A constant doubt among performance managers is to understand which is the best way to optimize paid media campaigns: by CPA (Cost per Acquisition/Action) or CAC (Customer Acquisition Cost).
After all, this choice reflects a good strategy that not only attracts new customers, but also builds loyalty and reduces costs.
To clear up this doubt, in this article we've brought you everything you need to know about these two extremely important metrics in the strategic process for your company's scenarios.
How to calculate CPA?
CPA (Cost per Acquisition) is a widely used metric that shows us how much we pay each time a user takes an action through an ad.
Acquisition in the digital environment is usually translated into a "purchase" action, but it's not always just that. In a scenario where the intention of the business is to get customers for a service, your CPA could be translated into a "sign-up" action, for example.
The formula for calculating the CPA is as follows:
CPA = Total Campaign Cost / Number of Purchases
For example, a campaign that had a total cost of R$1,000 and generated 50 sales, the CPA would be:
CPA = 1000 / 50 CPA = 20
In other words, the cost for each sale generated by the campaign was R$20.
The CPA calculation is used to evaluate campaign performance and compare different marketing channels, but it shouldn't be the only factor considered when evaluating the success of a campaign, as other factors, such as the average value of each sale, can affect its profitability.
How to Use and Interpret the CPA?
In addition to being a way of pricing campaigns, as mentioned above, CPA is very useful for understanding marketing strategies as a whole because it indicates what investment was needed to achieve a conversion, whatever it may be.
This is the most expensive ad format, after all, it is based on a concrete result. Its effectiveness drives the price, and CPA can cost up to 50% of the value of the sale, according to market figures. This is the disadvantage of this model.
On the other hand, the big advantage is that unlike other marketing tactics where you pay to advertise with no guarantee of sales, CPA optimization allows you to pay only after a sale has occurred, at a rate you determine.
This metric is generally used for partnerships and affiliate networks, but it can also be used in Google Ads e Facebook Adsfollowing some basic platform requirements.
In addition, it is important to be careful when interpreting the CPA, as very low values can indicate that the campaign is being very efficient, but they can also indicate that conversions are being poorly tracked.
Similarly, very high values can indicate problems with the campaign, but can also be justified by a high average value of each sale.
That's why it's necessary to evaluate CPA in conjunction with other metrics, such as ROI (Return on Investment), to get a more complete picture of the campaign's performance.
How to calculate CAC?
CAC (Customer Acquisition Cost) is a fundamental metric for any marketing manager to monitor, given its importance in the context of investment in sales and digital marketing.
It works as a key performance indicator for businesses with recurring revenue or repeated sales to the same customer. Therefore, for businesses without recurring sales, instead of CAC, we use CPA.
The CAC calculation is based on dividing the sum of the investments to acquire a customer by the number of customers acquired in a given period of time.
CAC = (Marketing Costs + Sales Costs + Acquisition Costs) / Number of New Customers Acquired
For example, if a company spent R$20,000 on marketing and sales during a month and acquired 50 new customers during this period, the CAC would be:
CAC = (20000 + 10000 + 5000) / 50 CAC = 350
In other words, the cost of acquiring each new customer was R$350.
This calculation is important for evaluating the success of the company's marketing and sales strategies and helping to make strategic decisions regarding the growth of the customer base.
How to Use and Interpret CAC?
Initially, the strategy used by businesses can take a toll until the customer makes their first purchase, as they go through the entire conversion journey.
This way, the return on investment is only obtained once the sale has been made, after which the cost of marketing tends to fall, given the trust and the communication channel that has already been established.
CAC should always be analyzed in conjunction with LTV (Lifetime Value). In fact, recurring purchase value is measured by LTV, so you can invest more in CAC to generate new customers.
However, there is always the question of cash flow:
Is the company prepared to invest first and get a return in the medium or long term?
This decision is a financial strategy, the marketing and sales areas are just playing their part in finding the best CAC within the reality of the business.
There is no magic formula for determining a maximum or minimum CAC cost. However, depending on the degree of complexity, it is possible to arrive at a reasonable value for it.
For example, in a clothing e-commerce (one-off purchase model) it is reasonable for the CAC to be lower than the Average Ticket of a purchase by a customer. Howevern the case of a streaming service streaming service, the CAC should be lower than the LTV.
So, to find out if your CAC is good, look at what the consumer is spending with you. If what they pay exceeds your investment, your cost of acquisition is favorable.
Optimize Campaigns by CPA or CAC?
As mentioned above, strategies vary depending on the business model in question. In businesses with recurring sales, it's worth optimizing by CAC, since you'll be able to predict purchases along the way from a customer who has already become loyal.
And if the company's goal is to maximize profit in the long term, optimizing campaigns by CAC is also a good choice. This is because CAC takes into account all the costs associated with customer acquisition.
Optimizing by CAC helps to ensure that the customers acquired are profitable in the long term.
If your business doesn't involve recurring sales, the best option is to optimize your CPA campaigns, a model that works with a more niche segmentation and a higher level of involvement in order to obtain higher remuneration.
Or if your company wants to get as many conversions as possible at the lowest possible cost, CPA optimization may also be more suitable. CPA focuses on the cost of each conversion, regardless of the costs associated with customer acquisition.
CPA optimization can be useful for maximizing the number of conversions in the short term, without considering long-term profitability.
In short, if the company is looking to maximize profitability in the long term, it should optimize campaigns by CAC. If the company is looking to maximize the number of conversions in the short term, it may be more appropriate to optimize CPA campaigns.
Optimize your Campaigns with Artificial Intelligence
The use of Artificial Intelligence in marketing provides competitive advantages for companies. Some of these are
Personalization
Artificial Intelligence can help personalize marketing campaigns, offering specific content and promotions to each customer based on their preferences, purchase history and other relevant information. This increases the chance of conversion and customer loyalty.
Automation
The technology is able to automate repetitive and time-consuming tasks such as target audience segmentation, A/B testing and data analysis. This helps save time and resources, allowing the marketing team to focus on more strategic tasks.
Precision
With AI you can analyze large volumes of data in real time and provide accurate insights into campaign performance. This helps you make more informed and effective decisions regarding audience segmentation, investment in marketing channels and other important decisions.
Machine Learning
Artificial Intelligence can learn from user interactions, adjusting marketing campaigns in real time to improve campaign performance and effectiveness.
Continuous optimization
Can you imagine continuously optimizing marketing campaigns based on real-time data? This is possible with AI. In addition to optimizing, Artificial Intelligence software also adjusts strategies and investments as needed to maximize ROI and campaign results.
A Pareto is an Artificial Intelligence company and throughout its history has developed intelligent automations that are used by more than 30,000 companies in 92 countries, enhancing scale opportunities and competitive advantages for businesses.
With our automations, you save time, reduce the risk of human error and get clarity on your results, as well as having a team of experts to support your project.
Request a free demosave time and expand your reach in paid media.
