Calculating your CPA (Do not run ads before you’ve done this!!!)

Calculating your CPA (Do not run ads before you’ve done this!!!)

Predicting your CPA is the difference between success and failure…

Anyone can get sales from Facebook Ads. Literally. ANYONE. The algorithm is made that way.

But if you are paying more in ads than the profit in the sale, this is not a successful campaign. And sometimes you may need to tell your client that Facebook Ads will NOT be profitable for them.

The very first question….

  1. What is your website Conversion rate? 1%? 2%? 5%? If you do not know this, you have absolutely no way of even knowing if your ads will generate results.

E-commerce (and ads in general) is a number game. You have to know the numbers. 

There are 3 main things that dictate whether you are going to make a profit from ads or not:

  1. Your website conversion rate
  2. Your AOV (average order value)
  3. Your product margin in each sale

Let me give you 2 Scenarios where the cost of ads are exactly the same:

In both cases, the CPM, CTR and CPC are the same – lets say it works out at 30p per click.

Business A, has a website conversion rate of 3%, the average order value is £35 and their profit margin is 60% (£21 in each order is gross profit) At 30p per click, and a 3% conversion rate it will cost them £10 to win each sale. They will make £11 profit on each sale.

Business B, has a website conversion rate of 2%, the average order value is £40 but their profit margin is only 35% (£14 in each order is gross profit). At 30p per click, and a 2% conversion rate, it will cost them £15 to win each sale. They will make a £1 loss on each sale.

To try and become profitable Business B needs to:

  1. Look at whether it needs to increase its RRP
  2. Reduce its cost of goods to improve the margin in each sale
  3. Look at increasing AOV (upsells, Lifetime Value)
  4. Invest some time in CRO (Conversion Rate Optimisation) to improve it’s conversion rate.