4 calculations types for the customer acquisition cost index
If your boss asks you how much are you spending for one paying customer, would you know the number?
Maybe you already calculate your Cost Per Action (CPA) or Cost Per Install (CPI) and have an attractive spreadsheet to send to your boss. Do you know what your Customer Acquisition Cost (CAC) is? Have you ever calculated ALL of the costs involved in attracting a new paying customer to your app or game?
By the end of this in-depth article, you will have learned:
✔️ what CAC is,
✔️ what you need CAC for,
✔️ the advantages of knowing your CAC,
✔️ how to calculate CAC, and
✔️ what to do with CAC next.
CAC stands for Customer Acquisition Cost. This index may be familiar to mobile app marketers, but everyone in your company needs to know what your CAC is. Here’s why.
Most marketers are confident at using CPI (Cost Per Install). Unlike CPI, CAC relates to a specific person who spends money. A CAC calculation is useful when you increase the number of paying users. In contrast, your CPI is a better metric if your target is the growth of an app’s user base.
The fundamental purpose of CAC is the calculation of the full cost of earning a new customer over a defined period.
Put simply: if your CAC is smaller than your Average Revenue Per Paying User (ARPPU) over the long-term, then you make money. From a business point of view, the lower, the better.
If your CAC is low, then your campaign is profitable. In this circumstance, it’s logical to let it run. However, in the real world, nothing is that simple. Be sure to consider payback time in your CAC calculations because with advertising you pay the costs now, but receive the revenue later.* In extreme circumstances, a company can suffer from severe cash flow constraints, even while running profitable LTV campaigns. In some cases, this can threaten the entire business.
You can measure the CAC index in isolation, a process that has some value. However, if you compare it with other metrics, you get a much better – and more accurate – picture of how your marketing campaigns are performing. Let’s explore how you assess your CAC in combination with your LTV (Lifetime Value of your customer).
The goal of your effort is to find the marketing channels that have both a high LTV:CAC ratio and are scalable. It doesn’t make sense to spend all of your time on channels that only deliver small numbers of customers.
CAC formula is a little bit tricky because each customer has a different definition depending on the type of businesses. The customer can be a person who buys a subscription, who pays for more lives or who buys a new pair of shoes.
In the ad business, a customer definition is simpler to define: the customer might be a person, to whom – when reaching a particular level – reward ads start to be shown.
Examples of customer definition from AppAgent’s client portfolio include:
Kiwi.com – anyone who purchases their first flight ticket, hotel, or any other service.
Joom – anyone who orders their first pair of shoes or any other product from an e-shop.
Small Giant Games – first in-app purchase made.
Promotheus – first ad viewed.
Studycat – first subscription bought.
It can be complicated to calculate your CAC accurately. The calculation depends on which department in your company is monitoring the numbers.
A list of the most commonly used CAC metrics
Paid CAC = marketing spend/customers
this data informs whether a company can scale-up its user-acquisition budget and make a profit.
Blended CAC = marketing spend/(paid customers + organic customers)
one disadvantage of this index is you will have a low notice value of profitability of your campaign and how well is it performing.
Organic users cover also non-direct marketing.
Very Advanced Paid CAC = (marketing spend + ad production costs + cost of support software + UA managers + ASO*) / (customers + ASO customers)
*ASO cost – After every optimization the more users coming means lowering the cost.
We don’t use this complex calculation often, but we provide it for awareness and inspiration.
Company CAC = total cost for the whole company in the period / new customers in the period. If this number is lower than cLTV (customer LTV) in the long-term, then your company will make a profit.
Caveats about using the CAC metric
Experienced growth hackers calculate their CAC on a channel-by-channel basis, ideally for each campaign. As we’ve advised before, be sure to add to your calculation the costs of referral fees, discounts, credits, and any other user acquisition costs.
Before you start calculating your first CAC, be aware of a few caveats about using this metric.
- A company may have invested in marketing for a new region, and the results won’t be received for some time. However, this payback time isn’t included in CAC calculations. In this circumstance, you have to cover the costs now but receive the revenue later. A lack of cash flow caused this way can sometimes kill an otherwise healthy business.
- The second caveat is relevant for businesses that permanently alter their revenue schema. Changes in price will change your LTV, meaning that the old CAC isn’t comparable to the new one.
- The third caveat is only a partial view in many instances, in particular, if some customers have a much higher value than others (whales in games, renewing subscribers, etc.). The CAC to acquire a first time payer is a good indicator, but it doesn’t fully reflect whether that payer will go on and pay a lot in the long-term.
Sources used for the article:
Customer Acquisition Cost: The One Metric That Can Determine Your Company’s Fate
Would you like to dig deeper into the CAC knowledge? Here are a few great articles we recommend that you read:
- Eric Seufert’s How does LTV / CAC fit into a growth strategy?
- Nice visualization and graphs in the Customer Acquisition Cost and Lifetime Value (CAC & LTV) presentation
- Learn from Netflix: Customer Acquisition Cost (CAC), Customer Lifetime Value (CLV) or (LTV)
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