What’s an app without users?
What’s a business without customers?
Well, it’s nothing more than an idea that has yet to be proven… but if you want to get serious about growth and find a successful path, then you need to understand all the minutia of every step towards it.
There are countless strategies for user acquisition that hold varying degrees of success, but if you don’t have a solid grasp of how much it costs to operate that user acquisition channel, then you put your app at risk from an inflated marketing budget that doesn’t grow your bottom line fast enough.
Imagine that you spend $5.00 to acquire one user, but their lifetime value on your app is calculated at only $4.00. It doesn’t matter how many users you acquire because you will be consistently losing 20% on each new user to your platform.
What this means is that a high Customer Acquisition Cost (CAC) and a low Lifetime Value (LTV) is a losing combination for any business!
What Is Customer Acquisition Cost (CAC)?
The definition of Customer Acquisition Cost, or CAC, is the total sum of marketing and sales expenses that are required to convert a lead into a customer. However, it’s important to understand that not every lead becomes a customer, but every lead still affects your total customer acquisition cost even if they do not convert.
For this reason, CAC needs to be looked at as an average that accounts for every single cost in the entire marketing and sales operation.
This include costs such as:
- Advertising / PPC Spend
- Marketing and Sales Employee Salaries
- Content / Creative Spend
- Lead Generation Costs
- Sales and Marketing Tech Stack Costs
- ASO Costs
Essentially, all expenses that are related to marketing and sales work need to be accounted in order to be able to properly calculate the true customer acquisition cost.
How To Calculate Customer Acquisition Cost (CAC)
The formula to calculate CAC is to take the entire sum of all sales and marketing expenses and to divide that by the number of new customers acquired.
Customer Acquisition Cost Formula
CAC = (Sales Expense) + (Marketing Expense) / (Number of New Customers)
While CAC is a metric that needs to be monitored closely as sales and marketing operations evolve, it can be useful to breakdown customer acquisition costs into a set time period. For example, you can look at the weekly, monthly, or annually based CAC based on all of your expenses and newly acquired customers for that time period instead of relying on an ongoing tally.
This will help provide you with insight on the performance of different marketing channels over a structured period of time.
Optimize Your CAC : LTV Ratio
Once you’ve fully realized the true customer acquisition cost and the average lifetime value of each customer on your app, then you can start to make more insightful decisions against optimizing your CAC to LTV ratio.
If you can lower your CAC and raise your LTV, then you are in a strong position to drive real growth for your app!