Allowable Cost per Acquisition (CPA)

Setting an Allowable CPA for customer acquisition investments helps business answer the question:

How much can we afford to pay for a new customer?

The allowable CPA is useful to control media spend since it sets a maximum amount that can be spent in acquiring a new customer (or lead).

It’s a target maximum cost for generating leads or new customers profitably based on the cost of acquiring a new customer through investing in media. It’s typically limited to the communications cost and refers to cost per sale for new customers. (It may also refer to other outcomes such as cost-per-quote or lead).

How is allowable CPA calculated?

As you would expect, the allowable CPA will depend on the average selling price of a product or service and the required profit based on the margin. Higher value products will have a higher CPA, so for example, financial service aggregators promoting gas and electricity services may have an allowable CPA around one hundred dollars/pounds/euros.

Using CPA to control media spend is common for large transactional brands like retail, travel, utilities and financial services where it’s important not to burn budgets, but less so in smaller businesses where it is harder to identify transaction value. But you could argue that it’s more important in smaller businesses.

Lifetime value should also be taken into account since you should be able to increase your allowable cost per acquisition by setting it based on the Customer Lifetime Value (CLTV) rather than on a one-off sales margin. This is because most companies will be able to make multiple sales to some customers over the course of time, so this means they can afford more to acquire them.

An understanding of customer lifetime value (CLTV) is key to competing effectively for new customers in competitive markets.

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Dr Dave Chaffey is co-founder and Content Director of digital marketing advice site Smart Insights. We’re a publisher and learning platform that helps our 150,000 active members in over 100 countries plan, manage and optimize their digital marketing activities by applying the actionable advice in our planning templates, guides and interactive e-learning tools.

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