Getting a Handle on your Cost Per Action (CPA)

Not only are gas prices on the rise, but often the cost per click when bidding on search terms is increasing too. It’s better to explore for shortcuts, than complain at the pump, which holds true with Google AdWords.

There is a range of options to respond with, such as:

• New ad copy to improve the click thru rate (CTR)
• Lowering the position of your ads
• Testing new landing pages to improve the rate of conversions
• Improving the overall functionality of your website
• Exploring lower-cost, alternative search terms

If you have exhausted all of these options and yet the price for those consistently performing search terms continually rises, when is it time to give up on that term?

The answer is easy, well sort of.

It all depends on your target Cost Per Action (CPA).

In other words, if you are selling something for $100 (or targeting a cost per lead with the same value), how much are you willing to pay for that action before it ends up being a sale or lead?

Factor in the actual cost of the clicks and add a general overhead “tax” to manage the program and you have the real CPA. If your CPA is $20 (20% to 30% of sales value), then you are in the typical ballpark for the cost of selling margin. More is bad (less profitable), less is good (improved margins). That’s the simple part.

The real question is defining how much time you have before deciding your desired CPA will never cut it.

This depends very much on sales latency, how long before you close the sale, and calculating the costs of additional selling methods that are necessary for your business model, such as follow-up phone calls.

In the $100 example, your sales latency should be in a matter of hours or days, unless you have a very unique offering. Higher-ticket items (including things such as enterprise software, heavy equipment, large service contracts, etc.) increase the time to decide, increasing your cost of selling. The important aspect to consider is what are you doing to reduce the sales process. Both online and offline.

So the bottom line is if your CPA is horrible, before you cast out the Paid Search model check out your website’s natural selling ability, as well as how to improve the overall selling process for your company.

This would be especially true if you see a very crowded search engine advertising space for your target keywords. After all, it is likely that someone in a crowded field of advertisers is using paid search profitably (of course, there are plenty of people who still conduct paid search campaigns irresponsibly).

If your ability to close sales is historically good in other channels, and/or through other online advertising methods, and paid search is turning out to be too costly, then you may have an alignment problem of search terms and that is an entirely new discussion.

Or, perhaps your business model just does not translate to advertising to people looking for exactly what you have to offer, and having the ability to control those advertising costs in a moment’s notice, all while tracking your spending to the exact question (search term) someone was asking when they found your product/service…