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What is Cost Per Acquisition (CPA)?

Get what you pay for. Pay Per Click is great at measuring how attractive an ad is, but it does not tell you anything about profitability. Cost Per Acquisition (CPA) however measures end goals like the number of sales or registrations you made from a particular ad or promotion.

We have all been asked “where did you hear about us?” when filling out a form to make a purchase or signup for something. Coupons from your local newspaper are likely to say, “present this ad and receive X discount.” Good marketers want to track which promotions are actually leading to sales, and how much. This is CPA analysis.

CPA is quite simple: [Ad dollars] / [Results]. If you spend $100 on advertising your Facebook fan page and get 100 fans, then it cost you $1 per fan.

This article describes a few modern ways to measure the true ROI of your promotions using online methods. They can work for both e-commerce and traditional retailers.

AdWords Conversion Tracking

This method is effective for those using Google AdWords to promote online businesses.

If you enable Conversion tracking on your AdWords placements, a cookie loads onto the user’s computer or phone when they click on your ad. If the user buys your product or registers to your site, then they are reported to Google as a conversion because the user did what you ultimately wanted them to do with your ad.

More about how to load and use Google Conversion tracking can be seen on this tutorial.

http://www.youtube.com/adwordsclassroom#p/c/0/wkt7hkoF9qE | Text | Video

Not using Adwords to promote your business?

Google Analytics is FREE and it can be used on almost any webpage.

First you are going to have to think about what you want to accomplish. Do you want people to download something, register for your website, or buy something? Whatever it is you want them to do is defined as your “goal”.

Once you have determined the goal, set up a Confirmation or Thank You page for the user to be redirected to once they have completed the desired task. Insert the Google provided tracking code on this page. If someone makes it to this page, then they are a conversion.

Once the tool has been running long enough and collected enough data, you can see from where your traffic comes and the amount that converts. This could give you good insight on where to spend your advertising dollars. For example, you run a Facebook ad campaign. You could use Analytics goals to determine how many people 1) found you on Facebook, and 2) registered, bought your product, or some other goal. If you find that Facebook has a higher conversion rate than other outlets, then you might want to consider adjusting your budget.

The video below shows how to set up and run Google Analytics goal tracking.

http://www.youtube.com/watch?v=95BUrGivlrw | Text | Video

Traditional promotional methods updated

A business with enough history can usually ballpark a promotion’s expected ROI. They simply gauge the spike in sales. For example, a weekend clearance sale at an established dress shop might typically increase profits by approximately 15%. Approximations work in most cases, but consider the power of the coupon.

A low price tag option is entering into an agreement with a coupon site like dealon.com. They won’t charge you for the service, but they will reserve about half of the revenue for themselves. If you’re doing a 50% off coupon, and dealon.com is taking half of the revenue, you could be left with about a quarter of what you’d make on a regular price sale. Herein lies the true cost of this type of advertising.

Dealon will help you design the ad and then run it on their affiliate sites for up to year. Performance is tracked via coupon codes with each order. At the completion of the promotion you can use the data to calculate the overall effectiveness.

Promotions like this are a great way to build awareness or unload inventory. However, always consider the true cost. Though there is no upfront investment, there is always a future cost when the service is performed or the good is transferred to the customer.

E-commerce

There are also sites like e-junkie.com that offer very low cost discount code management programs for online retailers. For five dollars a month, e-junkie gives you a shopping cart with promotional code functionality. You can measure your coupons’ CPA by dividing your ad spend by the number of discounted orders you filled.

[Coupon Code Promotion Spend] / [# of discount orders filled]

For example, if you spend $1,000 on Facebook ads with the promotion code “SUMMER” and see 500 orders placed using that code, then cost per action was two dollars. It cost two dollars to make each sale.

With further scrutiny you could determine if this promotion had positive ROI. For example, if net profit is only two dollars at regular price, then the promotion lost money. You paid two dollars to acquire the sale, which ate up the profit, but you also discounted the product which leaves you at below break even.

The power of understanding your profitability when it comes to promotions will help you make better business decisions. Each time you are presented with an opportunity to promote your business, if you understand conversions and how CPA affects your success, then you will be better at determining which promotions are going to work best.

Starting a Business?
Join Docstoc's 100% Free Quick-Launch Guide to Starting a Business! Curated Exclusively by the Editors of Docstoc