Just like with any new business venture, it’s advised you get dirty with a business plan so that you can be super familiar with the costs associated running that business. You’d be surprised how many established businesses still don’t really have a grasp on cost and what their target CPAs for various products should be.
A challenge advertisers often run into is that they can’t accurately track profit so they don’t even try to estimate a Target Conversion Cost (CPA). When I ask what their targets are, many advertisers will say their tracking is not accurate.
NEWS Flash: Tracking is NEVER 100% Accurate.
Here are some reasons why:
- Conversion or Analytics tracking pixels are not set properly.
- Auto-tagging is turned off in Adwords.
- Your Adwords account is not linked to your Analytics so you aren’t able to get ROAS for PPC.
- You get lots of phone call orders.
- You get repeat business.
- You sell multiple products or services per transaction.
- Final sales happen offline (in person).
- Assisted Conversions (visit starts on Google CPC but converts ‘Direct’ later)
All of these factors make tracking profit harder to do, but we still need to estimate some profit benchmarks. That way, we can formulate a target CPA to use in our management strategy, even if it’s just a general target we can aim toward. You can also expect to do this for various products or services that you offer if they have different price points and profitability for each.
FORMULA FOR A BASIC TARGET CPA
This is the basic formula for achieving the target CPA. While the formula is very easy to comprehend, actually plugging in the numbers is something most advertisers don’t often do. Below is a graph that outlines the formula for calculating a Target CPA.
First, take the Average Transaction Value or Revenue Amount you get for selling your product or service and subtract the Cost to Produce Products or Services, then subtract the Estimated Fixed Costs involved (non-Marketing). This will leave you with the Gross Profit before advertising.
Then decide what you NEED to make on this transaction as a net profit and subtract that amount from the Gross Profit before advertising. This is your Target CPA. While there are many factors that make this harder to do, the strategies below will help provide some insight on how to adjust for these factors.
CUSTOMER LIFETIME VALUE
When margins are short and there is little profit being made on an initial sale, the lifetime value of the customer or client can be used for the Revenue Amount. This is particularly helpful when there is a high likelihood for repeat sales. Just be sure to adjust the formula above to include the lifetime costs of providing the product or service.
Example: If my reported conversion costs are $100 but half of my sales come as phone orders, I know my actual conversion cost is probably around $50.
That is how you assign a weight (.50) to conversion data. It doesn’t have to be 100% accurate. Having a target conversion cost and tracking is better than not doing anything at all or using the data given as face-value.
Assisted Conversions are conversions that you receive in one channel but may have originated from a different source initially.
Sometimes a user will initially click on a PPC ad but then clear their cache and come through the site directly or organically to convert. If you know your customers to do research a bit before converting, then your should be open to the idea of ‘Assisted Conversions.’ Bear this in mind when arriving at your target conversion cost.
To see what type of assists you may be experiencing go to Assisted Conversion in your Google Analytics or read more on Channel Contribution here: https://support.google.com/analytics/answer/1191204?hl=en