How to Calculate the Target CPA / CPL

Starting to run PPC ads on Google Adwords / Bing Ads is super easy.  All you need is the intent and a few minutes from your schedule to set up an account with Google / Microsoft.

Making sure these ads lead to the best results for your business might just not be so simple though.  It usually requires a constant effort to monitor and improve the settings to help improve results. Then too, the job is never finished.

That is the reason why a business chooses agencies, like 99 Robots, that specialize in PPC Management and assigns the responsibility of managing the PPC campaigns.

‘Awesome. It’s a job well done. Let’s now watch the money flow in’

If you think that’s the next step after assigning PPC management to an agency, think again!

Your task as a Business Owner / Partner / Manager is never over. Period.

The agencies do make life easier for you by helping you harness the potential of PPC ads, but even they cannot perform magic.

So instead of waiting for ‘An Act of God’, the agency will usually seek input to understand the business and its promotion needs.

Typical onboarding information that you get asked is:

1. Monthly Ad Budget
2. Details of Products / Services to promote
3. Regions to promote within
4. Typical buyer personas for your products/services
5. Target CPA / Target CPL

What is CPA / CPL?

Both of these represent the value your/your brand is willing to invest for each sale / lead that it receives.

• CPA stands for Cost Per Acquisition
• CPL stands for Cost per Lead

Along with serving as a measure of performance for you / your company they also serve as targets to achieve for the agency / PPC experts you hire.

What should be my Target CPA / CPL?

This is a very important question to ask yourself if you are using PPC ads as a medium to promote your business / brand.

One of the main purposes of this is to bring an element of control on the profitability / performance of these PPC ads.  Come to think of it, the option to measure the benefits of promotions directly is one of the main reasons why online advertising has been growing at such trending speeds.

Each business, however, needs to realize that the target CPA / CPL is unique for it, just like each brand / service is unique in its own operations and cost of delivery, etc.

So there just cannot be a direct / simple answer to a question that seeks a target CPA / CPL.

How to calculate your Target CPA / CPL?

The most basic method to calculate the target CPA is:

Average Transaction Value – ((Your Expenses in the Product / Service) + (Desired Profit)) = Target CPA

With the above, you would typically learn how much you can spend for each sale / conversion while remaining on your desired profit levels.

For a subscription / repeat customer based business this would be:

Average Lifetime Value per User – ((Your Expenses in the Product / Service) + (Desired Profit)) = Target CPA

What if we are just beginning?

Knowing the target CPA for a business that is just beginning to spend on PPC ads is tricky.

The reasons are many but include:

1. The verticals that work / convert best are not known.
2. The average order / transaction value is not known.
3. The average lifetime value per user is not known.

So, for the initial promotions you could consider:

Average Transaction Value – Your Expenses in the Product / Service = Target CPA

Or

Estimated Lifetime Value per User – Your Expenses in the Product / Service = Target CPA

You may react to the above as:

No Profits?

Yes, in my experience it is better to begin at break-even when the targets are unknown.  This is because you do not want to set too low a target CPA / CPL as it will lead to a very low volume of sales / leads, if any.

What you would typically want though is to set a level where you know you do not lose anything, and then improve once that is achieved.

Do keep in mind however, that professionally set up and managed PPC campaigns can help identify and achieve the targets in an orderly and planned manner for you.