CPA vs ROAS: Which Metric Really Drives Your ROI?
Do you feel like your ad budget is going up in smoke? You’re not alone. In an age where micro-targeting and personalized ads reign supreme, knowing the difference between CPA and ROAS is the fine line between campaigns that rob your pocket and campaigns that pay you.
Whether you manage in-house campaigns or use agencies, mastering these metrics will revolutionize how you assess performance, allocate budgets, and ultimately scale your business. Are you ready to translate and use these potent indicators? Let’s dive in.
What?is CPA, and How Do You Calculate it
Cost Per Acquisition/Action (CPA) is the amount you spend gaining a single customer, lead, or desired action. Consider it the price it costs to convert. Whether you’re collecting email sign-ups, app downloads, or purchases, CPA tells you exactly what each one costs you.
It’s a simple formula: CPA = Total Campaign Spend ÷ Number of Acquisitions. For example, if you spent $5,000 on ads and acquired 100 new customers, your CPA is $50. Simple, right?
But here is where it gets interesting. CPAs vary largely by sector — what’s a “good” CPA ($200+) for luxury products will be a disaster for mobile app installs ($2-5). So, the CPA you want ideally depends upon the price point of your product, its profit margins, and customer lifetime value.
A common pitfall for marketers is pursuing a lower CPA without regard to acquisition quality. Note: a $50 lead is better than a $5 lead that never converts.
What is ROAS and How is it Calculated
Return On Ad Spend (ROAS) turns the tables by indicating what you get in return for your marketing spend. The money you collect directly for your advertising efforts is expressed as a ratio or percentage.
The calculation is similarly simple: ROAS =?Revenue From Ads ÷ Ad Spend × 100. If your campaign costs $5,000 and, in return, brings in $20,000 worth of sales, then your ROAS is 400% (or 4:1). That means that for every dollar you spend, you’re getting back $4.
Compounded over CPA, a better ROAS (between 400% and 800%) is always better. However, imagine at least a 200% (2:1) business target, considering other operational costs you need to keep the business profitable. The best campaigns can hit 5:1 or more (especially for fulfillment costs for digital products, which are minimal).
As a direct correlation between revenue and ad spend, ROAS gives immediate insight into campaign profitability and is a preferred metric in e-commerce brands and performance marketers who can justify budgets based on sales.
CPA Vs. ROAS: A?Side-by-Side Comparison
Although both metrics are used to measure the effectiveness of ads, they are also applied to different strategies. Consider CPA a cost-oriented metric and ROAS a revenue-oriented metric.
If your focus is on CPA, a few scenarios come into play. Brand awareness is often more important than immediate ROI when breaking into new markets. In that context, for lead generation campaigns, like those with longer or more sophisticated sales cycles, CPA?gives you a clearer guide to acquisition efficiency.
For example, CPA establishes baseline acquisition costs when testing new channels or audiences. CPA tracking is essential for subscription-based businesses because lifetime value doesn’t happen overnight. During land-grab, limited-time promotions, when the acquisition speed is the guiding force, CPA is the north star metric.
You?should set your CPA target based on your customer’s lifetime value. For instance, if customers typically spend $1,000 on your brand over their lifetime, a $200 CPA could be perfectly reasonable.
ROAS makes sense in contexts such as these:
- For e-commerce?and direct response campaigns where a purchase is an immediate goal, ROAS gives you direct feedback on your campaign performance.
- When you want to use proven platforms and tactics and get the maximum return from existing channels, you can use ROAS to allocate your budget.
- During competitive seasonal peaks such as Black Friday, when operating efficiency is key,?ROAS helps to ensure profit.
For this reason, ROAS is the best metric to measure the campaigns that drive higher conversion rates: remarketing campaigns. Plus, when you work with tight budgets, it?makes sure that you are profitable at every stage.
The beauty of ROAS is how directly it ties back to revenue. Where CPA informs you how much you’re spending, ROAS tells you how much you’re earning — making it a must-have for bottom-line decision-making.
Improving CPA?and ROAS in Campaigns
The magic is when you improve both metrics at the same time! The best marketers are always looking to reduce CPA through tactics. Tighter audience definitions create smaller, more targeted audiences that tend to convert at even higher rates.
The A/B testing, or split/bucket testing, of ad creative creates incremental changes in CTR that can lead to significant cost savings. Improving landing pages with faster load speeds and more straightforward conversion routes directly impacts the acquisition price.
Retargeting brings back interested visitors who were not converted. Bid adjustments allow you to spend more where and when an ad is most likely to convert.
PRO TIP: Pay special attention to small improvements. Even if you only manage to shave off 10% of CPAs across channels, the compound?effect on overall marketing power is non-negligible.
Conversely, acquiring ROAS at a level you didn’t before brings specific challenges. Upselling high-margin products increases average order value, increasing revenue without raising ad spend. Cross-selling and upselling help you maximize revenue per customer.
It’s also effective because selling to existing customers is cheaper. Dynamic pricing strategies mean you can change offers depending on user behavior or availability. Creating targeted offers for different segments drives conversion through personalization.
Most successful campaigns?have found an equilibrium between customer acquisition and return costs. If you’re getting spectacular ROAS, but your growth is too slow, then maybe you should be willing to accept higher CPAs to scale. On the flip side, if you’re getting cheap customers that yield a small return, you might want to re-align with quality instead of quantity.
The Importance of Aligning CPA and ROAS with Business Goals
That’s where many ROAS marketing and CPA marketing strategies go to die: measuring metrics as if they are one-size-fits-all rather than marrying specific metrics with your company’s business goals.
To calculate your ideal CPA and ROAS, you need to consider your stage of business. For example, startups might focus on growth (CPA), while established companies could focus on profitability (ROAS). The season’s strategic focus is also essential; typically, you’ll be more willing to pay higher CPAs during peak selling seasons when competition increases.
The product lifecycle will also affect which metrics to prioritize, as higher acquisition costs may be justified for new products. It is a competitive landscape that sometimes demands premium positioning and higher investments in customer acquisition. ROAS, though, can take on heightened importance in times of tight financial requirements.
Pick a different target for different campaigns and channels — smart marketers do. So, you would target 150% ROAS on your Meta prospecting campaign, whereas your Google brand campaign would have an 800% ROAS target. The trick is to measure, analyze and optimize consistently.
Monitor these metrics over time, setting benchmarks that make sense given your unique business model instead of industry average benchmarks that may not be relevant to your situation.
How GeistM Can Help
This is where performance marketing agencies, such as GeistM, come into play. Where most agencies simply promise placements, we outperform in CPA?and ROAS optimization.
GeistM stands apart because of its cross-channel attribution modeling. We track customer journeys across platforms, assigning full credit to each touch point and removing wasted spending. We also create content-driven campaigns and user-engaging branded creatives, which results in better quality scores and conversion rates.
Based on performance data, we optimize in real time instead of waiting weeks or months like traditional agencies. With our scalable creative testing, we test hundreds of creative variations simultaneously, allowing you to identify winners faster. We use machine learning in our predictive analytics to identify prospects before they convert or become stale.
While traditional performance marketing agencies specialize more in creative or analytics, GeistM combines both. Our content creators work alongside growth analysts, providing?a potent mix of engaging and delivering content.
Whether you use in-house marketing or partner with one of the top performance marketing companies like GeistM, you want to keep these metrics in focus to ensure your growth. Contact us today!
