Sep/08

19

Why 1 CPA Target Is Not Enough

Many marketers establish a cost per acquisition (or cost per order) metric as a key performance indicator, and use that as one of the measurements to gauge the effectiveness of their search campaign. Computing a target CPA involves understanding what your average lead or order value is (from a search campaign), less the cost of fulfilling that order.

How many marketers though, factor in the life time value of a new customer when computing their target CPA?

Most companies cannot rely only on existing customers for sustainable revenue and profit growth. Even with an unrealistic assumption of zero customer attrition, a company”s growth potential in that scenario is drastically limited compared to his competition that is growing his new customer base while minimizing the attrition rate.

Additionally, new customers tend to generally have a higher lifetime value than returning customers.

So it”s a fair bet that most companies must rely on a continuous stream of new customers. And if it follows that a new customer has a higher life time value and will ultimately bring more sales and profits than a returning customer, companies should then be willing to pay more for a new customer.

In light of this, to effectively manage your search campaigns, you should:

1. Compute a “new” versus  “returning customer” CPA by factoring in the life time value of a new customer, and;

2. Have the ability to segregate your search generated sales by new versus returning customer and tie that data back to the source keyword phrase.

If for example, your target CPA was $50, and you had a keyword that performed at $60, you’d probably be tempted to reduce your bidding in an attempt to lower the cost per click and CPA.

However, your data may show 90% of the sales this keyword generates are new customers, and that you can absorb a $65 CPA for new customers. Now, based on this information, there’s room to be more aggressive with your bidding, instead of backing down.

Not necessarily an easy assignment, but most likely worth the effort to get the most of out of your search campaigns.

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1 comment

  • Customer Attrition · Thursday, June 3, 2010 at 10:49 am

    You make some great points. You might be right that it is worth it to spend more to get new customer. Thanks for posting.

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