There are several payment models in the world of digital marketing, including cost per click (CPC), cost per lead (CPL), cost per install (CPI), and cost per action (CPA).
They all have their uses, but the cost per action is the most promising when it comes to controlling advertising costs and maximizing the return on investment.
So, what is cost per action, exactly?
Cost per action (CPA), often misconstrued as cost per acquisition, is a pricing model that entails that the advertiser pays the ad network only when prospective customers complete a specified action. In most cases, the action associated with the CPA is conversion-related, and the digital advertiser determines it.
- The cost-per-action or cost-per-acquisition model is a pricing model in which advertisers pay the ad network only after a specified, conversion-related action is completed by the user.
- This payment model is preferred by many advertisers because it enables them to control their costs and track their progress using tools like Google Analytics.
- The CPA formula is overall advertising costs divided by the number of actions taken.
- Cost per action should not be confused with cost per lead or cost per click – CPL and CPC are two other prevalent payment models in digital marketing that focus on different aspects of conversions.
- To optimize your campaign’s cost per action, try to have more than one goal, target the right audience, and improve your website’s conversion rate.
Read on to learn more about the importance of the CPA payment model and how it’s calculated.
Cost per Action (CPA) Explained!
The cost-per-action or cost-per-acquisition model—both terms are used interchangeably—is designed so that all ad payments are based on completed actions. These, as stated earlier, are typically conversion-related (i.e., sale, sign-up, link click, etc.)
Many advertisers prefer this payment model because it enables them to control costs, seeing as payment is only made when a certain marketing objective is completed.
Moreover, it’s easy to track cost per action using voucher codes and tools like Google Analytics. After all, it’s purely performance-based.
A bonus point about the CPA payment model is its flexibility. It can be associated with many desired actions, whereas a more rigid payment model, like the cost per install (CPI) mode, is only concerned with a single action; installation.
Unlike many payment models, the cost-per-action one is considered a direct reflection of profitability. It involves minimum risk, which is why it’s gaining momentum among marketers.
One point you should note, however, is that not all media networks offer CPA as a pricing option.
Think about it; with the CPA model, the ad network has to buy the ad real estate before any conversions take place and before any payments are processed. So, in the event of low conversion, the network takes most of the hit.
How to Calculate Cost per Action
There are a few formulas used to calculate CPA, with some being more complicated than others. However, to keep things simple, here’s the most basic formula.
CPA = Overall Advertising Costs / Number of Actions
For example, let’s say you spend $500 on your marketing campaigns, and you acquire a total of 20 actions. To calculate the CPA, you divide $500 by 20, which equates to $25.
If you’re using different advertising platforms, calculate each platform’s CPA individually. To put it differently, the CPA you calculate for your Facebook ads, for instance, will be different from the CPA for Google ads.
Cost per Action vs. Cost per Lead vs. Cost per Click
In addition to CPA, cost per lead (CPL) and cost per click (CPC) are two other prevalent payment models in digital marketing. How do the three differ, though?
The CPL model is mainly concerned with lead generation. It’s a financial metric of the cost of generating sales leads. It’s all about identifying prospective clients who are near the end of the buyer journey, whereas CPA is concerned with the entire journey, not just the end.
The CPC model, as you may have guessed, is a financial metric of the effective cost of each ad click. This pricing model is designed for increasing traffic, while the CPA pricing model encompasses more conversion-related actions than clicks.
Tips for Optimizing Cost per Action
Optimizing your marketing campaign’s cost per action is to reduce it as much as possible. The lower the CPA, the less you’ll have to pay for your desired action to be completed, whether it’s a sale, click, sign-up, or something else.
On that account, here are some tips for CPA advertising optimization:
Have More Than One Goal
Most businesses have one goal in mind, and that’s to sell or convert a unique visitor into a paying customer. And while this should be your ultimate goal, you need to set other goals to make the most out of your marketing campaigns.
Instead of focusing solely on sales, you should pay attention to metrics such as the number of pages visited or the amount of time spent on your website.
With access to this information, you can optimize your website, landing page, and other web pages so that they’re more compelling, which, in turn, is guaranteed to increase your sales.
Target the Right Audience
Optimizing your CPC campaigns is a surefire way of optimizing your CPA. The more effective your CPC campaigns are at targeting the right audience, the higher your conversions will be, which translates to a lower cost of action.
Optimize the Conversion Rate
Anything you do in order to improve your conversion rate goes hand in hand with optimizing your CPA. This includes refining your landing page, improving your site’s user experience, and conducting A/B testing.
Fortunately, there are numerous CRO techniques and practices that you can implement. Try as many as you can and observe how they affect your CPA.
In summary, cost per action is one of the many pricing models in the world of digital advertising.
This model entails that the advertiser pays the ad network after a specified action that’s conversion-related is completed, like acquiring one paying customer, a sign-up, or a click. The cost is typically a fixed rate.
Seeing as it’s purely performance-based, the CPA model is excellent for controlling costs. Not only that, but it allows for effective tracking with tools such as Google Analytics.
To figure out the CPA of your ad campaign, all you have to do is divide the overall marketing cost by the number of actions acquired. Note that if you’re using several marketing channels, each channel will have its own action cost.
Karl Barlett is a veteran in the marketing industry with over 9 years of experience in media buying. Karl has been instrumental in developing successful media campaigns for some of the biggest brands in the DTC world with an obsession to get the most out of every marketing dollar spent. Outside work, he enjoys video games and spending time with his dog, Louie.