Article Reviews

Calculating Customer Acquisition Cost (CAC)

I stumbled upon an article on Andrew Chen‘s blog on calculating Customer Acquisition Cost (CAC) and read around some related topics.

Some quick notes below.

Definitions

  • CAC (Customer Acquisition Cost)
    • Cost to acquire a paying customer
    • CAC = (Marketing + Sales Expenses) / # of New Customers Acquired
    • If your customers are acquired through Google AdWords or similar networks
      • CAC = Cost Per Click (CPC) to get a visitor / (% of visitors that convert to trial x % of trial users that convert to paid users)
  • CPA (Cost Per Acquisition / Action)
    • Cost to acquire something other than a paying customer (e.g. lead, trial user, registered user)
  • LTV (Lifetime Value of a Customer)
    • Profit over the entire relationship with a customer
    • LTV = Average Customer Life (years) x Average Revenue Per User (ARPU) Per Year x Gross Margin
  • CPM
    • Cost per thousand impressions
    • Price you pay for an ad-network to show your ad a thousand times
  • CPC
    • Cost per click
    • Price you pay an ad-network each time someone clicks on your ad
  • CTR
    • Click through rate
    • % of people who sees your ad that actually clicks on it
    • CTR = # of clicks / # of impressions

Pitfalls to Watch Out When Calculating Customer Acquisition Cost (CAC)

  • New vs. returning customers
    • For returning/reactivated customers, their expenses and # should either both be included or both be excluded from the calculation, i.e. the numerator and denominator needs to be apples-to-apples.
  • Timing mismatch
    • After incurring marketing/sales expenses, there is typically a lead time before the customer is acquired
    • # of new customers acquired in a period needs to be matched with the expenses that were incurred for its acquisition.
    • E.g. CAC (this month) = (Marketing Expenses 2 months ago + 0.5 x Sales Expenses 1 month ago + 0.5 x Sales Expenses this month)  / # of New Customers this month
  • Not including fully-loaded expenses
    • Salaries
    • Overheads (rent, equipment, back office support, etc.)
    • Cost of marketing and sales tools
    • Costs for not just dedicated marketing/sales staff but also staff who spend their time on marketing/sales including engineers, PMs
    • If a free product is your primary method of customer acquisition, consider including product, engineering, support, trial users costs

Guidelines / Benchmarks

  • CAC
    • Aim to reduce the level of human touch required to acquire customers to reduce CAC
    • LTV should be 3 x CAC or more
    • CAC should be recovered in under 12 months
  • CTR
    • An engaging social website will have 0.1% to 0.5% CTR on their ads
  • CPM
    • Social sites: < $0.25
    • International sites: < $0.50
    • Medium-sized sites with banner ad networks: < $1
    • Reference sites for special topics: > $5
  • Conversion rate for freemium
    • 0.5% to 1% of active users to convert to some paid features

References

-END-

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