You probably know how much you make from one sale – but do you really know how much it costs you to make that sale?
The businesses that make the most money online know how much it costs them to make a sale and they are continually working to improve the performance of every part of their online marketing strategy to reduce this cost.
When performance goes up it costs less to drive sales, which means more money in your pocket and more sales from the same advertising budget.
Let’s walk through an example…
Say you have an e-commerce store that sell basketballs online. You buy a basketball for $30 from your supplier and sell it on your website for $55. This means you have $25 to play with to make the sale of the basketball, or a $25 margin.
Marketing the product to get targeted consumer traffic to the website will bring your costs up and reduce your margin, but so long as the cost to get one sale does not exceed your margin of $25, you’re making money.
What Do You Need To Know?
You need to know what your CPA is.
CPA stands for ‘Cost Per Acquisition’ or ‘Cost Per Action’ and is a business metric that measures the advertising cost to acquire one new sale.
CPA is calculated by taking your advertising costs and dividing them by the number of sales you’ve made, providing you with a cost per sale amount (ie CPA). The aim is to lower your CPA while simultaneously increasing the number of sales from the same advertising budget.
To work out what your CPA is you will first need to install website analytics to track the number of people that visit your site and how many of them buy – this will give you your website’s conversion rate as a percentage.
For example, if 1,000 people visited your website and 30 of them bought something, your website’s conversion rate would be 3% (ie 30 sales divided by 1,000 visitors multiplied by 100, to get a percentage).
Note: Google Analytics is a free analytics solution that provides a wealth of valuable data including where your visitors are coming from and which ones are buying. If you don’t have it installed on your website, get it done as a priority.
Let’s get back to the basketball store…
You buy one basketball from the supplier for $30, and sell it for $55, leaving you with a $25 margin. Next you go out and spend $1,000 on advertising to drive targeted people to your website, resulting in 2,000 people visiting it.
And let’s say that your website has a 2% conversion rate…
The advertising cost you $1,000, you got 2,000 people to the website, the website converted at 2%, and you sold 40 basketballs.
The question is… did you make any money?
No, you broke even.
The CPA, or cost to acquire one new sale, was $25 (ie $1,000 cost divided by 40 sales).
You only had $25 to play with to get the sale and it cost you the entire amount, which means that you broke even.
So What Can You Do To Lower Your CPA?
You can lower CPA by improving the performance of any part of your marketing strategy.
You could increase number of qualified prospects to your site from the same $1,000 advertising budget by using better strategies. As long as your website conversion rate stays the same you will be earning more profit from the same budget.
For example, if you can drive 2,500 prospects to your website for the same $1,000 spend and maintain your website conversion rate you will make 50 sales instead of 40 for the same advertising budget (ie 2,500 people x 2% website design conversion).
Your CPA is now $20 (ie $1,000 divided by 50 sales)…
And from 50 sales, with a CPA of $20 and a margin of $25, you have made $5 per sale and $250 in total (ie $5 x 50 sales).
Now what else can you improve to reduce your CPA?
Your website converts 2% of your visitors into sales. What happens if you improve your website’s conversion rate to 5%?
Now you’re getting 125 sales from 2,500 people! (2,500 people x 5%)
Advertising costs remained the same at $1,000, but because the campaign performed better you were able to drive more people to the site for the same budget. And because the website sold better you were able to make more sales from the people that visited your site.
125 sales, a CPA of $8, and a profit of $17 per sale (ie $25 margin minus $8 of advertising cost).
Which means you just made $2,125 profit in total ($17 x 125 sales).
That’s much better than breaking even, right?
Because each part of your marketing strategy performed better you were able to actually make a profit, rather than breaking even.
And this mindset is what separates the businesses that make money online, and those that don’t.
Only once you know what it costs you acquire a new sale will you be able to work at improving performance, lowering your CPA and increasing sales and profits.
So get to it!
Before you can really start making money online you will need to know what your CPA is and how much you can afford to spend and still make a profit.
The beauty of online business is the wealth of analytical performance data that is available. Know what your marketing costs are, know your traffic volumes, know which keywords make you money, and know how well your website converts. Only after you have all this data in hand can you calculate your CPA.
And now I’ll leave you with a question ;)
What is your CPA?
Reply in the comments please.