CPA : The Most Important Marketing Metric
The most important metric you need to track when growing your business is your Cost Per Acquisition (CPA). In other words how much it costs you to get that one customer.
When starting you need to know what you can pay to get one new customer. Basically, how much income customer is worth minus how much can spend to get them.
How to find your baseline CPA
What is your “baseline” CPA? It is how much you can invest in acquiring one customer and break even. Any optimization of your acquisition pipeline from this point would be positive gross profit.
To get to your baseline CPA you need three numbers. How much money you can spend a month on operations. How much you can spend a month on acquisition of customers (sales and marketing). And how much a customer is worth to you.
This is how much you are going to spend a month to run your business. You can even burn rate. It should include all the expenses of your business. Employment, advertising budget, rent, ect.
To find your ideal CPA and bootstrap your marketing plan you need to know how much you can spend to get customers. This is where you acquisition budget comes in.
Your acquisition budget includes everything that you invest into acquisition. This would include all forms of acquisition from sales to paid advertising.
When bootstrapping your marketing invest as much as possible in acquisition. The greater percent of your operation cost you invest in acquisition, the higher your baseline CPA will be.
Customer value is how much net revenue from sale you expect to generate from one customer.
Based on your business model, you might expect to have only one sale per customer or multiple/recurring purchases.
As a new service, you should only count on getting one or two sales conversions per customer.
As you start to get sales and continue to plan for marketing, customer value should start to reflect the lifetime value (LTV) of a customer.
If you don’t know how much to sell your products yet this number is a variable. Based on your budget you will see what is the lowest customer value you can support.
Example to find a baseline CPA
How did we figure this out? It is really very simple.
OPERATION COST ÷ CUSTOMER VALUE =
ACQUISITION BUDGET ÷ MINIMUM CUSTOMERS =
To be successful going forward you want to plan as much as possible around CPA. The more accurate this number is the better you will be able to budget in the future.
For example, when doing direct sales, track how many hours work did it take to generate that leads to get that customer. Those hours of work cost money and will be reflected in your CPA.
When paying for traffic or ads find out how much does the campaign cost but also how it costs for your campaign manager.
Once this baseline is established in theory you can purchase an infinite number of customers at this cost. That cost will also be reduced as you optimize your advertising campaigns.