Conversion Economics – Finding Your Customer Acquisition Sweet Spot

By | Google+ , July 2nd, 2012 in Conversion | 16 comments
By splitting your budget between traffic and optimization you can find your customer acquisition sweet spot (Original image source)

Not only is spending a portion of your marketing budget on landing pages beneficial to your bottom line, there’s a way to predict how much you should be spending to optimize your Cost Per Acquisition (CPA).

And today I’ll share that with you.

Conversion Economics

Today I’ll expose exactly how much of your marketing oyster should be shucked off on those slippery little suckers we call landing pages.

(If I’ve got you thinking of the scene in Pretty Woman where Julia Roberts flips a snail off the table, then you know I’m adequately controlling your thoughts).

How much of your marketing budget should you spend on creating and optimizing landing pages?

According to information from Omniture (a world leader in web analytics), you can achieve a 25% improvement in conversion rate by using a promotion-specific, standalone landing page (vs. sending paid search visitors to your homepage).

Assumptions: Taking 25% as our base conversion improvement value, let’s also set $10,000 as our monthly marketing campaign budget.

Reducing Your Cost Per Acquisition (CPA)

Our goal is to analyze the effect of taking a portion of the monthly marketing spend and using it to pay someone (anyone really) for the purpose of conversion rate optimization (CRO).

If you assume that 100% of the budget is spent on generating traffic via paid search (Google AdWords in this example), what happens when you reduce that amount? Obviously the traffic will drop in direct proportion to the drop in budget.

Now, what if you spend 10%, 20%, 30% of your budget on optimizing your landing page instead of paying for traffic? In this case, 10% equates to $1,000, which will buy you a couple of days of concerted effort toward improving your landing page.

What effect will this have on your average CPA?


Finding Your Sweet Spot

The table below shows what happens when you start taking cash away from traffic to put into improving your conversion rate through optimization strategies, and how much money you should be throwing in this direction.

Campaign Budget Conversion Costs PPC Spend CPC1 Visitors Conversion Rate2 New Customers CPA
$10,000 $0 $10,000 $0.40 25,000 1.00% 250 $40
$10,000 $1,000 $9,000 $0.40 22,500 1.25% 281.25 $35.56
$10,000 $2,000 $8,000 $0.40 20,000 1.50% 300 $33.33
$10,000 $3,000 $7,000 $0.40 17,500 1.75% 306.25 $32.65
$10,000 $4,000 $6,000 $0.40 15,000 2.00% 300 $33.33

1 Average cost per click according to Google

2 Estimated conversion improvement of a successful test. Note: these numbers are also based on a diminishing percentage improvement per dollar spent. (25% initial increase by using a landing page followed by a compounded rate that bumps conversions by 25%, but is really only a 20% overall improvement in the second level – 25/125 equates to a 20% improvement).


What does this tell us?

What these numbers say is threefold:

  1. Spending a portion of your marketing budget on Conversion Rate Optimization (CRO) will yield a lower cost per acquisition for each customer.
  2. There is a limit (or sweet spot) to how much cash you should allocate into this endeavor.
  3. In this example the sweet spot occurs when you are spending 30% of your budget on optimization. Spend any more and the CPA climbs as the loss in traffic catches up.

Finding the sweet spot for your CPA…

Your own private sweet spot (?) will depend on how successful your CRO efforts are, perhaps you’ll only achieve a 5% increase per $1,000 spent. The only difference is that you’ll have a different chart and a different sweet spot. The important thing to learn here is that there does exist a point where you optimize your expenditure based on optimization efforts.

Find your sweet spot and you find the key to a minimized CPA.

Now ain’t that sweet!

Oli Gardner

About The Author

Photo of Oli Gardner

Co-Founder of Unbounce. Oli has seen more landing pages than anyone on the planet. He is an opinionated writer and international speaker on Conversion Centered Design. You should follow Oli on Twitter
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Comments

  1. RT @unbounce: How much of your marketing spend should you use for page optimization? Find out here – http://bit.ly/ttfjz – #CRO #landingpage

  2. PumpUp says:

    Your blog just give amazing tips, thanks a lot !

  3. […] pages and conversion rate optimizationConversion rate optimization (CRO) is the process for improving the return on investment (ROI) of your marketing activities. Landing pages act as the “marketing glue” between […]

  4. Alexis says:

    Great post Oli !
    Thanks for this concept of sweet spot

  5. […] an article published on the Unbounce blog, the company has found that a well optimized landing page can lead to a 25% increase in your sales; they also go on to explain how segmenting a percentage of your budget could be your best option […]

  6. Oil,
    Great post! Really like the analytic, but simple approach to thinking about the cost to acquire a customer.

  7. […] you’re just digging in, it doesn’t take long to realize that spending your time on Conversion Rate Optimization (rather than only focusing on search or PPC for example) can dramatically reduce your CPA. No […]

  8. […] you’re just digging in, it doesn’t take long to realize that spending your time on Conversion Rate Optimization (rather than only focusing on search or PPC for example) can dramatically reduce your CPA. No […]

  9. […] you’re just digging in, it doesn’t take long to realize that spending your time on Conversion Rate Optimization (rather than only focusing on search or PPC for example) can dramatically reduce your CPA. No […]

  10. […] want to spend too much, throwing money down the toilet. But if you can find the proper balance, the conversion economics sweet spot which maximizes your spend while producing an optimal cost per acquisition (CPA), this is precisely […]

  11. PPC Expert says:

    This article goes beyond typical / average analysis. Landing pages are indeed extremely important.

  12. Brian says:

    That’s a good way to look at it. In a way it almost seems like selling CRO short as the lower CPA will last a lot longer than one month (since this example looks at 1 month of PPC spend).

    Do you find that customers of CRO services only need it every once in a while or do they use it on an ongoing/monthly basis?

    • Oli Gardner says:

      You should definitely keep doing it on a regular basis. This is just to illustrate the benefit in a conceptual way.

  13. […] win the test, you’ll be afforded more leeway in the future while educating the HiPPO’s about the value of scientific experimentation & testing vs. random ideas. You’ll also start making more money for the company, which any smart HiPPO […]

  14. […] on your landing pages. Specific landing pages can increase your conversion rate by up to 25%, while high-quality landing pages can increase it even […]

  15. Well, Oli, looks like you’ve did a good analysis here.
    But, I’m not so sure about the assumption that you’ll have a linear cost of 1000$ for each 0,25% increase of the conversion.
    Because, the conversion optimization tools have a fixed cost, and, after a successful test, you can have more money to increase the budget as well. But, given the numbers you’ve used, it looks great to allocate something like 30% for CRO.
    This study show something like 1,16% of the marketing budget goes to CRO:
    http://www.smartinsights.com/wp-content/uploads/2012/10/infographicconversion.jpg