The assumptions for this model is that every conversion is worth the same, including:
Cost per Conversion
Value per Conversion
CPA is effective for businesses that generate leads which are followed up with offline to buy only one product, at a fixed margin. This approach may also be effective for eCommerce companies that sell only one product at a fixed margin.
However, if your company does not match one of the two profiles above, your AdWords account could be running very inefficiently. If your business offers more than one product at a fixed margin, you may be limiting your ability to compete effectively and damaging the bottom line.
Here is an example:
A company selling electronics on their site with an objective to generate as many sales as possible may have looked at historical performance and learned that the average sale is $100. They can spend 20% of the revenues on advertising, leading to a $20 CPA target. With the $20 CPA target, the Max CPC is calculated in this way:
- Target Cost per Acquisition (CPA): $20
- Conversion rate: 5%
- Max CPC: $1.00
This is the basic approach employed by most companies. The Max CPC will be set for each keyword based on the conversion rate. The primary objective for this approach to managing a campaign is to maximize the number of conversions while maintaining an average cost per conversion/acquisition of $20.
Further, a company could employ a portfolio approach, where a group of keywords could generate an average CPA of $10, while other keywords are allowed to go up to $30 CPA. The overall average of $20 is what matters to maximize the outcome under this approach.
As a reminder, this methodology is effective when you have ONE type of conversions (e.g.: one product to sell, one web form to fill out).
If there is variability in the value of a conversion (revenue or profit, for instance), then CPA may not be the right model for your business. For an eCommerce companies that offer many different products, each with different margins, the CPA approach does not take into consideration the total Revenues or Profit being produced by each keyword.
If the purpose is to generate revenues or profit, you must capture and use that data when deciding how much a click is worth. The magic in optimization is knowing the outcome before you buy the click; without historical data (revenue/profit) there is zero probability that you will make the right choice when deciding how much to pay for the next click to maximize your business value. Choosing the right conversion type to optimize from becomes infinitely critical for your success.
Next: the next post will cover how to optimize for revenues, followed up by a post on when to use profit.