How targeting a lower CPA can hold back your growth
I’ve been working with companies across all industries for years. One thing I see all the time is people whose only goal is lowering their cost per action (CPA) – whether that’s the lowest cost per click, cost per lead, cost per sale or any other metric they want more of.
They optimise and chase lowering this metric month-on-month, cutting campaigns that are delivering higher CPAs and ramping up campaigns that are delivering lower ones, whether it’s the lowest cost per click, cost per lead, cost per sale or any other metric.
I get why they do this and why they want lower costs. It’s logical, right?
The only problem is chasing those lower CPAs comes at the expense of two things:
Whether you’re generating leads, online sales or member signups, not all conversions are created equal and there’s one factor that is missing when costs are cut: The quality of the conversion.
Take leads for example. If you’re generating leads from one Facebook campaign which costs $100 per lead and you’ve got another campaign that is delivering leads at $50 per lead it would make sense to switch the budget to the campaign with the lower CPA and generate more leads, right?
Well, what if I told you that the campaign with the higher CPA had better quality leads that were closing into sales 3X higher than the lower cost leads? You’d be making a poor decision if you went with the lower CPA.
The same goes for eCommerce. Some sales may have a higher cost per sale but they may also have a higher average order value, a higher profit margin or a higher lifetime value. By optimising for a lower cost per sale you could actually be turning off the campaigns delivering you more profit whilst ramping up the ones that are making you less.
The other reason targeting a lower cost per action isn’t always the best decision is volume.
If I asked you if you wanted to run a campaign generating leads at $10 cost per lead or one costing $100 per lead and you knew from every lead you got you’d make $200 profit you’d pick the $10 option and make $190 profit right?
What if I asked the same question with volume included so 10 leads at $10 per lead or 100 leads at $100 cost per lead? That’s where things get interesting – all other things being equal, if you picked the leads costing $100 each but with a higher volume you’d make $10,000 profit as opposed to picking the 10 leads that had a lower cost but only made $1,900 profit.
This example is what happens in real life as well. If you are optimising for the lowest cost per action as your primary goal you’ll find that the volume you can generate will drop over time, as you’ll only be able to target the lowest hanging fruit such as the most targeted audience or search keywords. This impacts growth significantly as you won’t be able to scale up the campaign volume with less targeted audiences, keywords and channels as they will always have higher cost per actions despite the volume they offer.
So What Should You Do Instead?
Instead of continually optimising for a lower cost per action to ensure you make the right decision that will increase your performance there’s three things I’d recommend:
1. Work Out Your Numbers
Knowing what your profit margins are, your lifetime value and all the other important numbers will help you make the right decision on how to optimise your campaigns and budgets.
2. Measure Quality Per Source
Whether it’s the lead quality, the profit margin for each online sale or any other way of measuring the quality of the conversion it’s important you monitor and report on this regularly and use it to guide you on how to optimise your campaigns.
3. Make sure your data is significant
We love speed at Webprofits and its essential to succeeding with growth marketing but on the flipside I also love meaningful data. It’s important that you wait until your data is significant before you make any major decisions such as shutting off an under-performing campaign.
With those three things in place, when you’re then faced with a decision on how to optimise or scale your campaigns first look at the CPA data sure, but then look deeper and ensure that the decision you’re about to make is one that will make a positive impact to your bottom line – not just look better in your cost per action reporting.