Cost per acquisition (CPA) and customer acquisition cost (CAC)

By Eckhard Ortwein | Lean-Case

Jul 31
cost per acquisition

Cost per acquisition (CPA) and customer acquisition cost (CAC) are often used interchangeably but that’s wrong and in reality they’re completely different metrics. These metrics are essential to the health of your company and they shouldn’t be confused because mixing them up can result in a failure.

In this article, we’ll compare CAC vs CPA, explain the difference between these metrics, and provide you with cost per acquisition formula. You will also learn how to calculate customer acquisition cost.

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How to calculate customer acquisition cost (CAC) 

Customer acquisition cost (CAC) is the key metric of the Get Customer Phase in the customer lifecycle which includes all direct cost related to acquiring a new customer. We can break down this cost into Cost-of-Marketing driving lead generation and Cost-of-Selling driving sales strategy. Your customer acquisition cost can tell you whether or not your business can succeed if you compare CAC with your customer lifetime value (CLV). For growing SaaS companies, the industry standard of CLV: CAC ratio is 3:1 or higher. A CLV: CAC ratio of 1:1 means you lose money the more you sell and 4:1 indicates that you have a great business model. 

The basic formula which can be used to calculate customer acquisition cost looks like this:

CAC = (Total Marketing + Sales Expenses) / number of New Customers Acquired

Unfortunately, this popular formula is missing a lot of definitions and details around each variable in the equation to get it right. That’s why even the best basic calculation of CAC can be very misleading.

There are 3 key issues with the basic formula.

First, it doesn’t take into account the time period between when a company spends the marketing/sales money and when it actually acquires a customer. But if we don’t take these time periods into account, we could overestimate or underestimate CAC and it may result in making some terrible operating decisions. That’s why it’s necessary to figure out your marketing/sales cycle.

For example, if an average time from lead to customer is 60 days and we think that sales expenses are spread evenly over that time period, the CAC formula can be as follows:

CAC = (Marketing Costs (n-60) + 1/2 Sales (n-30) + 1/2 Sales (n)) / number of New Customers (n)

Here n= Current Month

The second issue is connected with the expenses that you include in the numerator (marketing/sales). The most common mistakes are
  • not including salaries of all people working on marketing and sales
  • not including cost of tools (software)
  • not including the overhead (back office, equipment, rent, etc)

The third issue is connected with distinguishing between new and returning customers. To avoid making your CAC looking artificially low, you should always include into the formula the expenses for customer retention and the total amount of new and returning customers.

As you see, calculating correct CAC involves a lot more than a basic, one-size-fits-all formula. It’s a complicated process that requires a lot of analysis. Use Lean Case to make sure all your calculations are aligned and accurate.

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Hosted by: Eckhard Ortwein, CEO and Founder of Lean-Case - a full service business planning company and we offer a fully done for you business plan.

Cost per acquisition (CPA) – the pre-condition to CAC 

Cost per acquisition is also often interchangeably referred to as cost per action or cost per lead (CPL) in business models where leads are qualified to prospects before being sold to. This metric can be used to measure effectiveness of your advertising campaigns. CPA measures the cost of acquiring everything but a customer – a product trial, a subscription or a lead. This metric is related to CAC because CPA measures the cost of things that are leading indicators to CAC.

To calculate CPA, you need to take your total advertising spend and divide it by the number of generated acquisitions.

CPA = the total cost of campaign / number of acquisitions

You can also calculate this metric using an online CPA calculator.

Difference and examples of CAC and CPA

CAC specifically measures the cost of acquiring an actually paying user (a customer). On the other hand, CPA (cost per acquisition) measures the cost of acquiring a non-paying user (not a customer), for example, cost per lead (CPL), cost per signup, cost per registration or cost per activation. Let’s review some examples.

  • If users sign up for a free month at Netflix, they are measured using CPA. But when they pay for their first month, they are measured using CAC.
  • Facebook is a B2C company supported by ads model so their paying customers are advertisers and CAC is the cost of acquiring a new advertiser. Ordinary Facebook users are measured by CPA which includes cost per new user registration, cost per activated user etc.
  • If you register on an e-commerce website without making purchases, you can be measured with CPA. But after you have made a purchase, you are measured with CAC.
  • If user are considered leads but weren’t qualified as prospects, they will be measured with CPA or more precisely – CPL (cost per lead).

As you see, it’s easy to get lost in the variety of useful business metrics. Still, it’s essential to have a solid business model for your startup. It will help you avoid surprises and will ease your life when searching for investments. There’s much more factors you need to consider when preparing for the next investment raising round. The best way to keep track of all the important criteria and ensure that your presentation is convincing and not missing crucial elements is to use Lean Case. With the help of our system you easily develop comprehensive business models your investors will be grateful for.

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About the Author

CEO and Founder Lean-Case - Eckhard is a Serial Entrepreneur co-founding cyber-security startup accells acquired by Ping Identity and m-payment startup paybox acquired by Sybase/SAP. As a Business Angel, VC Partner and Investment Advisor, he has realized that turning business models into numbers is a major challenge and must professionalize.

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