How to calculate Customer Acquisition Cost (CAC)
Table of Content:
- What is Customer Acquisition Cost?
- Customer Acquisition Cost (CAC) vs Cost Per Acquisition and Cost Per Action (CPA) - What’s the difference?
- Why is the cost of user acquisition important?
- How to calculate Customer Acquisition Cost
- Industry average Customer Acquisition Costs
- How to interpret Customer Acquisition Cost
- Lifetime Value (LTV) to CAC ratio comparison
- How to reduce Customer Acquisition Cost
“You’ve got to spend money to make money”, we’ve all heard it.
Investing in marketing, sales and customer acquisition is a critical part of getting your brand new app off the ground. But as time goes on, are you sinking costs upfront without seeing a return?
In this guide, we’ll explain how to calculate your own Customer Acquisition Cost (CAC) and how you can use it to uncover actionable insights for your app.
What is Customer Acquisition Cost?
Customer Acquisition Cost (CAC) is the amount that you spent for each newly-acquired user of your app, over a given time period.
It’s an important metric for your app marketing efforts as it helps you to assess the effectiveness of not just your marketing spend, but the other hidden costs like development and overheads.
To calculate CAC, in the simplest terms, you need to add-up all of the costs associated with acquiring new users, then divide that by the number of users acquired over the time period.
Customer Acquisition Cost (CAC) vs Cost Per Acquisition and Cost Per Action (CPA) - What’s the difference?
The marketing abbreviation CPA is often interpreted as “Cost Per Acquisition”, but it is most commonly used as an abbreviation for “Cost Per Action”.
With so many seemingly identical terms, it’s easy to assume that they all mean the same thing. Yet this isn’t the case.
The difference between customer acquisition cost and cost per acquisition comes down to granularity. Cost Per Acquisition is an advertising reporting metric that typically indicates advertising spend on a specific channel, divided by the number of users that installed the app. Whereas customer acquisition cost takes the wider total spend across all channels, teams and initiatives into account.
In terms of cost per action, this is an advertising pricing model that charges once a desired action has been completed. Generally speaking, the abbreviation CPA will usually relate to Cost Per Action.
Now that we’ve demystified the terminology, we can deep-dive into Customer Acquisition Cost and why it’s so beneficial.
Why is the cost of user acquisition important?
Here are some of the main reasons why you should be paying attention to your Customer Acquisition Cost (CAC):
Calculating CAC allows you to budget for sustainable growth
It’s understandable that you might expect to spend more on acquisition than you will see return in revenue for your first few months after launch. But this isn’t something that can go on forever.
Keeping an eye on your CAC alongside other metrics like Average Revenue Per User (ARPU) or user lifetime value (LTV), you can evaluate whether your marketing strategy is sustainable and adjust accordingly.
It allows you to fully understand how your marketing is translating to installs
Building on the previous point, calculating your Customer Acquisition Cost allows you to see the full picture around what you’re really spending to bring each customer in. While some of your channels may show excellent performance per dollar spent in their reporting, the overall picture might tell a different story.
It can help you to identify risks and correct them before they take effect
By calculating Customer Acquisition Cost, you can forecast what it will cost you to hit your targets if you were to carry on with the current strategy.
In doing this, you may identify issues with the plan and optimize the approach.
How to calculate Customer Acquisition Cost
To calculate Customer Acquisition Cost, simply total the sales and marketing expenditure in a given time period, then divide that by the number of installs during the same period.
The catch is that you will need to decide what costs to include. The exact list will vary for every app and category, but some typical costs relating to app sales and marketing include:
- Advertising spend
- Sales and marketing salaries
- Third party agency costs
- ASO and app store analytics tools
Once you have this total to hand, you can calculate CAC.
Here’s what the formula looks like:
So for example, let’s say in your opening month you acquired 10,000 new installs and spent the following:
- $10,000 in advertising spend
- $5,000 in fees to third parties
- $8,000 in sales and marketing team salaries
- $2,000 spent with social media influencers
In this case, your CAC would be $2.50 (25,000 / 10,000).
Industry average Customer Acquisition Costs
According to a recent report, the industry average CAC for both iOS and Android in the US comes to $1.75.
What’s particularly interesting is how much these approximate benchmarks grow for more in-depth action. For example, the average cost for a user that makes an in-app purchase goes up to $86.61.
While these figures may be interesting at face value, in reality they’re of little use in isolation, as CAC is so dependent on individual business context. That’s why we’re going to dive into how you should be interpreting Customer Acquisition Cost.
How to interpret Customer Acquisition Cost
Imagine you spend $10,000 on sales and marketing, earning 1,000 new installs as a result. At face value, your CAC of $10 might seem expensive, but if you’re an eCommerce app for clothes and your average sale is $50, this quickly becomes very affordable.
Alternatively, if you’re a mobile game where the only in-app purchase is a one-time $2 payment for an ad-free version of the app, then your spend is not sustainable.
This is why it’s so important to consider your customer acquisition cost in the context of user lifetime value (LTV).
Lifetime Value (LTV) to CAC ratio comparison
Lifetime Value is a prediction of the net profit you’ll expect to make over a user’s lifetime usage of your app.
It’s calculated by dividing the Average Revenue Per User (ARPU) by the User Churn. For more information and examples, you can check our complete guide to calculating user LTV.
Once we have this, we can combine it with customer acquisition cost to determine the LTV to CAC ratio (LTV:CAC). For example, if your CAC is $5 and your calculated user LTV is $10, then your LTV:CAC ratio is 2:1.
The LTV to CAC ratio is so useful because it can help to add context to your Customer Acquisition Cost.
Remember the example from above? A $20 CAC is fine if your user LTV is $100, as this would equate to a LTV: CAC ratio of 5:1.
The LTV to CAC ratio shows a brief snapshot of how much your users are worth compared to the amount you’re spending to acquire them. By assessing CAC in the context of LTV, you can guide your marketing, sales and customer service spending.
How to reduce Customer Acquisition Cost
Ultimately, reducing Customer Acquisition Cost will come down to improving the effectiveness of your sales and marketing activity. Here are some tips to get you started:
1. Find the intended target audience
If your marketing is reaching the wrong people, your budgets are going to waste. Keep an eye on your paid media targeting approach, as well as your app store optimization (ASO).
For example, you might want to review the keywords you are targeting to ensure they are appropriately specific to your target audience, or update the images on your app store page to speak more directly to your primary audience.
2. Focus on engagement to increase user retention after an install
As we covered earlier, a low Customer Acquisition Cost (CAC) is only as useful as the user Lifetime Value (LTV) it facilitates. You need to focus on retaining your users and increasing their engagement with your app, by listening to reviews and updating your app based on their feedback.
For a detailed explanation, you can check our complete guide on increasing app retention rate.
3. Use deep links to make your advertising click-through more impactful
Deep-links send users directly to an app, instead of a website or storefront. They save your users time and energy, crucially reducing the number of steps and therefore opportunities for a user to lose interest.
You might be wondering how a deep link to an app can help to drive installs, when users don’t yet have the app installed on their device. This is where the beauty of deferred deep links comes into play.
A deferred deep link is a smart link that will detect whether a user has an app installed. If the app is already installed, the user will be directed to the corresponding in-app page or experience. If the app doesn’t yet exist on the device, they will instead be deferred to the app store to download.
Deep links help to create a seamless user journey and can increase the likelihood of an install, but they’re also beneficial for increasing conversion rates for existing users, impacting their LTV.
4. Advertise during peak periods selectively
It goes without saying that advertising costs fluctuate with demand. It costs a lot more to advertise during peak periods, like the build-up to Christmas or Black Friday, than it might on a typical day.
Consider this when planning your annual budget. Are these peak periods crucial to your marketing strategy, or is your advertising budget better spent at more cost-efficient times of year?
5. Maximize the user LTV of your app
We’ve already talked at length about the importance of the relationship between user Lifetime Value (LTV) and your app’s Customer Acquisition Cost (CAC).
By assessing both in parallel, you can build out a more complete picture of your marketing effectiveness.
6. Assess your organic growth alongside paid performance
It’s easy to overlook organic customer acquisition and focus on your paid activity’s performance. Through App Store Optimization and word-of-mouth however, your app can rapidly build a strong organic stream of installs.
The benefit of this is that it will bring down your overall CAC, allowing you to refocus marketing spend to further grow your app’s audience.