Understanding your acceptable CPA (cost per acquisition) is the predicate to any successful performance-driven paid search campaign. The simplest formula for CPA is keyword price * conversion rate on your website. Knowing that you can afford to spend, say, $20 on each form fill out (e.g. your CPA is $20) constrains what keywords you can successfully compete on. Some keyword prices will simply be too expensive at your web site’s current conversion rate to work out to a CPA that is profitable.
While many companies obsess about their conversion rate as the primary way to drop CPA and thus gain access to bidding on more expensive keywords, the other way to affect CPA is to increase the lifetime value of the customer and in doing so, your acceptable up front CPA. A customer who stays longer is worth more to you (assuming you have a recurring revenue model such as a SaaS business or an ecommerce site where customers shop with you more than once over time). A customer who is worth more to you allows you to spend more to acquire them on their first purchase or contact. A higher acceptable CPA allows you to compete on more expensive keywords or in higher ad positions, thus increasing your conversion volume even without changing your conversion rate.
But how do you increase your LTV?
The simplest starting point is to understand how happy your customers are. Happier customers will stay longer. While many companies measure retention rates and other customer satisfaction metrics, the simplest way to measure customer happiness is with a NPS score. The Net Promoter Score (NPS) is a well tested metric using a simple question to find out how your customers really feel about your product: “would you recommend this to a friend or colleague.” NPS uses a simple 0 to 10 measurement system where scores of 0-6 are called detractors, 9 and 10 are promoters, and 7 and 8 are neutral. Your NPS score is simply the percentage promoters minus percentage detractors giving you a score of -100 to 100. While there is no standard measure, a NPS score above 0 is regarded as OK, above 30 as good, and above 50 as excellent. Few achieve 75 or higher NPS (keep in mind you can have a -75 as well!). As it correlates to customer happiness, if you have a low NPS score you will likely have a low LTV or repeat buying behavior and thus need a low CPA to make money off each customer.
There are many ways to measure NPS scores – some companies use email surveys, others ask during their customer cancellation process. At Trada, we have been working with one of the first “in-app” NPS survey systems called TallyBits (www.tallybits.com). We believe that knowing what our customers think about us as early as possible – and asking in the easiest way possible (right in the app) – gets us the best NPS data. In addition to raw NPS scores, we can segment our customers’ NPS rating by how long they have been with us, who their account manager is, who they were sold by, what industry they are in, and many more factors that can lead us to understand how to improve their customer experience.
Our goal is to constantly improve the happiness of both the Trada advertiser and optimizer. A happy customer is a long term customer. In the PPC space, new advertisers can be expensive to acquire. By keeping an average customer even one month longer, we can noticeably drive up the acceptable CPA we can spend in our own search efforts (yes, we use Trada for Trada) to acquire leads..
So, have you considered more than just your conversion rate in terms of how to gain an CPA advantage in PPC?