It makes a nice change to have an Online Marketing topic about which there is some fairly general consensus. The reason for this blog is that we have encountered many businesses that tend to get these two metrics confused and even switched around, but more on the significance of that in a moment.

First, then, Cost Per Acquisition. What does it mean, and why does it matter?

Every business or organisation, online or in the real world, commercially focused or charity, will have some kind of goal it is setting out to achieve. For many businesses, this is about attracting new customers and selling them something; for others, it’s about attracting recurring customers. Others simply want to get members or subscribers, while others are all about likes, brand awareness, etc.

What they have in common is that something needs to be done to attract these potential audiences, which either incurs a Marketing or operational cost. From this, X number of entities will take the desired route to action.

Once the total cost is known and this number of recruited entities is identified, divide them by the other, and we will have an approximate cost per acquisition. It isn’t always easy to calculate. In many cases, multiple interactions across channels compete simultaneously, but add everything in the organisation together, and you have a high-level CPA or Cost Per Acquisition. Every organisation should have a view on how much resource (people or money) they are willing to expend on this goal – without it, the organisation will eventually fail.

So, CPA is a financial metric of vital importance. On its own, it is not enough to predict an organisation’s profit, efficiency, or even a Return on Investment (ROI), as more data needs to be added to the mix to understand these concepts, but it’s an essential starting point.

By now, I’m sure you’ve filled in the gaps for yourself. To get beneficial data, it is necessary to also add into the mix how many prospective customers (for want of a better word to describe these multivariate entities) will convert or be approved by the organisation (e.g. passing credit checks, being the right age or location, having money) and how many go on to fulfil the necessary legal waiting periods. Add to this an understanding of lifetime purchasing habits, profit per product and any referral, and an organisation can start to understand how an acquisition gets it closer to its overall goals or profitability.

How, then, does this compare to the Cost Per Click?

Cost Per Click is a measure that really goes back to the early days of paid-for online marketing presence when you could advertise yourselves in online directories or the Google Paid Adverts programme (although other businesses pioneered this type of advertising before Google borrowed it very successfully). The client organisation buys an agreed amount of online publicity, which will cost a specific budget, and a certain number of prospects will click to learn more. Divide the campaign cost by the number clicking, and we will have our Cost Per Click.

These days, you can set a bid price, like in an auction, within search engines such as Google, as to how much you are prepared to pay for the maximum price per click. They will try to stick to this and will display your paid advert for free to as many prospective “customers” (subject quality alit” criteria) as possible. They will charge you for each click-through at a rate you agreed to be your top figure. And subject to volumes you can mop up clicks at a lower price if your competitors don’t have enough budon’tto bid for them.

It seems straightforward and not a million miles from the CPA calculation.

And here is where the problems start – as I said, we have experienced many clients who think the bid price they set within, say, Google as the Cost Per Click is the same as their target CPA. Suppose they are the same, all well and dandy. However, the cost per click does not represent anything like the number of prospects that pass through your various stages of the qualifying tunnel. They may not even hang around on your website for that long after clicking – but you will still be charged unless they bounced out very quickly or are repeat offenders visiting on the same date multiple times – Note, again, estimates vary as to how efficient Google is at not charging for these wasted clicks, let’s just say it’s let exactly in its interest to be gracious so expect bills that are higher than valid traffic volumes might otherwise suggest.

So a Cost Per Click will always be only a fraction of the CPA – in some cases they can differ by as much as 1000%. Go into business thinking a Cost Per Click, say, of £2.50 (a fairly typical amount in many industries) is your CPA and to budget accordingly, only to find out that only a third of clickers arrive at your site and take action. Hence, the CPA is £7.50, which is the correct route to the poor house. We’ve seen it time aWe’veme again and it generally manifests itself in clients wondering why they’re not getting they’retion out of there monthly market budget, which could often be in the thousands of pounds per month.

To make matters worse we generally observe the Cost Per Click getting roughly 1% more expensive per month, so over a year, that’s more than 10% dent in budgets – few businesses make 10% profit (we generally make 3-5%, about the same as Tesco but a lot less in absolute amounts!). Imagine the horror if you’d relied on Paid search and then confused CPA and CPC to add to the mix.

There is one bit of good news to add to the mix. While CPA is still a valid calculation in the world of SEO (and you can even work out a CPC cost by looking at how much traffic you get for your campaign budget that you pay your agency rather than give to Google), the CPC for SEO generally drops monthly. Yes, it takes longer to get results than via Paid Search, but once SEO starts to bite, campaigns breathe and reach grow over time, reaching more critical phrases for the same budget, so your traffic grows, and CPC AND CPA will drop with SEO. It is a best-kept secret, even if it requires patience and nerves.

Stuart Haining
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