Foundations · Lesson 3 of 6
Setting a target CPA from your margins
About 11 minutes · Yogender Kumar, Managing Partner
By the end of this lesson you'll be able to
- Calculate the contribution one order really leaves you
- Work out what a customer is worth over 12 months
- Set a target CPA and the matching break-even ROAS
Why this matters
A target CPA is the number every campaign decision hangs on. Set it too low and you turn away customers who would have made you money. Set it too high and you grow sales while losing cash.
The core idea
In Lesson 1 we said Northfield keeps £24 from a £60 order. That was a simplification. It took off the product and delivery, but other costs come with every order too: card fees and returns.
What's left once all of those are paid is the order's contribution. It's what the order contributes towards your overheads and profit, and it's the true ceiling on what you can pay to win it.
Two habits keep this honest. Work in prices excluding VAT, because the VAT was never yours. And only count costs that rise with each order. Rent and salaries don't, so they stay out.
Where a £60 Northfield order goes (excluding VAT)
- Product £30
- Delivery £6
- Card fees £1.20
- Returns £2.80
- Contribution £20
Worked example
Northfield's figures again, still illustrative. All prices exclude VAT.
- Average order: £60
- Product cost: £30
- Delivery: £6
- Card fees: £1.20 (2% of the order)
- Returns: £2.80 per order on average, once refunds and unsellable stock are spread across all orders
Contribution is £60 − £30 − £6 − £1.20 − £2.80 = £20. That is Northfield's real break-even CPA on a first order, not the £24 we used before.
Northfield wants to keep £6 from each first order, so a first-order target CPA is £20 − £6 = £14.
Now add repeat business. Half of Northfield's customers order once more within a year, and a repeat order costs little to win, so we leave that cost out here. So the average customer is worth £20 + (0.5 × £20) = £30 in contribution over 12 months.
If Northfield is happy to make its £10 profit over the year rather than on day one, its target CPA becomes £30 − £10 = £20.
Both targets are right, for different businesses. A shop short of cash should use £14, because it gets its profit back on the first order. A shop with money in the bank, and proof that customers really do come back, can use £20. It wins more customers, but it waits months for the profit.
Three numbers Northfield could use as its limit
From CPA to ROAS
Many platforms report ROAS (return on ad spend) instead of CPA. It's revenue divided by ad spend, and you can convert between the two.
Break-even ROAS is the order value divided by the break-even CPA. For Northfield that's £60 ÷ £20 = 3.0. A campaign showing a ROAS of 2.5 looks like it returns £2.50 for every £1. In fact it's losing money on first orders.
One UK catch: platforms often report revenue including VAT. Take the VAT off before you compare, or ROAS looks 20% better than it is.
In practice
- List every cost that comes with an order, with prices excluding VAT.
- Use your actual returns rate from the last six months, not a guess.
- Pull repeat rates from your order data, by the channel that won the customer if you can.
- Write down both targets: first order only, and 12 months.
- Agree with finance which one you're using, and why.
- Recalculate every quarter, or whenever prices or delivery costs change.
Common mistakes
- Using prices that include VAT. On a £72 price, only £60 is yours. Building a target on £72 overpays for every customer.
- Counting lifetime value you haven't seen. "Customers stay for years" needs evidence from your own orders. Until you have it, use the first-order target.
- Taking ROAS at face value. A ROAS above 1 doesn't mean profit. Check it against your break-even ROAS.
Try it yourself
Your average order is £45 excluding VAT. Product costs £18, delivery £5, and card fees plus returns average £2 per order. A quarter of customers order once more within a year. You want to keep £5 per customer over the year. What is your 12-month target CPA, and what ROAS would a first order need to hit that CPA?
Show answer
Contribution per order is £45 − £18 − £5 − £2 = £20. Over 12 months a customer is worth £20 + (0.25 × £20) = £25. Your target CPA is £25 − £5 = £20. A first order needs a ROAS of £45 ÷ £20 = 2.25 to hit it.
Quick check
Not scored. Pick an answer to see the explanation.
Which costs are most often left out when people work out break-even CPA?
An order leaves £20, and a customer is worth £30 over a year. A partner charges £25 per first order. What's true?
Key takeaways
- Contribution is what an order leaves after every cost that comes with it.
- Break-even CPA equals contribution per order. Target CPA sits below it.
- Repeat orders raise a customer's lifetime value, so you can pay more, but you wait for the profit.
- Break-even ROAS is order value divided by break-even CPA.