CPA models tend to be reserved for a certain kind of company; those with deep pockets and an infinitely scalable product. The vast majority don’t even understand what CPA means, let alone have a strategy for it.
I believe that every business, from law firms to hairdressers to manufacturers, can benefit hugely from adopting a CPA mentality. In fact I think that this is one of the biggest oversights made by business people and marketers in 2017.
It’s all about the numbers
What is a Cost Per Acquisition (CPA) model?
Cost Per Acquisition is the amount you have to pay to get a customer on board through direct response tactics – PPC, remarketing and lead generation methods on social media.
This has nothing to do with brand. It’s about pure cost of sales. For some businesses that’s really easy to measure. For example, a gym that offers online subscription can see exactly how much they spent on adwords to generate a customer. However, for other businesses it’s a bit more complex. For example, a law firm is unlikely to have an ecommerce facility on their website, so instead you have to estimate the conversion rate from online enquiry through to them becoming an actual customer. All businesses should record this data.
The simple idea behind a CPA strategy – and this is where it gets seriously exciting for both business owners and marketers – is that theoretically you should then be able to aggressively increase your advertising spend on direct response tactics until the cost per sale has equalled the customer lifetime profit value. For example, if a hairdresser makes £10 profit per booking and can see via their historical data that the average customer comes 10 times, then the lifetime profit value is £100, so they can spend up to £99.99 generating new business.
The serious benefits offered by this way of thinking
It helps you scale – theoretically you should be able to scale the leads all the way until the point at which the diminishing returns (there is only so much traffic available in any niche) have inflated the CPA to the long term profit value of the client. For a lot of companies this could represent a HUGE number of leads.
It helps you test markets – before investing in a long term brand strategy it makes sense to test the waters. This direct response approach enables you to do exactly that.
It gives you a safety net – once you’ve established your cost per acquisition you can, if you believe you will generate leads organically, switch it off. However, this at least then means that should you ever need to supplement your lead generation you can instantly do so.
Is this a replacement for brand/organic?
Of course not. Why pay for something if you can have it for free. Moreover, by building the brand and strengthening your relationship with the consumer you increase the lifetime profit value of each customer which means you can, if you wish, spend even more on your CPA model and remain profitable.
Why do so few companies operate this way?
From my experience very few companies (even including tech start ups) think this way. Here are two valid explanations:
– They are going through a period of change and do not currently wish to grow.
– They are so limited by cash flow that the future profits of a client will not arrive quickly enough to fund the campaign
However, these don’t apply to the majority of established companies, so why don’t more companies adopt this mentality?
The answer is that to do so requires two things that few companies possess – aggressive ambition and a handle on their numbers. In fact in my experience these two qualities tend to work against one another. Accountants for example, you would hope have a solid grasp of their net profit levels and the lifetime value of their customers, but often lack the boldness to aggressively scale. Entrepreneurial types have the ambition but rarely the attention to detail.
The best marketers and business owners have both.
Dan
