Cost Per Acquisition (CPA) Formula for Local Businesses

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Cost Per Acquisition (CPA) Formula for Local Businesses

 Knowing your Cost Per Acquisition is vital information for any local business to know, and will help improve your marketing, allow you to have more realistic expectations, and help you plan overall marketing to meet your growth goals. Watch my short video as I demonstrate how to determine the CPA using Google Adwords Keyword Tool

To determine your Average Cost Per Acquisition, we use the Google Keyword Tool to get some good data. Google Adwords is all competition driven. Google does not arbitrarily set the cost per clicks in Adwords, the competition and bidding environment does. This is really important to understand what I just said. Adwords is one of the best tools in existence to test the competitiveness of your market.

A competitor of yours would not spend $100 per click in Adwords for a $200 sale and remain in business for long, but they would for a $1,500 average sale and most likely remain in business and profitable (depending on what service they were selling).
Learn this formula inside and out and you will be able to determine your CPA in your local market and have a better understanding of what you should be investing online to drive leads and new customers.

Formula for Determining Customer Acquisition Costs

This formula will help you determine what competitors are willing to spend in Adwords to acquire 1 new customer with a Visitor to Sale (Closing the Deal) Ratio of between 1%-3%. I am already taking into account industry average conversion rates (visitors to leads) with this formula, so you don’t have to do anything else.

Write down (or research in Google) some of the top keyword phrases used in your local market. Use keywords with at least 2 phrases and some with up to 4 words (no more than 4 at this point). Copy and paste those into the Google Adwords Keyword Tool (make sure that Columns – Approximate CPC is selected)

Adwords Tool – Take top 4-5 keywords (2-3 non-location, and 2-3 geo-targeted)

Example:
Keywords + CPC
Work injury lawyer $37.75
work injury attorney $38.60
work injury attorney chicago $53.04
work injury lawyer chicago $46.96

1% Visit to Sale Ratio
Average $44.09 x 100 (1% conversion to sale rate average = 100 clicks to get 1 new customer) = $4,408.75 (what competitors are willing to spend to acquire a new customer on average). Most likely the average sale in this market is about $44,000 ($4,408/.10(10% Marketing Costs) = $44,000.00 (I actually compared this with some industry data after I ran my CPA formula and I was off by a couple thousand bucks).

3% Conversion to sale ratio
Average $44.09 x 100 = $4,408.75/3 = $1,469.67 (3% conversion to sale rate avg = 100 clicks to get 3 customers or 33 visits).

Average the 2 numbers above $4,408.75 + $1,469.67 = $5,878.42/2 = $2,939.21/Average Cost Per Acquisition.

Want to Know What Your Average Cost Per Lead is?

With a 20% Close Ratio Expectation (1 out 5 leads turns into a customer on average for most local businesses) divide the above CPA $2,939.21/5 = $587.80/lead

Now, if a client in the personal injury attorney market told me their CPA was $500.00 to drive a $44,000.00 Client/Payout, I would say it sounds a bit off to me, but not impossible (they might have great attorneys, strong referral base, awesome systems in place, retention marketing, have weak competitors, no competition, etc). More than likely though, they would probably be in the $2,900+ range for Cost Per Acquisition costs.

What Are Your Growth Goals?

Once you know your CPA, you can determine what your marketing budget should be for the year to achieve your overall revenue growth goals.

Based on the example above:

  • If you need 10 new clients per month: 10 x $2,900 = $29,000/mth marketing budget
  • If you need 20 new clients per month: 20 x $2,900 = $58,000/mth marketing budget

The Cost Per Acquisition formula can be used for almost any industry and does not factor in an lifetime value of each customer. If you get referrals from most of your customers or you customers end up buying from you again, you could lower your Cost Per Acquisition number 10-20% or more on average. Remember, you want to be conservative here and realistic. Start measuring exactly what it costs to acquire 1 new customer once you get your marketing going and hopefully you do much better than what Google tells you it will cost to acquire a customer.

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