Businesses and agencies use different metrics to determine the success of their digital marketing campaigns. A common metric used is Cost per Acquisition (CPA).
Is the traditional CPA metric a reliable measure of success? Probably not as much as you think.
What is Average Cost per Acquisition?
Average CPA is calculated by dividing the total cost by total conversions.
What is Marginal Cost per Acquisition?
The marginal CPA represents the cost of additional conversions.
Marginal CPA is the increase in cost divided by the increase in conversions.
What is Profitable Cost per Acquisition?
It is the highest a business can pay for a conversion while remaining profitable.
Why marginal CPA is important:
Marginal CPA determines the optimum profit for your digital marketing spend. Digital marketing has a diminishing return so the more you spend, the more expensive it becomes to generate a sale or lead. How expensive is too expensive though?
Most agencies and businesses use the assumption that they are maximizing their profit by spending as much money as they can as long as the average CPA is below their profitable CPA.
Although the average CPA is still on target, obtaining extra conversions is costing a lot more than the company’s profitable CPA – they are losing profit on the last X% of spend.
To maximize profit, the marginal CPA must not exceed the profitable CPA.
Example:
Business ABC is analysing their last 2 months of digital marketing activity to decide if they should increase or decrease their budget. The profitable CPA for their product is $18.
ABC increased their budget by $2,000 and received an additional 100 conversions which puts their marginal CPA at $20. Their average CPA ($15) is still below their profitable CPA ($18) so they’re still turning a profit but they actually made more in month 1.
ABC will be most profitable when their marginal CPA is just below their profitable CPA ($18) which will happen somewhere in the range of $2,000 to $4,000. A further analysis of marginal CPA across keywords will determine a good budget for month 3.
Next time you reevaluate your digital marketing budget, consider the marginal CPA of past budget changes. You could be missing out on a tonne of profitable sales or could be paying way too much to acquire them.
Author:Tyron Zeelie – Campaign Manager at Sprocket Digital
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