Last updated on September 20th, 2022
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4 calculations types for the customer acquisition cost index
Would you know the number if your boss asks you how much you are spending for one paying customer?
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 do you need CAC for,
✔️ the advantages of knowing your CAC,
✔️ how to calculate CAC, and
✔️ what to do with CAC next?
What is Customer Acquisition Cost?
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.
If you want to understand how to read user acquisition data, read the post that explains other top-funnel metrics such as CTR, CVR, and IPM.
Now back to CAC. The fundamental purpose of this metric is to calculate the full cost of acquiring 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, you make money. From a business point of view, the lower, the better because your margin grows.
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). If you’re interested in this topic, read more on how to set up a solid LTV).
Your marketing efforts aim to find channels with 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 business. 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 is simpler to define: the customer might be a person to whom reward ads start to be shown when reaching a particular level.
Examples of customer definitions 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 blended CAC is you will have a low notice value of the profitability of your campaign and how well it is performing.
Organic users also cover 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, 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 know how to calculate CAC on a channel-by-channel basis, ideally for each campaign. As we’ve advised before, be sure to add the costs of referral fees, discounts, credits, and any other UA costs to your calculation.
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. Price changes 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, particularly if some customers have a much higher value than others (whales in games, renewing subscribers, etc.). The CAC to acquire a first-time customer is a good indicator, but it doesn’t fully reflect whether that payer will go on and pay a lot in the long-term.
CAC payback defines your cash flow… AND BUSINESS VIABILITY
Changing consumer behaviors as social norms revert to pre-COVID patterns and time spent with digital products subsides influence your CAC more than you can imagine. The aspect of when your customers pay for the app or in-game purchases can have massive implications on the ability to scale efficiently.
The cool down of the VC market and upcoming recession is connected to adversity against long-term bets towards future – and unstable – income. Investors look for cash efficiency and robust prediction based on fresh data reflecting changes in the society.
Companies with slow CAC payback require significant financial capital to scale. Many venture-funded startups begin their journey like that but it’s vital to measure the time aspect of CAC and work towards shorting it.
If you are responsible for financial performance of your operations, I recommend you to read more on this topic and review a case studies of Netflix, Duolingo and Blue Apron.
Sources used for the article:
Would you like to dig deeper into Customer Acquisition Cost? Here are a few great articles we recommend that you read:
- How does LTV / CAC fit into a growth strategy?
- Customer Acquisition Cost and Lifetime Value (CAC & LTV) presentation
- Customer Acquisition Cost (CAC), Customer Lifetime Value (CLV) or (LTV)
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How do you calculate blended cac?
Marketing spend/(paid customers + organic customers)
Organic users cover also non-direct marketing.
How do you calculate company cac?
Total cost for the whole company in the period / new customers in the period