Customer Acquisition in SEM: Are You Using CPA as Your Main KPI? You’re Losing Money

Home » Customer Acquisition in SEM: Are You Using CPA as Your Main KPI? You’re Losing Money

Many online customer acquisition managers use CPA (Cost Per Acquisition) as the main indicator to measure the performance of SEM campaigns. By doing so, they are missing the opportunity to improve their campaigns and increase the company’s profit.

Many acquisition managers aim for a CPA that’s a percentage higher than the Customer Lifetime Value (CLTV) of customers. However, it’s impossible to know beforehand what percentage is necessary to maximize the benefit of the customer acquisition operation. If the CPA is too low, we will gain more customers, but some of them won’t be profitable for us. If the CPA is too high, we will acquire very cheap customers, but we will miss out on acquiring customers who would have been profitable for our company. What is the alternative?

Alternatives to CPA for Customer Acquisition

Google Ads allows campaigns to be optimized with an aim to “Maximize conversions” or “Maximize conversion value”. If we set the conversion value as the CLTV of our customers, we will achieve campaigns that significantly improve compared to an optimization by CPA. With this configuration, Google Ads seeks the optimal balance between the number of customers acquired and the cost we pay for each one. However, this setting still suffers from two limitations:

It does not help us define what the daily investment in Google Ads is that maximizes the benefit for the company.
It forces us to use a “Smart Campaign”, which limits our control capacity.

The Best Option: Net Margin Optimization

In a sector where online customer acquisition is an essential element of business success, we need to align customer acquisition KPIs with the KPIs that guide the operation of the company as a whole. Instead of using CPA, let’s use the Net Margin of the customer acquisition operation as a KPI, defining it as:

Customer Acquisition Net Margin = Number of new customers * Customer Lifetime Value – Marketing costs

How to do it? For our main SEM campaigns, we need to calculate the Net Margin for different Cost per Click (CPC) values, and adjust the CPC in successive iterations until identifying the one that achieves the maximum Net Margin. We can do it manually, by modifying the CPCs each week and measuring results, or much more operationally, through software that does the work for us.

How much can we improve our performance using net margin optimization?

Our company has been developing software for several years that allows its clients to optimize their Google Ads campaigns based on maximizing net margin. Our software is installed in the SEM customer acquisition accounts of several of the largest Spanish insurance companies, and we are achieving improvements in the net margin of operations of the order of 20% – 50%.