Performance Based Marketing: What Are CPA and CPL?

Why do you run marketing campaigns? To make sales? Spread awareness? To capture leads?

Whatever your reason is, you’re not just doing it for fun. Instead, you want to get something out of it.

Unfortunately, what you want isn’t always what you get. Sometimes you invest lots of time and money in a marketing campaign and get nothing.

But what if you paid only for successful campaigns? Wouldn’t it be great if you only paid when your campaign delivered the results for which you hoped?

That’s where performance-based marketing comes in.

What is Performance-Based Marketing?

Performance marketing is results-based. You pay for the results you receive from a ‌campaign and nothing else.

You might pay a flat monthly or annual fee for standard marketing services. Your results might be good or bad. Either way, you’ll need to pay up.

This isn’t the case for performance marketing. Instead, you pick a measurable goal that defines your pricing. It could be something like:

• Clicks
• Views
• Sales
• App downloads
• Impressions

Whatever the metric is, what you pay for is what you get.

Examples of Performance-Based Marketing

The most famous example of performance-based marketing is Google Ads. Throughout your life, you’ve probably seen hundreds of these ads:

These are cost-per-click ads (CPC). This is performance-based marketing because advertisers only pay for clicks and nothing else.

Another example of performance-based marketing is LinkedIn ads. LinkedIn ad pricing is relative to the objective that you choose.

For example, an advertiser might choose website visits as a performance metric. In this case, they get charged only when someone clicks on their website.

What is CPA in Marketing?

First, what does CPA stand for in marketing? CPA stands for “cost per action.”

CPA marketing pays only for pre-defined actions on ads. For example, an action that advertisers pay for might be an app download.

Don’t confuse CPC with cost per click (CPC). CPC is a type of CPA.

“Cost per action” and “cost per acquisition” are often used interchangeably. 

This common confusion is an error. Cost per acquisition measures how much it costs to get one paying customer.

Why Should You Use Cost Per Action?

CPA marketing is suitable for businesses of all sizes and industries. That’s because CPA campaigns are so flexible.

For example, small businesses might choose cheaper click-based ads. But larger companies may pay for expensive download-based ads.

In any case, CPA only works if you know how much an action is worth to your business. Without a baseline, you’re stuck with guessing. And if you’re guessing, costs will spiral out of control.

How to Calculate CPA

You can calculate CPA by dividing your total actions by the amount spent on the ad. This equation comes out as:

CPA = Amount Spent / Total Actions

“Actions” is whatever you define it as and will vary depending on the goal of your ad. It can be downloads, clicks, or anything else.

How to Optimize for Cost Per Action

To use CPA effectively, you must optimize it as much as possible. Otherwise, you won’t make any money with it.

Here are the best ways to optimize your CPA:

1. Improve Your Landing Page

Good landing pages are a must if you’re using website visits as an action. Within seconds of finding your site, visitors will form their impression.

If they get a poor impression, they will leave. That means lots of money lost over time.

A/B testing is the best way to optimize your landing pages. Create two versions of your page and see which performs better.

From there, keep testing and tweaking. Eventually, you will create a page returning dividends on your ad investment.

2. Fine-Tune Targeted Demographics

One of the key factors of effective advertising is targeting the right audience. Advertising to the wrong people will only burn your money.

To find the right audience, you need to create a buyer persona.

A buyer persona is your ideal customer’s profile. It comes from careful market research into who needs your product or services most.

Your persona gives you a baseline target demographic. With testing, you can refine it further.

3. Write Effective Ad Copy

Copy is the defining aspect of most ads’ success. And high-converting copy is never an accident.

When writing ad text copy, you need to think about the features and benefits of your product. People don’t wake up and decide to buy things; you must explain why they should.

Then, bring it home with a compelling call to action (CTA). High-converting CTAs will be what makes your CPA profitable.

What is CPL in Marketing?

Cost per lead (CPL) is a method of performance-based marketing. CPL marketing is paying for each new lead generated.

Companies that offer subscriptions or high-price products often use CPL tactics. One of the best-known CPL marketing strategies is affiliate marketing.

For instance, web hosting companies pay affiliates large sums for each subscription referred. Hosting companies can afford it because they make lots of money from subscriptions.

Imagine a web host negotiates a $50 lead rate with an affiliate.

However, they might require two months subscription for the affiliate to get paid. This ensures they are only paying for long-term customers.

The web host now has an established cost per lead they can factor into their budget.

When Should You Use CPL Marketing?

At its core, CPL is a metric that all businesses can and should use. You must know how much it costs to get a lead to keep marketing profitable.

However, CPL-based marketing tactics are a different story.

CPL acronym marketing works best for products with long-term sale models. CPL is better than CPA if you plan on making money from leads for a long time.

Many SaaS companies prefer CPL because they make money from customers over time. But a store selling less expensive products could not.

How to Calculate Cost Per Lead

You calculate CPL by dividing marketing costs by the number of new leads. The formula is‌:

Cost Per Lead (CPL) = Total Marketing Costs / Total New Leads

More complex calculations will also factor in time spent and third-party costs (such as marketing tools).

How to Optimize Cost Per Lead

Dumping money into CPL marketing doesn’t guarantee results. Instead, you’ll need to carefully craft converting ads.

Here are a few ways to do so:

1. Target Based on Behavior

Many advertising mediums allow you to target based on behavior. This is a great way to ensure only relevant people see your product.

For example, imagine you’re selling audio mastering services.

You can target people who frequently search for audio mastering. This group is more likely to convert than the general public.

You can also retarget people who’ve visited your website. But instead of targeting everyone who visits your website, you can target based on the pages they visit.

For instance:

• If they browsed a particular service, you could retarget based on that service
• If they left items in their cart, you could entice them to complete the sale

Not all pages express equal interest. To illustrate, visiting a blog post page does not signal intent like visiting a checkout page.

2. Optimize Your Website for Conversions

With CPL marketing, your business is only as good as its website.

Make sure it:

• Indicates social proof (reviews, high-profile features, etc.)
• Loads remarkably fast
• Is mobile-friendly
• Explains why your product or service will help the visitor
• Answers frequently asked questions
• Makes it easy to speak to a sales representative

Conversion-optimized websites will create low CPLs. Improving your site is of the best investments you can make.

3. Reduce Poor Quality Leads

Not all leads are equal. Some leads may look good on a spreadsheet but are unprofitable in reality.

Imagine if your CPL campaign kept getting calls about a product you don’t offer. These poor-quality leads will only inflate your CPL – not make sales.

You must optimize your CPL campaign if you’re getting lots of low-converting leads. Here are a few ways to filter bad leads:

• Add pricing to your website. This may result in fewer calls, but they’ll more likely be from people who can afford your services.
• Add negative keywords to your keyword bids.
• Add conversion tags to your website. These tags help you tweak your site to serve visitors better.

CPA and CPL: Which is Better for Performance-Based Marketing

For ‌this article, the “action” in CPA will be sales. So now we can compare CPA and CPL directly.

Short Term vs. Long Term

CPA marketing focuses on short-term results. The sale occurs immediately with a CPA model, and the advertiser gets paid right away.

The short-term CPA model works best on products with smaller margins.

CPL models may take months before the conversion happens and the advertiser gets paid. But when it does, it will be highly profitable for the company.

So Which is Best?

Ultimately, there is no one-size-fits-all answer to this question. Your business must instead compare the pros and cons of both models.

CPA is best for high-volume, low-margin products, and services. CPL is best for high-margin products with long-term sales cycles.

However, you can mix the two to an extent. By combining the two, you can make short-term sales with the potential for longer-term relationships.

Conclusion

The CPA model is mostly one-and-done. CPA models often mean you won’t see a customer again after the sale.

On the other hand, CPL extracts long-term value. By building relationships with customers, you’ll create long-term profitability.

It will come down to your situation to decide which is best.

Need help? Get in touch with our PPC team to determine which model is right for your business.