CPA meaning: What it is & how to calculate it as a startup

As a startup, you're always looking for ways to cut costs and increase profits. One avenue that may be worth exploring is CPA (cost per acquisition).

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CPA – what it is and what are its uses for startups

When launching a startup, there are a lot of important numbers to consider. One among them is your Cost Per Acquisition, or CPA. This metric measures how much it costs you to acquire a new customer. Obviously, the lower your CPA, the better. But how do you calculate it? There are three primary factors to consider:

Marketing budget

This is the amount you're spending on advertising and other marketing initiatives. To get an accurate number, be sure to track all of your expenses related to acquiring new customers.

The number of new customers you're acquiring

The number of new customers you're acquiring:
This one is pretty straightforward. Just divide your total marketing budget by the number of new customers you're acquiring.

The lifetime value of a customer

This is the projected amount of money a customer will spend with your company over the course of their relationship with you. When calculating your CPA, be sure to use a realistic estimate of your customers' lifetime value.

By taking these three factors into account, you can get a clear picture of your CPA and make informed decisions about your marketing budget. Keep in mind that your CPA will change as your business grows, so be sure to monitor it closely and adjust your marketing strategy accordingly.

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How to calculate CPA

There are a few different ways to calculate your startup's CPA. The most common method is to divide your total marketing and advertising costs by the number of new customers or leads generated. For example, if you spend $1000 on marketing and advertising, and this results in 10 new customers, your CPA would be $100. 

Calculation: Marketing spend / number of acquired customers = CAC


Another way to calculate CPA is to divide your total sales revenue by the number of new customers or leads generated. In this case, if your total sales revenue is $5000 and you acquired 10 new customers, your CPA would be $500. 

Calculation: Sales revenue / number of acquired customers = CAC

It's important to note that there's no right or wrong way to calculate CPA. The method you choose will depend on your business's unique situation.

The primary factors startup founders should consider when calculating their Cost Per Acquisition (CPA)

CPA is a key metric for startups because it allows them to track their marketing and advertising efforts, and optimize their spend to get the most bang for their buck. By regularly monitoring and calculating their CPA, startup founders can make sure they're on track to achieving their business goals.

When calculating their CPA, startup founders should consider the following three primary factors:

The type of customer acquisition channel being utilized

There are a variety of customer acquisition channels that startups can use, such as online ads, PR, or events. The cost associated with each channel will vary, so it's important to take this into account when calculating CPA..

The quality of leads being generated

Not all leads are created equal. Some may be more interested in your product or service than others, which means they're more likely to convert into paying customers. The cost of acquiring high-quality leads should be factored into your CPA calculation.

How much it costs to maintain acquired customers

It's not enough to simply acquire new customers—you also need to keep them happy and engaged with your product or service. The cost of customer retention should be included in your CPA calculation.

By taking all of these factors into consideration, you can get a more accurate picture of your customer acquisition costs, and make sure you're making the most efficient use of your marketing and advertising budget.

CPA & CAC – The difference between the two metrics

Both cost per acquisition (CPA) and cost per conversion (CPC) are two important metrics. CPA is the cost of acquiring a new customer, while CPC is the cost of converting a lead into a paying customer. 

Both metrics are used to assess the effectiveness of an online advertising campaign. However, there are some important differences between them. CPA is typically calculated on a per-transaction basis, while CPC is usually calculated on a per-click basis. This means that CPC can be more accurate when measuring the effectiveness of an ad campaign, as it takes into account the number of people who actually click on an ad. However, CPA is generally seen as a more holistic metric, as it takes into account the total cost of acquiring a new customer. As a result, both CPA and CPC should be considered when assessing the effectiveness of an online advertising campaign.

Blended CAC vs Paid CAC – How to differentiate the two metrics

When it comes to customer acquisition, there are two main approaches: blended CAC and paid CAC. Both have their advantages and disadvantages, so it's important to choose the right approach for your business. 

Blended CAC is the most common approach, and it involves acquiring customers through a combination of marketing and sales efforts. The advantage of this approach is that it allows you to reach a wider audience and generate more leads. However, the downside is that it can be more expensive than paid CAC. 

Blended CAC = Sales and marketing expenses (excluding salaries and overheads) / Total new customers acquired.

Paid CAC, on the other hand, involves acquiring customers through paid channels such as online ads or sponsorship deals. The benefit of this approach is that it's often cheaper than blended CAC. However, the downside is that it can be more difficult to reach your target audience. Ultimately, the best approach for your business will depend on your specific needs and goals.

Paid CAC = Sales and marketing expenses (excluding salaries and overheads) / Total new customers acquired via paid channels.

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Things you can do to reduce your startup's CPA

If your startup's CPA is higher than you'd like, there are a few steps you can take to bring it down.

Review your marketing and advertising expenses that goes into your CAC

One of the first places to look when trying to reduce your CPA is your marketing and advertising budget. Are you spending too much on certain channels or campaigns that aren't generating a good return? If so, consider cutting back on those expenses.

Improve your lead generation efforts

Another way to reduce your CPA is by improving your lead generation efforts. This could involve anything from revamping your website to make it more user-friendly and effective, to investing in pay-per-click (PPC) advertising.

Focus on customer retention & referrals

In addition to acquiring new customers, it's also important to focus on retaining the ones you already have. This can be done by providing excellent customer service and offering loyalty programs or discounts. By keeping your existing customers happy, you can reduce your CPA over time snce current users invite new users to your product or service.

Common questions on CPA

What is CPA?

CPA stands for cost per acquisition. It's a metric that measures the amount of money spent on marketing and advertising in order to acquire new customers. To calculate CPA, divide your total marketing and advertising expenses by the number of new customers acquired through those efforts. For example, if you spend $1,000 on marketing and advertising in a month and acquire 10 new customers as a result, your CPA would be $100.

Why is CPA important?

CPA is important because it allows you to track your marketing and advertising efforts and determine their ROI (return on investment). By understanding how much it costs to acquire new customers, you can make informed decisions about where to allocate your marketing budget and how to improve your efforts over time.

What is a good CPA?

There is no definitive answer to this question since it will vary depending on your business, industry, and marketing goals. However, a good starting point is to aim for a CPA that's lower than your average customer lifetime value (CLV). This way, you'll be generating more revenue than you're spending on acquiring new customers.

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