CPA is possibly the word I hear most during the week; why has it increased, why has it decreased, what can we do to improve it…. Like most metrics, CPA is interconnected with many other factors that makes it difficult to give a single answer.
Client is spending around £100,000 on advertising, to keep things simple lets say its PPC.
They are generating £1.25 for every £1.00 spent and have a CPA of £20, they want to reduce this to get a better return.
Sound familiar? Here starts the race to the bottom!
Reducing CPA, usually means reducing bids, spending less and generally narrowing your opportunity to increase sales, but sure your ROAS will improve. Doesn’t sound all too bad.
Unfortunately businesses don’t run on CPA, they don’t run on ROAS, they rely on customers and those customers spending cash with them regularly.
Unpicking that descriptor, key metrics such as Average Order Value, Lifetime Value and Incrementality are being ignored.
Look at these two scenarios, scenario 1 shows you the typical example I gave and scenario 2 shows the version with improved CPA with decreased spend and in turn less sales.
| Scenario 1 | Scenario 2 | |
| Average Order Value | £25 | £25 |
| Average Orders per customer in 12 Months | 5.0 | 5.0 |
| Advertising Cost | £100,000 | £60,000 |
| Online Orders | 5,000 | 4,000 |
| Revenue | £125,000 | £100,000 |
| CPA….. | £20 | £15 |
| ROAS | £ 0.25 | £ 0.67 |
| 12 Month Lifetime Value (revenue) | £ 625,000 | £ 500,000 |
| Incrementality | £ 500,000 | £400,000 |
| Additional Spend | £40,000 | |
This example explores the bigger picture, which arguably takes some effort to fill in the gaps, and this is partly the issue that making micro decisions in mass on a day-to-day basis means we’re often led to use metrics that are easily accessible.
The conclusion here is that a scenario with a higher CPA, larger spend and lower ROAS can actually lead to a larger cash return when you factor in lifetime value and the incremental revenue generated from a larger pool of customers.
Of course there are cases where sales can be increased by keeping CPA at a similar level or even reducing it, this very much depends on how well your PPC is being optimised, this is really an example for scenario planning when your PPC is already firing on all cylinders!
These results can of course be further improved by increased average order value and conversion rate through a dedicated CRO programme!