Cost Per Acquisition Is a Key Performance Indicator for Ecommerce Businesses
You have to build your ecommerce business one customer at a time. And there is a price to pay to acquire every one of those customers. That is the basic idea of cost per acquisition.
But, firstly, I’d like to focus my attention primarily on the following ten metrics. Each of these indicators is key to the short-term survival and long-term success of my ecommerce business.
When I mine my software for data, this is what I am looking for.
1. Number of Visitors to the Site
First and foremost, I am interested in the number of visitors I am able to attract to my website. After all, if there is no traffic, nothing else matters.
2. Percentage of Traffic Coming from Search Engines
In my case I regard ecommerce SEO as a vital discipline. This is because free search engine traffic is one of the best kinds. Also, a visitor has a high degree of trust in a website that the Google search results recommend.
3. Bounce Rate
If someone stepped into your retail store, glanced around for a few seconds and walked away, you would be irritated. But when that behavior becomes increasingly common, it would be a cause of great concern.
What I am talking about is bounce rate. I want to know the proportion of my visitors that leave me without giving me a second chance. I want to identify the reasons the bounce rate is high, and find means to lower the bounce rate.
4. Conversion Rate
So I have my traffic coming in, and a large proportion of it is not bouncing off. So far so good.
But that is not the objective of my business. I do not want prospects to browse around. My ultimate interest is in converting them into paying customers. This is why the conversion rate becomes critical.
5. Average Order Size
Because discounting has become the order of the day for eCommerce, there is always the risk that you are creating more and more transactions, but for smaller and smaller amounts.
As a result, you need to monitor the average order size.
6. Percentage and Number of Sales to Repeat Customers
It is important to assess customer loyalty.
As an ecommerce business, your greatest assets are your brand and your loyal customers. I derive comfort from the fact that an ever-increasing number of my customers are coming back and buying some more.
This indicator also allows me to assess the efficacy of my efforts to engage with my existing customer base.
7. Dollars of Sale for Each Dollar Spent on Advertising
It is not a smart strategy to solely depend upon advertising for gaining new customers.
However, advertising can certainly be one element in your marketing mix. But advertising can bleed you dry in no time. That is why you should closely monitor the dollars of revenue earned for each dollar spent on advertising.
8. Product Affinity
Customers tend to buy some products along with certain other products.
This is the basic idea of product affinity. As a category expert you probably have an intuitive understanding of what products go with what product.
But it is best to learn from real data.
9. Number of User Generated Content Pieces
Ecommerce customers tend to be a fickle lot.
If your website is able to engage customers meaningfully, then you are likely to emerge as the winner.
This is why you should be happy if more and more customers are publishing reviews and comments, rating products, and otherwise interacting with your website.
10. Daily Sales
The proof of the pudding is in the amount of daily sales.
In the initial few months you should be able to see a steep growth of daily sales numbers. If you have been around for more than two years, then you should be seeing a strong year-on-year growth.
What Is Cost Per Acquisition (CPA)?
As already mentioned, and as is obvious from the literal meaning of the term, cost per acquisition is the cost that an ecommerce business pays to acquire a new customer. That sounds simple, but in reality measuring CPA is pretty complex.
The following are some examples of the characteristics and significance of the cost per acquisition.
Cost Per Acquisition When Using Pay Per Click Advertising
Costs seem quite transparent when you are paying per click.
For instance, if you paid a total of $100 for 350 clicks, and from those 350 clicks you managed to create 5 new paid customers, then your cost per acquisition in the entire campaign is $100 divided by 5 equals $20.
This computation is accurate. However, the rationale underlying measurement of CPA is that you should be able to figure out:
- the bang for the buck that your marketing spends are generating.
- the financial validity of your ecommerce venture.
That is where the issue gets murkier. For instance, is CPA still a valuable metric if we do not consider the following:
- the average spends by each customer
- the lifetime value of each customer
- the spillover or referral gains from acquiring a new customer
Of course, if you have a handle over these three metrics, PPC ads make it quite easy to measure your cost of acquisition of a customer.
Cost Per Acquisition When Selling Through Affiliates
Assuming that you have no significant costs associated with administering an affiliate marketing program, computing your cost of acquisition of each new customer through an affiliate marketing program is pretty easy; I would say even easier than with a PPC campaign.
That is because you end up setting the exact percentage share that you want to give your affiliate.
Though the measurability of CPA through affiliate sales is great, it is often found that for new ecommerce websites, the CPA tends to be unacceptably high.
The likes of Amazon.com can get away with paying affiliate commissions as low as 4% to many of their affiliates, but you will not be afforded the same luxury until you can establish yourself.
Cost Per Acquisition When Using SEO
Unlike the comfortable CPA computations involved in PPC and affiliate marketing, SEO spends can seem like shooting in the dark.
Though all ecommerce businesses would love to land up on the top of search engine result pages, they find it quite tough to ascertain the value of doing so. As a result, budgeting for SEO is a wildly inaccurate discipline.
When the founders of ecommerce businesses have had prior exposure to successful SEO, they tend to be more gung-ho about it. On the other end of the spectrum are the founders who believe that if they cannot measure the outcome of an activity, they will not participate in it. And what makes all this more insane is the fact that Google keeps changing its search algorithm, often significantly, all too frequently.
Advocates of SEO would like us to believe that CPAs are lowest with spends on SEO. But there are also those who believe that there is no longer such a thing as SEO.
Cost Per Acquisition When Using Social Media Marketing
If you thought that measuring CPA on SEO spends was crazy, you have not yet been exposed to social media marketing.
At least in SEO the objective is to rank higher in search engines, and drive traffic to your website. In social media marketing the objectives are more sublime.
Your social marketing agency will ask you to be happy as the degree of your customer’s engagement with your brand is going up. And they will use measures such as “likes,” “favorites,” retweets,” “shares,” and others. It will leave you befuddled about the actual return on your investment.
The Big One: Cost Per Acquisition When Using Multiple Marketing Channels
Here is the proverbial icing on the cake, and I mean that sarcastically.
If you use multiple marketing channels, you will find it increasingly difficult to isolate the cost effectiveness of each. For instance, there could be cases where you first acquire a visitor using Google Adwords, but actually convert that into a sale using Facebook retargeting.
Another example could be that you first acquire visitors organically from a search engine, and then convert them from the remarketing program of Google.
How would you ever compute CPA in these hybrid cases? Of course, you could take the total marketing spend and divide it by the number of customers you acquire, but the resultant number, though accurate, will not be actionable.
Despite the difficulty of measurement, cost per acquisition is a key performance indicator of your ecommerce business.
You must monitor it as closely and accurately as possible. Only if you know the CPA and the lifetime value of a customer, would you know the financial health of your business.
David Hoang works as a copywriter for WriteAnyPapers. He used to be a web developer, but he decided to change his career. In this case, David has an opportunity to tell others how to apply different solutions.