Advedro - The New Era Of Digital Advertising

The Latest News In Ad Tech

The higher the CPA, the more profitable
July 18, 2020
STOCKHOLM


Profitable CPA

It may seem obvious that a lower advertising cost per new customer is something to celebrate. But it's not that simple. A higher CPA can often mean a higher profit on the bottom line.

It is easy for an advertiser to celebrate if you have managed to lower your CPA by 20% a month. A lower CPA may be good, but you may very well have done yourself a disservice. Instead of optimizing for the lowest possible CPA, it is smarter to optimize for the highest possible profit.

Volume important for profitability

Almost all companies have some form of fixed cost. It can be personnel, warehouses, machines, and so on. The higher the utilization rate you reach on your fixed costs, the more profitable your company will be. This is basic for a business economist, but we marketers often forget this when we advertise on Google or Facebook.

In the pursuit of the lowest possible CPA, we miss the importance of volume. The simplified examples below have two scenarios, Low CPA and Profitable CPA. When you increase your CPA, all else being equal, you will get more new customers, which leads to more revenue that can help you cover the fixed costs.

Profitable CPA

Therefore, it is more profitable with a higher CPA if this leads to an increase in volume, which means that you get better coverage of your fixed costs overall. In our fictional example, the volume increases from 2,000 to 3,000 customers when the CPA increases from €10 to €20. The lower CPA gives a loss of € 5000, while the scenario with a higher CPA gives a profit of € 10.000.

This is, of course, a simplified example; the reality is much more complicated. The purpose is to show how important volume is for your profitability.

Set the right target CPA

In the Google and Facebook advertising systems, it is impossible to optimize for profit on the last line in an ideal way without optimizing for a CPA (or ROAS if you are an e-trader). Therefore, it is vital that you have as accurate of a CPA goal as possible to optimize. When calculating your target CPA, you need to consider how an increased volume affects your company's overall finances.

Of course, you also need to know the average income you have per customer and your variable and fixed costs.

What happens if you increase your target CPA by 50%? Your advertising costs for a new customer are guaranteed to grow. You can also assume that it will lead to more customers.
Then there is the question of whether there will be enough more customers to compensate for the increased advertising cost. This can not be known with certainty in advance, but our experience tells me that it is worth trying.