flow.

Say, for example, that your CPA is $10. You've calculated that each customer has a CLV of $1,000.

That means you earn $990 per customer with your marketing efforts. That's outstanding, right?

It may or may not be, it all depends on your business model and current financial position.

That's why you need your accountant. So you can put the number into context.

4. Determining the Right Inputs

Now we get to the hardest part of all of this: determining the right inputs.

You might think that it's easy to calculate the cost of your marketing efforts. After all, you can just total how much spend on marketing, right?

Not necessarily.

For example, let's say that you created a viral video just a couple of months ago that's still driving sales to your website. The current cost of that is $0 because it's hosted on YouTube for free.

However, at the same time, you're spending $1,000 per month on PPC that's getting you only a few hits and fewer sales.

If you run the numbers in that simplistic analysis, it might look like the $1,000 you're spending on PPC is money well invested because you're getting a lot of sales. But the reality is that most of your sales are coming from the viral video.

That's why many marketers prefer to calculate CPA based on a specific channel as opposed to calculating overall CPA. As a general rule of thumb, it's much easier to calculate the cost for a specific channel.

Keep in mind also that you have to differentiate between fixed and recurring costs. For example, if you hire an SEO company, you might get charged a one-time fee up front for special services (such as onsite SEO). That company will also you charge you a monthly fee for ongoing SEO.

For example, your SEO company might charge you $15,000 up front for special services and $10,000 per month for ongoing SEO. In that case, don't forget to include that $15,000 when you determine CPA. It's still a cost even though it doesn't reappear every month.

As you can see, it's not always easy to calculate the right CPA for your business. There are a couple of ways that you can do it, though.

5. The "Everything Matters" Strategy

Some marketers believe that everything (including SEO, PPC, email marketing, content marketing, affiliate marketing, etc.) contributes to top-line sales. When they calculate CPA, they include all marketing costs and divide that number by the total number of unique conversions.

Yes, as we've seen, that approach can result in a number that's overly simplistic. However, it can still offer some insight.

If you decide to go with the "everything matters" strategy, it's a good idea to look at the trendline instead of just the raw number as it currently stands.

For example, if your CPA last January was $20 and dropped to $18 in February and dropped again to $16 in March, then it looks like you're at least headed in the right direction. You'll still want to do some more analysis with an accountant, though.

6. The "Last Touch" Strategy

Some marketers prefer to measure acquisition cost by looking at the last marketing strategy that brought the customer to the site.

For example, if someone clicks on a PPC ad and makes a purchase, then it was that ad and that ad alone that made the sale. That's the thinking that goes into it, anyway.

As a result, "last touch" strategists prefer to measure CPA on a per-channel basis. Instead of calculating overall marketing costs, they'll just calculate costs for a particular channel (in this case, PPC) and then use only conversions that resulted from that channel when calculating CPA.

If you want to use the "last touch" strategy, you'll need to have the right tools and analytics so that you can measure conversions per channel. Fortunately, there are plenty of tools available for exactly that purpose.

Personally, I recommend looking at the last touch (last click) strategy as well as your first click and linear reports. Make sure to check your multichannel funnel reports in Google Analytics. This will tell you everything you need to know.

7. There's No Reason You Can't Use Both

Of course, there's no reason why you can't use both strategies. It's perfectly fine to use the "everything matters" strategy to measure overall CPA and the "last touch" strategy to measure per-channel CPA.

As a rule of thumb, it's a good idea to use the "everything matters" strategy to gauge the overall health of your business while using the "last touch" strategy to determine which marketing channels are giving you the best ROI.

Once you've determined which channels are bearing the most fruit, you can reallocate resources from the poorly performing channels to the more effective ones. That effort will, in turn, boost your overall CPA.

This year, determine your CPA and do it right! You cannot make marketing decisions right without this information.

Published on: Jan 10, 2017