Foundations · Lesson 6 of 6
How to reduce your cost per acquisition
About 12 minutes · Yogender Kumar, Managing Partner
By the end of this lesson you'll be able to
- Break CPA into cost per click and conversion rate
- Plan CPA improvements in the right order
- Tell average CPA and marginal CPA apart before adding budget
Why this matters
When CPA rises, the first instinct is to cut bids or change channel. More often the money is leaking somewhere you already control: wasted clicks, slow pages, a checkout that loses people. This lesson works through the levers in the order I'd pull them.
The core idea
On any click-based channel, CPA comes from two numbers:
CPA = cost per click ÷ conversion rate
At 50p a click and a 2% conversion rate, CPA is £0.50 ÷ 0.02 = £25. You can bring that down by paying less for each click, or by turning more clicks into orders. Lifting conversion from 2% to 2.5% cuts CPA by a fifth, and it needs no extra media spend.
Before either of those, check the count. Lesson 4 showed how sales get counted twice. A CPA built on wrong numbers can't be fixed by changing the campaign.
Worked example
Northfield's paid search, illustrative as before. In Lesson 3 we set its limit at £20 per customer. To keep it simple, we'll treat every order as a new customer.
Start: £10,000 a month, 50p a click, 20,000 clicks, 400 orders. A 2% conversion rate, and a CPA of £25: over the limit.
Step 1: cut the waste. The search terms report shows 4,000 clicks (£2,000) on searches like "free furniture" and "homeware jobs". None of them led to an order in 90 days. Northfield adds them as negative keywords. Spend drops to £8,000 and orders stay at 400. CPA is now £20.
Step 2: convert more of the visitors. Product pages load slowly on phones, and checkout asks for an account before payment. Northfield speeds up the pages and adds guest checkout. Conversion rises from 2.5% to 3% on the 16,000 clicks that remain: 480 orders. CPA is now £8,000 ÷ 480 = £16.67.
Nothing about the bids changed. Both steps worked on money Northfield was already spending.
Northfield's search CPA after each change
Spending the savings
Northfield now has £2,000 a month spare, and the obvious move is to put it back into search. It does, and the extra £2,000 brings in 90 more orders.
The average looks fine: £10,000 ÷ 570 orders = £17.54. But look at the extra money on its own: £2,000 ÷ 90 = £22.22 per order. That's above the £20 limit.
This is marginal CPA, the cost of the next order rather than the average one. Extra budget reaches people who are less ready to buy, so each new order costs more than the last. The average hides it, because the cheap early orders are still in the total.
My rule: add budget in steps, and stop when the marginal CPA reaches your limit, not the average.
Putting the £2,000 back: average against marginal CPA
In practice
- Check that conversions match real orders before changing anything.
- Review search terms, placements or audiences weekly, and exclude the ones that don't convert.
- Test pages on a real phone over a mobile connection.
- Count the steps and fields between landing and payment, then remove one.
- Add budget in steps of 10% to 20%, and work out marginal CPA after each one.
- Move money between channels using marginal CPA, not each channel's average.
Common mistakes
- Cutting bids first. Lower bids often lose your best clicks along with the waste. Remove the waste directly.
- Judging new budget by the average. The average can stay inside your limit while every extra pound loses money.
- Changing several things at once. If pages, bids and ads all change in one week, you won't know what worked. Change one thing, wait, then measure.
Try it yourself
A campaign spends £6,000 at 60p a click, which buys 10,000 clicks, and 1.5% of them buy. What's the CPA? What does it become if conversion rises to 2%? And if better ads then cut the cost per click to 50p on the same budget?
Show answer
Start: 10,000 × 1.5% = 150 orders, so CPA is £6,000 ÷ 150 = £40. At 2%: 200 orders, so CPA is £30. At 50p a click the same £6,000 buys 12,000 clicks. At 2% that's 240 orders, so CPA is £25. You can check this with the formula: £0.50 ÷ 0.02 = £25.
Quick check
Not scored. Pick an answer to see the explanation.
Cost per click is £1 and 4% of visitors buy. What's the CPA?
Your average CPA is £18 and your limit is £20. The last £1,000 you added brought in 40 orders. Should you keep that extra spend?
Key takeaways
- CPA on click-based channels is cost per click divided by conversion rate.
- Fix the count, cut the waste, then convert more visitors, in that order.
- Small conversion gains cut CPA without spending more on media.
- Add budget until marginal CPA, not average CPA, reaches your limit.
Further reading: the full guide on our blog