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
• 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
• CPC
• Cost per click
• 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
• 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
• 0.5% to 1% of active users to convert to some paid features

References

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