Online advertising – sometimes it makes sense to pay more.

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Ad platforms report on many metrics such as click-through rates (CTR), number of impressions, conversion rate etc. When analysing the results of online marketing campaigns many zoom in on cost per acquisition (CPA). However, one metric that is often overlooked: profit.

Do take profit into account and it opens an interesting new choice. When you draw a graph plotting CPA against profit it looks (something like) this:

Graph showing it sometimes makes sense to pay more.

There is a maximum profit at the top of the curve, but this only exists in theory. In practice there is a huge variance in people their behavior that constantly changes CPA. This makes aiming for profit maximisation not practical, nor realistic. It makes more sense to focus on a range.

Notice that there are two different CPAs, point A and B on the graph, that both lead to the same profit. Say that A has a value of €55 and B of €70. Which one will you pick?

Most people choose option A because it is cheaper. But you should seriously consider option B. Here’s why.

Option B has the higher CPA, meaning that you are paying more per click. This results in a lower margin and more revenue, something that can have different benefits. First, all other things being equal, with option B ad platforms will favor your ads over the competition because you pay more. So your competitors lose out on this traffic.

In addition, if your business does anything other than one-off sales, it is better to get your revenue from a higher number of customers, because you can sell them more goods and services in the years to come.

Finally, more traffic allows you to optimise faster. It will take you less time than competitors to A / B test your ad copy and website.

A disadvantage of the higher CPA is that you have to monitor your campaigns more intensely. If your margins decrease, paying more to acquire each customer can backfire.

About the author

Ivo Oltmans
By Ivo Oltmans

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About

My name is Ivo. In the last 10+ years I have worked on various SaaS products in marketing, sales and business development roles.

Want ideas to grow your company? I love meeting new people and chatting about business. My gmail handle is i.oltmans.

When in doubt whether or not to contact me, you should :-)