CPL, CPA and CLV: As per the Jackson 5 – It’s as easy as ABC

20 February 2022

We have all been there when someone is rabbiting on in a meeting using acronyms that may as well form part of a MENSA equation. We feel it is important that customers are able to differentiate between CPL, CPA, CLV, TBE, and GOAT, although we would argue that Pivotal One lead generation falls under the latter.

CPL

Ok, let’s take a look at CPL. CPL stands for Cost-per-Lead and is the amount of money you spend to acquire a new lead.

Ideally, you have an average cost per lead across all marketing channels. However, understanding your CPL will allow you to better optimise campaigns to ultimately reduce your CPL and bolster your sales pipeline.

This simple calculation will help you understand how much you are spending to earn a new customer:

Cost / Number of leads = Cost-per-Lead.

So, if you are spending £1,500 for an advertising campaign, and you get 10 leads, your CPL would be £1,500 / 10 = £150 per lead (pricey), and there is no real guarantee that this will result in a conversion. We feel that more emphasis should be given to your CPA strategy, as the supporting mechanics can result in a better conversion rate and cost saving (see below).

CPA

CPA stands for Cost per Acquisition and is sometimes referred to as Cost per Action — as confused as a baby raccoon, don’t be, these terms mean the same thing!

At the most basic level, Cost per Acquisition is a marketing metric that can measure the aggregate cost of a customer taking an action that leads to a conversion.

CPA works best to ensure you end up paying for actual profitable engagement. In that sense, the risk isn’t as high, as you know exactly how much each action or sale will cost. Additionally, you are protecting yourself from potential leads that won’t convert, as well as click fraud.
In a nutshell, Cost-per-Acquisition is the 24ct gold standard (cue Derek Trotter) because it measures the average cost of acquiring a revenue-generating customer. Let’s have a look at the calc:

Total cost / number of new customers = Cost-per-Acquisition

So, let’s say you generated 10 new leads at a cost of £25 per lead, that would equate to a total cost of…drum roll please – 10 * £25 = £250.

Assuming you convert 1 of the 10 leads to become a customer, your conversion rate is 10% and your CPA is £250. However, you will have spent time and money following up leads that are potentially garbage. This results in loss of time, frustration for the Sales team, frustration for yourself, and more importantly, it impacts business functionality and the achievement of targets.

This is the good bit – Pivotal One solely focuses on “soft top” leads, what does that mean I hear you cry? Leads that are thoroughly vetted and highly “convertible”, as there is a stronger chance of delivering what you need at a greater conversion percentage, this results in a saving on both a cost and time front and ensures the Sales team remain happy campers.

For example, our lead of £50 may well convert at 25%, meaning the CPA is £200. Whereas Sir Leonard of Leads might be trying to flog you leads at £25 a pop that only converts at 10%, meaning you have a CPA of £250. Essentially, we focus on quality over quantity and feel that will always serve you better. Remember, on the surface a cheap lead may look good value, however, there is usually an underlying narrative as to why it is cheaper than a pair of Ray-Bans bought from a Turkish beach.

Without a working understanding, you risk overpaying for your customers or paying more to acquire a customer than what they’re actually worth to your business. Before you rush off to scrutinise / number crunch your CPA, please read on.

CLV

To understand your CPA fully, you must first understand how much the average customer is worth to your business, this is referred to as CLV (oh no…another acronym!). CLV stands for Customer Lifetime Value and will drive all your other business decisions.

CLV represents the predicted net profit that a customer generates throughout their relationship with your company. Instead of looking solely at the value brought by a customer at their first purchase, CLV helps you calculate how valuable that customer could be for an unlimited period.

Understanding your CLV will help you to know exactly what it will take to reach your goals. Likewise, the CLV is important for us to know because it gives us an idea of what price your lead(s) needs to come in at and what conversions we need to hit to make it viable for all concerned. But how do I number crunch it…

CLV = (Average monthly transactions * Average order value) * Average gross margin * Average customer lifespan

Essentially, if you have worked out that your CLV after all costs is £1,000, you should be looking to make £800 for every sale from our lead.

For example, using the same metrics as previously stated in the CPA walkthrough, if your CLV is £1000 but our lead of £50 only converts at 5% (very highly unlikely, we aim for 20% and above) you would be at a break-even figure with our leads, and it wouldn’t be commercially viable. This is something we aren’t afraid to be transparent about, as we want you (the customer) to get the best possible experience and value from our service.

Once you know what’s what on the CLV front, we can step in to support you with the planning and strategising of how to get you there.

Remember, there are a lot of forces (you don’t need to stray over to the dark side young Skywalker) that you have direct control over, some you have partial control over, and other variables that you cannot control at all. If you think of your business in this way, you’re always looking for levers that you can directly manipulate. For instance, you can improve your conversion rate, you can reduce customer churn, and you can use CPA as a great tool for re-allocating your budget.

At Pivotal One, we enjoy the hustle of acquiring new leads, and you can bask in the glory when said leads convert and help drive growth for your business. Effective CPA is something that can bring in new customers whilst powering the growth that you desire.