How to Figure Out PPC & Organic CPA
One of the common questions we hear from potential clients is: how do we measure our cost per acquisition (CPA), which is just a nice way of saying “how much does it cost us to make a sale?” It can honestly be hard to measure CPA from organic SEO efforts and many potential clients find pay per click (PPC) a more attractive method of marketing because of how easy it is to gather data. But the conundrum many businesses face is the realization that organic can be cheaper in the long run if they know how to measure their CPA. Knowing what each marketing channel costs to make a sale is just good business, but the fact is most people are just guessing.
If you’re going to properly estimate how much you’re going to spend in any particular marketing channel, it is essential to figure out how much it costs to acquire that customer. The next step after that is to figure out the lifetime value of that customer and determine if the return on investment provides enough positive cashflow to pursue that marketing channel. Otherwise, you’ll end up with a lot of effort wasted and little to no profit afterwards.
Lifetime Value of a Customer
So the first step is to measure the potential lifetime value of your customer. The net valuation an individual provides from the minute they become a paying customer to the moment they stop purchasing your products or services. The average estimate is 15% of a customer’s lifetime valuation is allocated toward the cost of acquisition. For example, if a customer holds a lifetime value of $2,000 than 15% of that or $300 is the max you should be spending on your CPA for any particular marketing channel. Now out of that $300 to acquire that new costumer, you’ll have to figure out how much of that money is being divided out among your different marketing channels, and that is where measuring CPA becomes handy.
Pay Per Click CPA
One of the most used online marketing channels by business is PPC in which people run ads on different search engines like Google or through social media sites like Facebook. In short, you as the business only pay for your ads if someone clicks on it. Usually people setup their ads to drive business toward a landing page in the hopes that the individual will convert into a paying customer. Since each click is counted and businesses can setup analytic goals to track the interaction between the individual and landing page it is very easy to collect data for tracking CPA.
For example if we had a PPC campaign going on with a budget of $40,000 to include landing page set-up, ad designs, and any other expenditures we could find CPA by measuring a few things.
- Budget $40,000
- Total Clicks 5,000
- Conversion Rate 8%
First thing we need to do is figure out the lifetime value of our customers, and for times-sake we’ll just say that our customer’s lifetime value is $1,000 and 15% of that is $150. Now we have to figure out how many of the 5,000 people who clicked on our ads arrived to the landing page and converted into a paying customer. We get that number because our analytics say our ads had a conversion rate of 8% or 400 visitors who converted into a sale. After that we need to find out our CPA from our $40,000 divided by our 400 converted visitors and we find our CPA was $100. Earlier we learned that our lifetime value of a customer was $1,000, which means our CPA budget per customer was $150, meaning this marketing channel is providing a good CPA.
Organic SEO CPA
Now figuring out organic CPA is much more difficult because we have to monitor much more data in order to get accurate numbers, and every website is different. The first thing you need to figure out accurately is how people are entering your website and from what sources. If you can divide your traffic by people who enter through search engines, direct URL, social media or other organic methods from those entering from PPC you’ll be able to get the first numbers needed in order to figure out CPA.
Total Traffic – PPC Traffic = Organic Traffic w/Social Traffic
Total Traffic – PPC Traffic – Social Traffic = Organic Traffic
The next thing you need to figure out is how much money you’re putting into your organic efforts. This should include your SEO budget as well as the money going into paying your staff to work on the blog and things to that nature. If need be you might want to separate your social media traffic to your website and figure out your own CPA for just social media, otherwise if you decide to keep it in you’ll want to include the money you spend to support your social media efforts.
After you figure out how much you’ll have to divide that number out against your goal page. Your goal page might be the /thankyou page that comes up after each sale. Take the number of goal pages and minus your PPC conversions and you should have your organic conversions. Take your organic conversions and divide it out against your organic spend. This number you end up with is your organic CPA and to figure out if it’s a reasonable number or not you’ll have to remember the 15% of your customer’s lifetime value.
1) Conversions – PPC Conversions = Organic Conversions
2) Organic Conversions/Organic Spend = Organic CPA
CPA < 15% Customer Lifetime Value = Good CPA or CPA > 15% Customer Lifetime Value = Bad CPA
3) Organic Traffic/Organic CPA = Organic Conversion Rate (Extra Credit Info)
The truth is as long as you’re getting a positive ROI than you’re making money. If you’re making more money from PPC or if you’re making more money from Organic it doesn’t really matter, because you’re making money. The people who get caught up in CPA are usually the ones who are getting distracted by all the smaller fish and aren’t going deep enough to find all those big fish waiting to bite your (click) bait. Now having just said that, I would still measure out your CPA for PPC and Organic SEO efforts because more date means more insights into customer behaviors, and that information can be priceless.