Cheshire Cat From Alice's Adventures in Wonderland

What’s Your Target CPA?

There’s a passage from Lewis Carrol’s, Alice’s Adventures in Wonderland that I think about often. It’s the part where Alice asks the Cheshire Cat for directions. In most editions, it reads like this:

‘Cheshire Puss,’ she began, rather timidly, as she did not at all know whether it would like the name: however it only grinned a little wider. ‘Come, it’s pleased so far,’ thought Alice, and she went on. ‘Would you tell me, please, which way I ought to go from here?’

‘That depends a good deal on where you want to get to,’ said the Cat.

‘I don’t much care where — ‘ said Alice.

‘Then it doesn’t matter which way you go,’ said the Cat.

‘ — so long as I get somewhere,’ Alice added as an explanation.

‘Oh, you’re sure to do that,’ said the Cat, ‘if you only walk long enough.’

When I see the quote used, it’s usually chopped off at the end, leaving a shorter, simpler message.

‘I don’t much care where — ‘ said Alice.

‘Then it doesn’t matter which way you go,’ said the Cat.

You probably understand why. It supports an agenda — namely, that of the self-help addicted, lifehacking, productivity junkies who believe, contrary to Tolkien’s famous adage, all those who wander are lost.1

[If literature isn’t your thing, hang in there just a little longer and we’ll get to business.]

It’s a shame. The second part of the quote is equally valid.

‘ — so long as I get somewhere,’ Alice added as an explanation.

‘Oh, you’re sure to do that,’ said the Cat, ‘if you only walk long enough.’

Assuming you genuinely don’t care where you’re going as long as you’re determined to get somewhere, going in one direction is certain to do that and totally reasonable.

After all, few of us are as blessed as Moses to have God tell us our life purpose through a burning bush.2 Most of us are left to find what we like by experiencing what we don’t, whether that means bad jobs, bad relationships, or something else.

Wandering shouldn’t be vilified, lost or not. It’s necessary — if not for finding one’s self, then at least for personal growth.

But all of that changes when there’s money on the table.

What Does This Have to Do With Business?

Meet Domenico, or, “Dom” for short. You don’t know him (we’re going to pretend you do), but you know people just like him.

Dom is a businessman. He started out as a salesman and rose through the ranks until he hit CFO. He’s 50-ish. Wife and kids. Loves fishing but only manages to go a couple times a year. You casually said he should send you a picture of his best catch the next time he manages to hit the lake, and he said he would. You forgot about it until Memorial Day when, sure enough, you received an email without a subject line or text, just an image attachment — it’s Dom, holding a fish that could swallow your dog.

Man Holding Large Pike
Everyone knows a guy like Dom. Image by Derek Purdy.

Dom is old school. When he receives an email and has something to say, he calls the person back. The two people Dom texts are his daughter and his wife, the former of which only because she never answers when he calls, and the latter because he loves how her face lights up whenever she receives one of his messages. For Dom, keeping up with technology is a labor of love.

When the CEO of their insurance company gave Dom the task of finding a digital marketing agency, Dom was surprisingly cool about it. He called three agencies outside of normal business hours (obviously Dom works late) and left three voicemails. Two agencies emailed him the next day. You called him back. He didn’t respond to the others.

A few weeks later you have an onboarding meeting. It’s you, Dom, a couple of your team members, and a few other people from the insurance company with three letter acronyms on their business cards.

You start with jokes. After that, the easy questions. Then the difficult ones. Finally, you drop this bomb:

You: “Do you have a target CPA?”

There’s a pause. You look at Dom, thinking that, since they don’t have a CMO, the next best person to know should be the CFO. He says they used to have a CPA, that his name was Chris. Chris went to prison for cooking the books and pocketing money for his gambling addiction. The last anyone had heard, he had gotten out and was living in Costa Rica. A local accounting firm handles their numbers now.

Dom laughs. You laugh too, although you waited a second or so after him to start laughing, just in case it’s a sensitive subject. Everyone laughs at Chris’s expense — not that he cares. He’s on a beach somewhere in Costa Rica.

PAUSE THE STORY: What Is a Target CPA?

A target CPA is not a certified public accountant on somebody’s hit list. CPA stands for cost per acquisition (or cost per action). Insurance companies want inquiries and leads, typically in the form of phone calls, emails, and online form submissions.

The question,

“What is your target CPA?”

could be better asked,

“How much can you pay per lead while still being profitable?”

I’ll go into more detail later. Now, back to the story.

You reword the question, asking it as you should have the first time.

You: “How much are you willing to pay for a lead?”

Dom: “That depends on the quality of the lead.”

He’s not wrong, but to measure the success of their marketing efforts and your business partnership, you need a number — a target CPA. Without it, you might as well call yourself Alice and the internet Wonderland.

After 15 minutes of deliberation you can’t draw out a definitive number. Dom says he’ll have to consult his spreadsheets and get back to you.

He never got back to you.

Two Months Later…

You send Dom his first marketing report. Knowing he prefers the phone, you call him up and ask how last month went.

He says good, as far as he can tell. He asks the same question back and you say the same thing: Good, as far as you can tell.

You explain the various metrics and ask if he’s happy with performance so far, an indirect way of asking his opinion on the current cost per lead. He is. You make a note in their client file to use it as a benchmark.

Over the course of the next month you cut the cost per lead in half. The month after that, you do it again. You continue reducing the CPA for several months, until you near peak optimization, and it finally goes back up a little.

Dom isn’t happy.

Having never officially decided upon a target CPA, Dom became accustomed to the continuous improvement. He considered receiving leads at a lower cost good (which it is), and an increase in that same cost bad (also true). But he lost sight of the bigger picture.

He stops answering your calls.

You start checking to make sure his invoices are paid.

One day you get an email out of the blue.

They’re switching to a different agency.

It’s over.

This story isn’t real.

Dom isn’t the CFO of an insurance company. You don’t work at or own a digital marketing agency (well, at least not this one). Chris didn’t fudge the numbers, do prison time, and he’s not sitting on a beach in Costa Rica.

Couple Sitting on the Beach
Sorry, Chris. You’re not real. Image by Cody Black.

The meaning of this story can be interpreted many ways. If you’ve experienced anything similar, you know there’s always more to the story than I can possibly hope to write. I am undoubtedly biased, but have written in such a manner here to prove a point, which is true regardless of which side you’re on. The point is this:

You shouldn’t complain about what you get if you’ve never made clear what you want.

If, like Alice, you don’t much care about the results of your online marketing efforts, so long as you accomplish something, by all means do whatever you want. Just don’t complain about the outcome.

How to Determine a Target CPA

Up until now this article has been mostly philosophical. That’s cool and all, but it isn’t useful.

However, before we get to the useful stuff, I want to apologize. If your work experience is more similar to Dom’s than it is to mine, you might be offended. I unfairly presented the client’s point of view. It’s true.

For that reason, allow me to point out what I — or people in my position — do wrong.

Where Marketers Go Wrong

We ask the wrong questions. Those who aren’t asking the wrong questions typically aren’t asking any questions at all, afraid that pressing a client for difficult answers might cause them to leave and take their money elsewhere.

Frankly, any client that can immediately answer “What’s your target CPA?” probably doesn’t need you (that is, “you” being the marketer).

If, rather than asking the wrong questions, you’re not asking any questions at all, you’re doing a disservice to your clients. They signed up for this. If they wanted to give someone money in exchange for feeding their ego, they’d get a trophy wife (or a trophy husband).

It’s your job to guide them in answering this difficult question by asking a sequence of easier questions. The first is simple.

Question #1: What actions do customers take that are important to your business?

With the exception of e-commerce3, phone calls, emails, and store visits are among the most common. Now you start getting to the harder questions.

Question #2: What percentage of inquiries turn into real business?

The accuracy of their answer matters little to you. For now, a guesstimate will work fine. The percentage will be entered into a formula and presented back to them for their approval. Here’s the final question.

Questions #3: What’s the average lifetime value of a customer?

Instead of asking for the average lifetime value of a customer, a lot of marketers ask for the average profit per sale. It’s safer and more conservative, but not always realistic. New customers can be returning customers. It’s an important factor to consider.

From here, the formula is pretty straightforward.

Target CPA ≤ Average Lifetime Value of a Customer x Percentage of Inquiries That Turn Into Real Business4

Let’s go back to Dom. For simplicity’s sake, let’s say all insurance policies are equal. If the average lifetime value of a customer is $800 and 10% of inquirers end up buying a policy, leads need to cost less than $80.

Here’s the beauty of it all: You use their numbers, guide them with self-explanatory math, and tell back to them what they’ve already told you.

“So, Dom, using the numbers you just told me, if 10% of inquiries turn into real business and the average lifetime value of a customer is $800, would you agree that leads should cost no more than $80?”

They have two choices:

  1. Agree with you.
  2. Call themselves liars.

I’m kidding (not really). If they disagree, they may change their numbers, but even so you’ll finally have an answer to the question, “What’s your target CPA?”

1“Not all those who wander are lost.” From the poem “All That is Gold Does Not Glitter” in The Lord of the Rings by J. R. R. Tolkien.

2In the Bible, Exodus 3. God speaks to Moses through a burning bush, telling Moses to go back to Egypt, talk to Pharaoh, and free his people.

3This article doesn’t focus on e-commerce, since determining a target CPA there is pretty straightforward. Advertising spend needs to be less than profit. Nuff said.

4If the target CPA is equal to the average lifetime value of a customer multiplied by the percentage of inquiries that turn into real business, your margin is zero. A true target CPA equation would factor in your ideal profit margin and applicable business expenses, but the point of this post isn’t to lecture you on how to run a business in the green. I’m just saying if you’re going to spend money on advertising, you should probably know what you want from it.