Cost-per-Acquisition (CPA) calculations in a digital environment can often feel like a moving target, particularly as consumers’ paths to conversion become more complicated.
For companies with brick and mortar locations, these calculations have an added layer of complexity; even once you have established baseline acquisition costs, properly attributing in-store sales with online ad spend presents an additional challenge.
Understanding Costs to Calculate Your CPA
The question of how companies effectively track and optimize conversions strikes at the heart of all business functions, from operations to sales and back to marketing. In fact, calculating customer acquisition costs can be a fantastic exercise for any business that seeks to understand the synergies between all departments. These cost calculations may include direct or fixed costs such as rent and utilities, as well as indirect and variable costs like sales commissions and credit card fees.
The distinction between fixed and variable costs may seem out of place in an article about ad platforms, but in fact, it tells us a lot about how different ad platforms function. As companies scale, costs need to be constantly monitored for opportunities to trim and optimize, and this practice should not end at the ad server.
Platforms like Google Ads and Doubleclick have cost-per-click (CPC) or cost per thousand impressions (CPM) fees that vary depending on the value of the traffic sent. More clicks and impressions mean more volume at the top of the funnel, which is great for exposure but not necessarily for direct revenue return. CPC models, while they can run on a CPA target, also rely on algorithmic guessing and keyword-level conversion data to estimate that CPA.
Sales commissions lie slightly further down the funnel, but not at the bottom. Sales commissions are also variable, usually with a salary cap that acts as a fixed cost. Since commissions are made on sales, they are guaranteed revenue, making them a surer thing than Google Ads but no less costly; the more you sell, ostensibly the higher the commission total goes and the more money is taken off the bottom line.
Both of these approaches leverage conversion data, but with different cost strategies to deliver return.
Empyr partners get the best of both worlds when it comes to conversion cost. The platform behaves like a "revenue share model" where the advertiser pays a percentage of the sale to Empyr and to the consumer. This allows customers to pay a fixed CPA for each new customer regardless of how much they spend.
A recent case study illustrates the distinction:
An online pet services marketplace was looking for ways to expand their business and had identified their target CPA at $15
With that target in mind, Empyr was able to implement a fixed Cash Back/Media Fee ratio; when the transaction amount reaches $75, the $15 CPA is hit. With this cap in place, any spend over $75 is considered a win for the client because advertising costs are fixed at the $15 per transaction cap.
As a result, the online pet services marketplace was able to acquire thousands of new customers at a CPA that was ultimately 27% better than the original target, freeing up additional budget that could be reinvested into the program and expanding acquisition efforts.
Such innovative solutions lead us to the question of whether ad budgets are actually relics of the past. If your CPA is profitable, and your ad platform is 100% CPA based PLUS has a fixed cap, the budget is theoretically however much the market or production can handle. CPA bidding gets you closer to the actual sale, much further down the funnel than traditional CPC advertising, and worlds away from the top-of-funnel CPM strategies that many brands employ today.
How to Win at Advertising
Look Past Ad Budgets
Innovative Cost-per-Revenue-based (CPR) platforms like Empyr’s enable brands to move to a more dynamic approach to ad budgeting. If you have a variable CPA but a Return on Ad Spend (ROAS) that comes in at 10x, for example, you know that no matter how much you spend, you will always get $10 back on every dollar spent. You can then focus more on finding the point of diminishing returns with your other variable costs rather than bumping up against arbitrary budget numbers. The budget should be wherever the return on ad spend becomes non-viable or where the market is saturated.
Seek out Companies That Offer Guaranteed CPR
This revenue share model offers unique flexibility because it is based on guaranteed revenue, not clicks, and unlike sales commissions, it is a fixed number. This allows Empyr customers to scale in unprecedented ways.
Work Toward Full Attribution Across Platforms and Between Online and Offline
Cost-per-Revenue may seem like a no-brainer, and in many ways it is. So why haven’t more brands embraced it? Part of it is technology. Until recently, there were limited ways that brands could track online advertising to offline brick and mortar spending. This muddied the attribution waters and created confusion around costs.
Related: The Rise & Fall of Beacon Technology
Fortunately, there are a growing number of ad tech platforms, including Empyr, that allow brands to not only track conversions, but provide data visibility and attribution across platforms and between online and offline sources. For companies that want to move to a more dynamic CPA strategy and shake off the constraints of arbitrarily limited ad budgets, these solutions offer the utmost flexibility.
Companies employ a variety of techniques to drive down acquisition costs. Applying these techniques to advertising is key to scaling smartly. Brands may never stop spending money on CPC ads, but by leveraging card-linked offers and the unique CPA model embodied in them, companies can benefit from having another tool in the customer acquisition tool belt that can free up budget and assist in the growth process.