I often hear questions like these…
“What’s a good cost per click?” Or, “What’s a good cost per lead?”
Well a better set of questions would be…
How much a lead is worth to your Online Business (whether affiliate marketing, media buying, e-commerce et al)?
And how much can you afford to pay to make a conversion/acquire a new customer?
These are simple questions. But important ones.
What if I told you that there is a way to know if you’re going to “win” before anything else happens?
Enter the Guaranteed Profitability Formula:
GPF = CPA < Offer PayoutWhat the above simply states is that if your Cost Per Acquisition is less than your offer payout you are guaranteed to make a profit.
In other words, in order to “win” in any online business model, that is to be profitable, one simple thing must happen;
Your CPA, that is the Cost Per Action or Cost Per Acquisition, must be less than the offer you sell/promote et al, pay you.
For example if your CPA spend (for traffic) is $100 bucks and the revenue is $130, then you have made $30 profit.
Right?
The key is to be able to accurately know your profit (and other metrics) in advance so you know exactly how much your CPA spend can be.
This way you can figure out EXACTLY how much you can afford to spend to profitably acquire a new lead/make a conversion.
So how much a lead/conversion is worth to you?
In order to answer that question and take into consideration we need to modify the GPF to now be:
GPF = CAC < AOPV This states that the (Omnifarious) way to Guaranteed Profits will be true if the Customer/Lead Acquisition Cost (CAC) will be less than the Average Offer Payout Value.
We usually know the Offer Payout.
So we need to figure out the Average Offer Payout Value.
And we need to figure out the Customer (Converted Lead when you are promoting lead gen offers) Acquisition Cost (CAC).
Once you know your CAC, suddenly it becomes a lot easier to figure out the answer to the question of how much a converted lead is worth to you. And with that what other performance metrics should be.
OK let’s dive in…
The process I will outline for you will work for ANY type of business or selling system. It works for affiliate marketers/media buyers, phone-based selling companies, ecom stores, and even brick-and-mortar stores.
Don’t get intimidated by the calculations here. I’ve noticed that some people tend to get hung up on the details and obsess over getting these numbers exactly right.
If you’re just getting started, it’s OK if your numbers aren’t exactly right!
Do what you can. Start with a ballpark figure to help guide your marketing. Over time you can refine that number to get more and more accurate and specific to your business data.
Note: when I mention the term customer below, if your offers are mainly lead generation ones (as opposed to straight to sale offers), a customer could also be a lead that has converted for a lead gen offer.
Customer/Lead Acquisition Cost (CAC) Formula – Step 1: Estimate how much a customer is worth
The first thing you’ll need to figure out is:
How much revenue do you generate from a typical customer/Converted Lead over the life of their relationship with you?
Keep in mind this extends beyond the revenue you generate from your initial conversion and/or sale.
Your initial sale/conversion might only bring you $5.
But many of the converted leads/customers who convert at $5 offer will go on to make additional conversions (ie via your follow up emails to them etc).
So, if your offer pay out on average gives you $5 each, and each lead converts five times on average, then that lead/customer we say could be worth $25 on average. If each lead converts six times on average, then a customer is worth $30 on average.
Makes sense?
This is known as your CLTV (customer/Lead lifetime value), and it’s an extremely valuable metric to know about your business, especially when you are building your own traffic source (in this case mainly an email traffic source).
There are 2 ways to figure out CLTV.
Calculate it in Your Own.
If you know how many leads converted and how much total revenue you generated.
But you’ll typically need a date range going back at least 12 months (or 90 days at a minimum) to get his as accurate as possible.
Then you simply divide the total revenue by the total number of customers/leads converted:
Customer Lifetime Value = Revenue/CustomersFor example: Say you generated $150,000 in revenue over the past 12 months (both from immediate conversions after they become your opted in lead and over time via follow up emails).
And over that time 7,500 customers/leads converted to the offers you promoted.
Just divide $150,000 / 7,500 = $20.
This number, $20, is your customer lifetime value.
The other way to calculate is to…
Estimate It to Get a Starting Point.
Now if you don’t have the data available to calculate in your own, that’s OK.
You can start out by estimating your CLTV.
A good benchmark to start with is anywhere from two to eight times the price of your initial conversion value.
So, to stick with our example here, if our first payout offer is $5, then a good benchmark to start with would be anywhere from $10-$40.
For this example, we’re going to go in the middle, with $5 x 4 = $20 customer lifetime value.
Customer Acquisition Cost Formula Step 2: Subtract Refunds/Shaved commissions & WHAT HAVE YOU
The next step is to figure out how many commissions/payouts are lost (due to a number of reasons) and subtract that from your CLTV.
This is something you can figure out from your tracker and the affiliate network dashboard. (Note: If you owned the products this you would be able to tell from your own CRM).
But if you don’t have access to that data, you can use 10% as a conservative benchmark.
So now that you have your, let’s call it, refund rate, subtract that from the CLTV that you calculated in Step 1.
Let’s say that your refund rate is 10%. Our Step 1 CLTV was $20, and 10% of that is $2.
Customer/Lead Acquisition Cost Formula Step 3: Subtract Overhead Costs
Note for completeness purposes: if we were selling physical products we would have a step here to subtract the COGS e.g. Cost Of Goods Sold which include things like cost of procurement/making of the product, shipping costs etc). But since we don’t, we skip this step.
Next, you need to account for overhead costs.
Your overhead includes things like…
- Payroll (Say you have a media buying team running ads for you, this would be their own payment cost)
- Utilities (if you have an office)
- Software (your tracker subscription)
- Servers
- Legal Expenses,m Accounting etc
Multiply your overhead by your CLTV.
For our fictitious example, say overhead is 30% of the CLTV (over a date range): $20 x 30% = $6.
Customer/Lead Acquisition Cost Formula Step 4: Subtract Desired Profitability
Let’s pause for a second and think about where we’re at.
We started with our total revenue per customer (Converted Lead) (CLTV) and subtracted all the costs associated with producing that conversion, namely, refunds and overhead costs for our purposes.
Let’s calculate things so far to get an idea of where we’re at:
CLTV – Refunds – Overhead
$20 – $2 – $6 = $12
In other words, out of the $20 that you generate per customer (converted lead), almost half of it ($8) goes toward creating your conversions. And you have $12 left over.
Does that mean you can afford to spend $12 to acquire a new customer/new conversion?
Technically, yes, but then you wouldn’t be making any profit. You’d be breaking even on every customer.
So, the last thing you need to do is decide what sort of profit margin you want to earn.
This number will depend on a lot of different things like…
- Your personality
- Your chosen business model
- The industry you’re in
- wWhat your cash flow situation is
…and more.
For (CPA) affiliate marketing, a good profit margin to shoot for is between 20% and 40%.
Here’s what that would look like for our fictitious example:
- 20% x $20 = $4 profit per customer/Lead
- 30% x $20 = $6 profit per customer/Lead
- 40% x $20 = $8 profit per customer/Lead
So, how do you choose which profit margin will work best?
This is where you want to refer back to the number we calculated above.
Out of our $20 CLTV, $8 was used to produce a conversion.
That means we have only $12 remaining.
If we chose a profit margin of 40%, we would earn $8 in profit for every customer/converted lead.
However, that would leave us only $4 to acquire new customers/new conversions ($12 – $8).
That’s NOT a lot of money to make new conversions (new converted leads/customers).
If we chose a more conservative profit margin of 20%, on the other hand, we would earn only $4 in profit for every conversion.
But that would also leave us with a healthy $8 towards creating a new conversion costs ($12 – $4).
So, let’s say that we decide that our desire profitability will be 30%.
In this case, we can spend up to $6 to acquire a new customer (conversion). That’s our tolerable customer acquisition cost.
This is how much money is left over from the customer’s lifetime value after accounting for refunds, cost of goods, overhead, and profitability.
This is how much you can afford to pay to acquire a new customer/make a new conversion.
So theoretically, you could have a cost per customer (conversion in our case) at $6 and still be 30% profitable, over a period of time.
NOTE: this is how much you can afford to get a conversion. NOT how much you can afford to get a a freebie lead into your list.
3 Important Things To Keep In Mind
Now that you have a basic idea of how to calculate your customer acquisition cost, there are a few things that you’ll want to keep in mind as you’re thinking about this stuff.
1 – How to Use Your Customer Acquisition Cost to Figure Out Other Metrics
Going back to our original questions of:
“What’s a good cost per click?” Or, “What’s a good cost per lead?”
Now that we know our Customer Acquisition Cost (CAC) we can calculate the above easily.
For example, if you can spend up to $6 to acquire a new customer/converted lead, and you know that your offer(s) convert 10%, in other words you convert 10% of the freebie leads into converted leads, then that means you can afford to spend up to $0.6 to acquire a freebie lead ($6 x 10%) and be at 30% profitable.
And if your landing/squeeze page converts 40% of visitors into leads, that means you can afford to spend up to $0.24 per click ($0.6 x 40%).
Makes sense?
These numbers are highly dependent on your ability to select and promote good affiliate offers.
And it all starts with figuring out how much you can afford to pay to acquire a new customer.
Once you know that number, then you can work backward and figure out what your CPC (cost per click) and CPL (cost per lead) should be.
2 – There’s a Direct Relationship Between Your Campaigns and Your Funnel/FLOW
Remember that the success of your traffic campaigns is dependent on the funnel or flow that you are sending traffic to.
Consider a landing page (Squeeze Page) that converts at 40%.
If you spend $1,000 to send 2,000 people to that page, you’ll get 800 leads at a cost of $1.25 each.
But if your landing page conversion rate was only 20%, then you would only get 400 leads out of that same traffic… resulting in a cost per lead of $2.50.
All without making any changes to your traffic campaign.
This just goes to show that your traffic campaigns and sales funnels are closely linked together.
If you don’t have a high-converting flow (good traffic, good landing page, good affiliate offer, good follow up email series inc good affiliate offers), your traffic campaign isn’t going to work.
On the flip side, if you optimize your funnel… that’s only going to make your traffic campaign more successful.
Some benchmark metrics for the funnel side would be:
- 30%+ Optin Rate on the Squeeze Page
- 10% Conversion Rate on the offer (immediately – front end)
- 10% Conversion Rate on follow up offers (back end)
Knowing these numbers, along with your customer acquisition cost (CAC) allows you to really dig in and figure out some cool things regarding your traffic campaigns.
Let’s say you send 4,000 clicks to your Squeeze/Landing page at $0.25/click. (So, you spend $1,000.)
At a 30% conversion rate, that will generate 1200 leads at a cost of $0.83/lead.
If 10% of those leads convert on your immediate affiliate offer, that will bring you 120 new customers/converted leads at a cost of $8.3 each
But if 10% also convert on your 1st follow up offer, that will bring you another 120 conversions at a cost of ~4$ each.
And now that you know how much a customer is worth to you and how much you can afford to pay to get a new customer, these numbers suddenly become a lot more useful.
In the example we were using earlier, we could afford to spend up to $6 to acquire a new customer.
So, if our landing page, immediate affiliate offer and 1st follow up email offer are converting at 40%, 10% and 10% respectively, generating new conversions at $4 each, that would give us some room to play around with our traffic bids.
We could continue to scale up that campaign until our CAC increased from $6 to $12 and so on.
Finally, please note that these are just examples.
What matters is that you know your own numbers and are able to figure out if they make sense for your (affiliate) business or not.
3 – Your Cash Flow Situation Could Change Things
Finally, and this is really important…
Remember that it takes time for any traffic campaign to start generating revenue. The vast majority of affiliate marketers do NOT see an ROI on the same day they start a traffic campaign.
So, that begs the question: Just how long can you afford to wait before seeing an ROI on your campaigns?
The answer to that question will help guide your overall marketing strategy.
If the back-end of your affiliate business generates a profit on new leads after 10 days, but you need to generate that revenue within 2 days because of your cash flow situation, then you’re not going to be able to spend as much money to acquire a new lead/customer.
When I started running traffic for myself, I didn’t have a lot of cash on hand.
Cash flow was tight, which meant that whenever I spent money to acquire new leads and a new customer, I had to break even on that customer pretty much within a day.
Today, however, my financial situation has changed.
Now I can comfortably wait 30-60 days before generating (a really good) profit on my own leads.
This allows me to scale more than I could in the past.
It also allows me to pay than my competitors to acquire new leads and create more conversions.
Think about that.
Kostas “The Omnifarious Marketer” Papadakis