Few things make marketers more excited than watching click counts rise. That said, click counts are an important part of the marketing equation, but they only tell part of the story, and that is precisely where the CPA vs CAC debate kicks in.
How so? Clicks give you data about how many people found your ads and content. The challenge is turning those window shoppers into paying customers. That brings us to the importance of tracking your conversions. To that end, you need to know how much you’re spending to get those conversions.
CPA (cost per acquisition) and CAC (customer acquisition cost) are two of the most common ways to determine how exactly you are paying for your Google Ads.
What’s the difference between them? Why should you know the differences between CPA vs CAC?
Is one better than the other?
Do you need to calculate CPA and CAC metrics as part of a responsible marketing strategy?
These are all good questions to ask - and we’ve got equally good answers for you too! 👇
What Is CPA?
In our quest to better understand CPA vs CAC, let’s start by defining CPA. Simply put, CPA is a metric that measures the total cost to acquire one paying customer on a particular ad campaign or advertising channel. CPA doesn't just refer to buyers, though. It also pertains to specific actions like clicks, downloads, and installs, as an “acquisition” can be any ad-related action you define as valuable for your business.
CPA is a term that marketers commonly use to describe cost per acquisition, but don’t be surprised if you hear it called by another name such as:
- Cost per action
- Pay per action (PPA)
- Performance-based advertising
It’s important to make the distinction between CAC vs CPA because you’ll have to make a decision when you set up your ad bidding parameters for how the ad network will charge you. Chances are that CAC and CPA are the most common bidding strategies you’ll stumble upon.
What’s the most preferred bidding strategy, though? Most marketers would tell you they prefer CPA. There are a couple of reasons for that:
- You’re paying for a direct result;
- It’s easy to compare ad performance across channels (Facebook, Google, YouTube, etc.).
You could think of CPA as a more refined metric than the CAC metric. The main benefit of CPA vs CPC is that it tells you how well prospects and customers are receiving your ads and other content.
When Is Targeting CPA a Good Idea?
So, what’s the big attraction with CPA in marketing? Try to think of acquisition by its root meaning, which is to acquire something, or get something. That “something” doesn’t have to be a sale; although, it could be a qualified lead, a form submission, or a download of content that you’re offering.
Of course, any time you get something, you have to pay for it. That begs the question, “what are you willing to pay for?” The beauty of CPA in marketing is that you have choices in how you define your acquisitions. You only have to pay when the actions you identified as acquisitions occur.
You have to think of it this way. If your ads aren’t converting into sales, you can’t call them successful, even if you’re getting hoards of clicks on your ads or website.
Here’s where the value of CPA comes in:
- It gives you a ballpark estimate of how much you have to spend for each customer
- The ad network only charges you when the action you selected is completed, which enables you to control advertising costs
- It tends to suit B2B businesses
- It helps streamline bidding processes for ad accounts with more than two ad campaigns on them
Any time you invest money, there’s a degree of risk. With CPA in marketing, there’s less risk because you get some kind of targeted action in return for your money. Ultimately, it’s a great way to stretch your ad budget. On the flipside, if you’re not getting the results you’re after, you can reinvest the savings into different marketing strategies and try again. The point is, you don’t have much to lose with CPA.
To answer the initial question, targeting CPA is a good idea most of the time. And, it’s a good idea for companies that are looking for a return on their marketing dollars based on their customers actions.
What Is CAC?
That’s a wrap on CPA, so let’s switch gears and get a better grasp on CAC in marketing, as well as the elements that separate it from CPA.
Many people get confused by CPA and CAC. Although the two are not the same thing (and, to be honest, not even in the same broad category of things as targeting CPA is a Google Ads bidding strategy, whereas calculating the CAC is a more general notion).
How do you compute CAC? It’s simple. Just calculate the entire cost of your sales and marketing activities over a specific timeframe and divide it by the number of customers you acquired during the same period. Just be sure to include expenses related to staffing, research, etc. Your analytics will give you the data to help you calculate it.
As opposed to CPA, which allows you to determine the cost for every action (signups, downloads, etc.), with a CAC metric you’re calculating the total cost of attracting and converting leads into customers. In essence, CAC gives you the means to compare how much you’re spending to attract customers in comparison with how many paying customers you actually get. Generally, marketers define a specific time period for calculating CAC.
While the CAC metric is an important benchmark for marketers, it’s also important to other managers that are involved with evaluating the company’s profit margins. Consider what the CAC metric means in the holistic scope of the business.
Company execs and investors use CAC to evaluate the company’s current profitability and the potential for profit in the future. One of the things that’s typically on their minds is whether there are any opportunities to lower CAC to increase profits. The higher-ups are keenly aware that CAC can take the company to the next level (perhaps in record time) or send it into bankruptcy.
Overall, if you can lower CAC, you’ll get a greater ROAS, and it’s a chance to impress those who are looking at the company’s bottom line. However, it is quite important to mention that looking for the CAC (or, to be more specific, solely aiming to lower the CAC) is not necessarily a bidding strategy in Google Ads, as much as it is a by-product of choosing the right bidding strategy for your business’ specifics.
Is Going After CAC a Good Idea?
Regardless of whether you’re just getting your business off the ground or it’s steadily progressing and you’re looking to give your bottom line a boost, lead generation and retention are ongoing challenges. That’s a valid point regardless of what industry you’re in.
CAC is more beneficial for certain industries than others. E-commerce makes for a good example. It’s nice to know which users are signing up for content, but marketers are most interested in learning the cost of acquiring customers that offer up their credit cards.
On that note, in the early days of a startup, it’s always harder to get qualified leads. Over time, you’ll get into a comfortable cadence, and you’ll be looking for ways to reduce CAC. Marketers beware, experimenting with CAC can quickly become an obsession!
As you consider the practical application of targeting CAC, let’s give it a little context.
The question you need to ask yourself is this. Are you interested in the cost of acquiring customers through a particular campaign or channel? If so, CPA is your metric of choice. If you’re more interested in the total cost of acquiring customers, CAC is your bailiwick.
CPA vs CAC in 2021: What’s the Best Option, Then?
With so many marketing terms floating around, it’s easy enough for markets to confuse the meanings of CPA and CAC.
To state it simply:
- CAC reflects the money you spend to acquire a customer
- CPA reflects the money you spend for your target audience to perform a specific action (which may or may not be an actual purchase)
The differences become glaring when you look at a subscription-based model. For example, if a customer signs up for a free online fitness session, you’re measuring CPA. If they love it and decide to pay for that second month, you’ve moved to the arena of measuring CAC. These are the types of metrics that, when monitored regularly will keep your company financially healthy.
As a final wrap, ultimately, your marketing efforts should be producing revenue. Visits and ad clicks play a role in getting conversions, but the conversions are what really count. Good or bad, CAC gives you an indication of your company’s overall financial health.
We hope that you’re sufficiently enlightened about CPA vs CAC and that you got some great takeaways. In the fascinating world of digital marketing, there’s always something new to learn about setting up effective ad campaigns using a data-driven approach. Whether you’re a hungry startup or a seasoned business looking to make improvements, you don’t have to navigate marketing strategies alone. At ClickGUARD, we have the experience and expertise to help you reach your business goals. Check out our blog. It’s filled with lots of great content about optimizing ad campaigns.