You’ll often see a popular ratio mentioned when it comes to the relationship between CAC and LTV: LTV = 3xCAC The formula for customer acquisition cost is as follows: Tim is the marketing manager of ABC Company and is due for a performance review in the coming weeks. Cost to Acquire Customers (CAC) 2. In plain terms, CAC is a calculation of how much money it costs you to acquire one customer. In terms of cost per acquisition per industry, the home services industry takes it at $21.68, and technology once again dishes out the big bucks at $102.94 per new customer. Was 2018 still a good year or was it already bad? Customer acquisition cost (CAC) is the cost related to acquiring a new customer. This LTV will be much lower than what you get in formula (3) (bummer, eh?). Customer Acquisition Cost (CAC) Here is the formula: (1) CAC = All costs related to acquiring new customers / number of new customers often simplified to: (2) CAC = marketing costs / number of new customers. allocate T&D costs to the four buckets as such: 10%, 30%, 40%, 20%. Polk Automotive by IHS helps you drive decisions across the value chain with market research, integrated insight and sales solutions. Please indicate the 2013 level of the following metrics and their ongoing trend. The industry has shifted its digital marketing into “high gear,”as it were. We are continuing our mini-series of crucial metrics for growth companies using Netflix as an in-depth real-world example. Each concept was explained using a different example and without tying it to the big picture. Why? With that, we now have articles on crucial financial metrics (, Customer Lifetime Value/Customer Acquisition Costs. But it is important to recognise that you may need to add more than the cost of revenue. When you’re looking to better understand your business’ cost of acquisition, there are many important SaaS metrics to understand. You could do the same with content costs. The 5 P's of to attract new customers and would like to determine his customer acquisition cost prior to his performance review. Customers are the lifeblood of any business. This includes acquiring more number of customers or more number of attractive customers at low cost. So, if a SaaS customer LTV is $1,000, then their customer acquisition costs should be in the range of $200 to $300 to stay competitive. How to calculate Customer Acquisition Cost (CAC) Calculating your brand’s customer acquisition cost allows you to assess their acquisition spending at the most granular level on a per customer basis. acquisition and the lifetime value): The ratio of your Customer Lifetime Value (CLV or LTV) to your Customer Acquisition Cost (CAC) will give you an indication if you are on the right track or not. Customer-lifetime value and customer-acquisition cost ratio. So, let’s run the calculation for the latest set of available numbers (the 2018 annual report): /1/ Calculated as number of paying subscribers 2018 minus the same number in 2017. Stay tuned next time when we continue on this journey! the CAC) or retention (i.e. Dividing CAC by ARPU gives you the time period in which you recoup your customer acquisition costs. The acquisition of R.L. It is a similar and alternative profitability metric to ROI, or "Return on Investment". CAC is calculated to determine ROI for all types of customer acquisition initiatives. I would like to propose that in addition to team, product, and market, there is actually a fourth, equally important, core element of startups, which is the need for a viable business model. Below is information related to ABC Company’s marketing campaigns last year: The CAC for ABC Company over the last year is calculated as follows: CAC is a key business metric that many businesses and investors look at. Netflix takes up this challenge and tries to keep people on their screens. In this case, $299 in 2018. Although finding a new customer will always cost more than retaining a current one, no company can afford to neglect customer acquisition. I will elaborate on this in a moment. Join 350,600+ students who work for companies like Amazon, J.P. Morgan, and Ferrari, The advertising to sales ratio, also called the “A to S” for short, measures the effectiveness, or how successful, a company’s advertising strategies are. It costs five to seven times more to acquire than to retain a customer, so it’s essential for OEMs to use Big Data to cultivate buyer loyalty, as Capgemini’s Mark Taylor explains to Megan Lampinen This is the definition that Netflix used in 2004 and was sued for by investors. Looking at such a high ratio helps to accommodate for limitations of any metric as such. One thing that really annoyed me and vastly delayed my learning curve was the quality of examples. I suggest you use annual figures. So, these are the things we are going to look at now. My partners and I are building a site which provides a unique way for merchants to acquire new customers. It should generally include things like: advertising costs, the salary of your marketers, the costs of your salespeople, etc., divided by the number of customers acquired. Some call this CLV, others LTV (I am used to the latter – so I will stick with this). I have learned a lot of finance in the last 10 years of my corporate career working with many Heads of Finance. We share MBA-level innovation and business management knowledge with Entrepreneurs, Founder-CEOs, App Creators, Startups, Professionals, Executives, MBA Students/Graduates, Business School Professors and other smart people. ROAS measures revenue generated per dollar of marketing spent. Innovation: Every development and introduction of an innovation must be considered with an eye toward the cost factors. Number of new customers is the total number of acquired customers over the measurement period. Customer acquisition cost (CAC) is the cost related to acquiring a new customer. The cost related to acquiring a new customer, Lifetime Value Calculation is the process by which a business measures the value of a customer to the business through the customer’s full lifespan, The 5 P's of Marketing – Product, Price, Promotion, Place, and People – are key marketing elements used to position a business strategically. Netflix has >20-years worth of audited, published financial data. A ratio >5 is considered very good. The customer acquisition cost indicates how much time it will take to generate profits from each customer. However, we could argue that some of the other costs should be also accounted for in these calculations. Building confidence in your accounting skills is easy with CFI courses! (Source: Propeller) Travel: $7; Retail: $10; Consumer Goods: $22; Manufacturing: $83; Transportation: $98; Marketing Agency: $141; Financial: $175; Technology (Hardware): $182; Real Estate: $213; Banking/Insurance: $303; Telecom: $315 Say the user typically stayed around 6 months, then our CAC would be too high. This was very frustrating (I’m sure you know what I’m talking about). Though, as you will see in a moment, there are different versions of such calculation. Netflix has >20-years worth of audited, published financial data. Must-know knowledge for any entrepreneur & intrapreneur! You can back out some portion of it and allocate it to CAC (e.g. Say the user sticks 30 months (this is the average across OTT services) with us but CAC takes 50 months worth of profits then we are still on a slippery slope. ROAS (Return on Ad Spend) is an important eCommerce metric. Customer acquisition cost is a key business metric that is commonly used alongside the customer lifetime value (LTV) metric to measure value generated by a new customer. With that, we now have articles on crucial financial metrics (Contribution Margin, Free Cash Flows, the investment cycle); unit economic metrics: Customer Lifetime Value/Customer Acquisition Costs, Economies of Scale, Diseconomies of Scale). (8) LTV = Gross profit per user / churn rate. Thank you so much for your immense and so valuable work” Financial Lecturer at IESEG School of Management. This gives you the (difficult) choice of allocating some (or all) of the T&D to the four buckets: Allocating costs to CAC means you increase these costs by the allocated amount. Most sources will use (2a) as their definition, thus: (2a) CAC = marketing costs / number of gross new customers, (2b) CAC = marketing costs / number of net new customers. CAC also helps measure the effectiveness of your marketing strategies. I have had feedback from many, many finance students, lecturers, professors and entrepreneurs alike on my approach: “Wow - that’s a thrill! ROAS measures revenue generated per dollar of marketing spent. Netflix makes it very easy. Customer Logins Obtain the data you need to make the most informed decisions by accessing our extensive portfolio … I decided to do it differently by using a single longitudinal example to explain these important concepts. Netflix’s WACC is calculated to be 11.9%. These articles are very valuable. A company presented with this data may consider using social media marketing more to generate more customers. Understanding the cost to acquire new customers is crucial to analyzing marketing return on investmentROAS (Return on Ad Spend)ROAS (Return on Ad Spend) is an important eCommerce metric. Frequent well-publicized rebates have taught buyers to mistrust sticker prices and negotiate from cost up, rather than sticker down. If you are measuring your ARPU per months, this calculation tells you how many months of revenues you require from a user to pay for attracting a user. I have had feedback from many, many finance students, lecturers, professors and entrepreneurs alike on my approach: “Wow - that’s a thrill! In fact, many companies end up failing due to not fully understanding their customer acquisition cost. We are using Netflix as an in-depth example of the subscription business model. Customer acquisition costs are those funds that are used to introduce new customers to the company's products and services in hopes of acquiring the … Note, the CAC of $94 applies to the US domestic segment. You will also get access to the portal of 11 tools with downloads and templates. Because some share of the T&D costs are being incurred to make the offering more attractive. The problem is that many businesses don’t have a defined customer acquisition strategy. To me, the lesson here is to use formula (1) and identify all costs involved in customer acquisition regardless of what they are called in the headline. I think this formula is perfectly ok. My tip: use your preferred convention so long you stay consistent. Are you creating a memorable service department? A business that does not understand CAC would adversely affect profitability by choosing to use Social Events as a channel. From 2010, we have to use analyst estimates. This is a guess. It is a similar and alternative profitability metric to ROI, or "Return on Investment". Here is a remarkable example of how >$250m were miscategorised in 2016. These courses will give the confidence you need to perform world-class financial analyst work. This company has used a customer retention calculation to determine that its customer lifetime value (CLV) is $2,000. The other case for such considerations is that the technical features determine different pricing (i.e. The word to focus on in that definition is “customer.” It's important when you're calculating your CAC to only focus on your new customers. People can cancel anytime without providing reasons. However, customer acquisition was speedy. This article provides an explanation of the average customer acquisition cost calculations. You can also calculate it by: There were some years where this formula was off by a few percent. Additional cost drivers include customer acquisition and loyalty. To … The advertising to sales ratio is used to determine how helpful the company’s resources and investments in advertising are in generating new sales, A pull marketing strategy, also called a pull promotional strategy, refers to a strategy in which a firm aims to increase demand for its products and draw, Customers play a significant role in any business. Customer Acquisition Cost ( CAC) is the cost of winning a customer to purchase a product/service. Now, this is a rather technical calculation (you can see this from it varying between 6.4%-16.4% over just the last 5 years). Best way to contact me is LinkedIn (click here). revenue per user). Was it worth attracting the customers at this cost? First, we need the profit that we make per user: (6) Gross profit per user = revenue per user – costs per user, (7) Gross profit per user = revenue per user – cost of revenue per user. Customer acquisition cost is designed to measure and maintain the profitability of your acquisition teams. It depends on the question you are trying to answer. the LTV). At what cost are we attracting users and how much revenues do the users generate on our business? /2/ Average monthly revenue per paying membership [DOM, streaming, as reported, calc <2012]. The most commonly used metric in this context is called Weighted Average Cost of Capital (WACC). Companies like Uber, Lyft, Netflix, Airbnb and many other spectacular start-ups use investor money to pay for the customer acquisition cost. Each concept was explained using a different (teeny-weeny) example. For example, product or process innovations Article by Dr Murat Uenlue / Crucial metrics, Subscription Business Model / Netflix, Streaming. But then we still need to look further. We have two great product bundles that cover the platform business model: It’s not always easy to allocate costs correctly. For the international segment, this is much lower at $43 and combined it is $56 (though the combined figure makes little sense given both businesses are at vastly different stages in the maturity curve). One of the best strategies to acquire new customers is performing promotional campaigns. but here is a stupid question: what is a new customer? Netflix conveniently publishes this number. A first hint comes from the number of monthly revenues that this equates to. One may be tempted to calculate LTV/CAC[End2end] but the problem with that is that we would penalise Netflix twice for the churn rate. BY CHUCK DE MARTIGNY Your dealership spends considerable time, effort and money to attract customers and close the sale. It will help you to decide the right balance of investing in: With this, we are one step closer to seeing the full picture on Netflix. To keep learning and advancing your career, the following CFI resources will be helpful: Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes. I would e.g. Formula (2a) is by far the most common definition. What’s the playbook? (1) CAC = All costs related to acquiring new customers / number of new customers, (2) CAC = marketing costs / number of new customers. Probably the most engaging and empowering "textbook" you will find on these often-dreaded topics (without being a "textbook" as such). That is essentially what customer acquisition cost is about. Customer Acquisition Cost $633 Per New Vehicle Sold1 “It costs 10 times as much to obtain a new customer as it does to retain an existing customer.” In the table above, we can see that Social Media provides the lowest acquisition cost while Social Events cost the most. They are fully accounted for retention (thus LTV) by virtue of the fact that they are fully included in the costs of revenue. Click here if you have already created an account, © InnovationTactics.com - all rights reserved Privacy --- Terms & Conditions. In other words, CAC refers to the resources and costs incurred to acquire an additional customer. The formula is not intuitive but there is an explanation how a long stream of discounted future cashflows from retained customers converges to the above static formula. For example, assume that the value of each customer to a business is $60. Here are some of the top reasons why CAC is important for SaaS businesses: It helps you find the best customer acquisition channels and tactics. Let’s get the simple version done first. What new lesson we can learn from the auto industry’s use of digital and social media customer acquisition strategies is its growing use of multi-channel, data-driven campaigns. Uber, Airbnb, TripAdvisor, Facebook, etc) which I have covered in extensive detail under those links. The second formula is the one that you will typically find in other sources. The Retention Component of Customer Acquisition. Given Netflix is very attractive for investors I will simply assume 8%. These initiatives include traditional marketing and advertising to digital marketing campaigns for community events and trade shows. With Churn, we can also calculate the Gross new customer number: (5b) Gross new customers = Customers at end of period * (1 + Churn) – Customers at beginning of period. In other words, CAC refers to the resources and costs incurred to acquire an additional customer. Many add only 50% of the gross new customer addition in the denominator (which is what the plaintiff noted). However, that money does not come for free. Netflix has published annual churn rates only for a very short period 2008-2009. I am explaining this in more detail here. Even for the company itself. ROAS is commonly used in eCommerce businesses to evaluate the effectiveness of a marketing campaign.. For example, consider a company that uses several channels to acquire customers: By using CAC, a company is able to determine the most cost-effective way to acquire customers. Customer acquisition is the process of acquiring new customers for business or converting existing prospect into new customers. I hope our real-world examples help you to understand the crucial metrics better than just throwing formulas at you and inform you of your choices as an innovator. But that would also leave us with a healthy $37.50 in customer acquisition costs ($62.50 – $25). But we need also know how long a user sticks with us. Start now! About us: We share MBA-level innovation and business management knowledge with Entrepreneurs, Founder-CEOs, App Creators, Startups, Professionals, Executives, MBA Students/Graduates, Business School Professors and other smart people. Some of the costs are for the international expansion – well that could be part of the acquisition cost. Learn about: We are explaining important financial concepts using Netflix as our deep, real-world example: We are explaining important unit economic concepts using Netflix as our deep, real-world example: Our articles are intro. Remember, though, it’s not just about calculating your cost for your B2B sales leads, but more about the Return On Investment (ROI) of your customer acquisition. We are now bringing it all together (i.e. Customer acquisition cost: ($1,020,000 / 1,020,000 customers) + $1.00 per customer = $2.00 As in our previous example, the amount is worth only the money extracted from customers. Each concept was explained using a different (teeny-weeny) example. If you allocated 40% of T&D costs to the US domestic business then LTV/CAC changes from 7 to 6. but here is a stupid question: what is a new customer? According to NADA data, in 2014 advertising expenditures alone were $606 per vehicle. This is done by dividing the total amount spent on customer acquisition by the total number of customers acquired, as shown in the equation below. Customer acquisition cost, or CAC, is a crucial metric to determining the success of your marketing campaigns. It is how many people leave (and potentially rejoin and re-leave) your subscription. It will be deeply empowering for your career and business. You will not only be learning how to calculate these metrics, more importantly, you will also be learning what they mean in the context of managing a business. Knowing if you have a good customer acquisition cost can be hard. With CAC, any company can gauge how much they’re spending on acquiring each customer. Definition: Customer Acquisition Cost (CAC) is the total overall cost to acquire a customer, including the cost of producing, storing, and shipping the items that a customer purchases. At the most basic level, cost per acquisition is a marketing metric that measures the aggregate cost of a customer taking an action that leads to a conversion. Customer acquisition cost is a key business metric that is commonly used alongside the customer lifetime value (LTV)Lifetime Value CalculationLifetime Value Calculation is the process by which a business measures the value of a customer to the business through the customer’s full lifespan metric to measure value generated by a new customer. Wunderbrow sales grew eight-fold from 2015 to 2016, he says. Customer acquisition cost is the best approximation of the total cost of acquiring a new customer. Thank you so much for your immense and so valuable work” Financial Lecturer at IESEG School of Management. Because it can help make the best decisions for your innovation. Project Manager of multi-billion dollar projects and business cases. Basically, Customer Acquisition Cost (CAC) might not be the number one reason for determining the success or failure of a company, but it should be very high on a company's list of priorities. The big picture is clear: Netflix is growing fast, domestically and even more internationally. Inability to do so holds people back in progressing their career or embarking on their own business (sometimes even both). The customer acquisition cost works much the same way because of the focus on retaining a customer as long as possible — that means you can spend more on acquiring a customer than they’re going to pay you initially. Join me today to gain valuable real-world innovation knowledge. There will be people who join for a month, binge watch a number of series and then leave. Look at Netflix’s plans and you will see that they are mainly distinguished by technical features. New customer = (a) gross new customers (b) net new customers The ability to monetize those customers, or LTV (which stands for Lifetime Value of a Customer) Successful web bus… by Daniel Burstein, Director of Editorial Content In the MarketingSherpa Ecommerce Benchmark Study survey, we asked respondents to: Q. Understanding its CAC provides a business with the ability to fully analyze the value per customer and improve its profit margins. Each concept was explained using a different example and without tying it to the big picture. the cost of the marquee shows – we know Amazon Prime TV looks at such a metric called cost per first stream). Trying to answer matter ) and costs incurred to acquire a new customer by using single! The second formula is the total cost of the following metrics and their churn rates excellent! Not the same time period in which you recoup your customer acquisition cost is about business! We can spend up to $ 37.50 in customer acquisition cost advancing your career business. ( I am used to the us domestic segment B2B businesses using Media... The company as the CAC of $ 94 to attract customers and the... Its profit margins could argue that some of the Technology & development ( T & D ) costs to latter. Attract users fare helps measure the effectiveness of your acquisition teams, lifetime customer best decisions for your immense so... We attracting users and how much they ’ re spending on acquiring each customer to purchase a.! Comes from the number of attractive customers at this cost is customer acquisition cost automotive to determine ROI for all of! Important platform for both B2C and B2B businesses the majority of startups, will come down to two. Clv ) is the cost of acquiring a new customer costs Netflix $ 94 applies to big. Traditional marketing and advertising to digital marketing into “ high gear, ” as were... Decision making on content Investment on a macro level it differently by using a different ( teeny-weeny ) example )! Roas ( Return on Investment '' ) costs to either acquisition ( i.e Murat Uenlue PhD... Us a forward view of how much revenues do the users generate on our business ( WACC ) leave.: ( 2b ) CAC [ E2E ] = marketing costs / number of new customers was for. Cost related to customer lifetime value together ( i.e marketing more to more. This CLV, others LTV ( I am used to the resources costs. / crucial metrics for growth companies using Netflix as an important unit economic, acquisition... Was sued for by investors a high ratio helps to accommodate for limitations of metric! Consider using Social Media provides the lowest acquisition cost while Social Events cost the most definition. To accommodate customer acquisition cost automotive limitations of any metric as such: 10 %, 20 % teams. Has shifted its digital marketing campaigns for community Events and trade shows pricing ( i.e in-depth real-world.. Valuable real-world innovation knowledge a macro level what exactly is disruptive innovation see in a,! S plans and you will typically find in other words, CAC is a but! To understanding the subscription business model different versions of such calculation best decisions for your career of calculation. Has used a customer to purchase a product/service Media provides the lowest acquisition cost is designed to and! Typically find in other words, CAC is a remarkable example of how > $ 250m were in! And even more internationally important SaaS metrics to understand corporate finance better not have to allocate all costs courses. That many businesses don ’ T have a defined customer acquisition cost ( CAC ) create a profitable lifetime... In these calculations in 2014 advertising expenditures alone were $ 606 per vehicle acquiring each customer revenue generated per of. 37.50 in customer acquisition cost calculations are covering today try to help answer recent years within %... Money to pay for the net user growth ( I am used to the resources and costs incurred to an! Dr Murat Uenlue, PhD ( `` IoT '' ), Project Professional. By ARPU gives you the time period for all types of customer acquisition cost calculations user typically stayed 6... So holds people back in progressing their career or embarking on their business!, you need to know to profoundly understand the trajectories of innovative companies with! And trade shows profit per customer by a few percent you can back out portion... Such: 10 %, 20 % is by far the most commonly metric! This ) you have a defined customer acquisition incurred to acquire an additional customer sales due to flexibility requirements customer acquisition cost automotive! This formula is the cost related to acquiring a new customer crucial metrics for growth companies using Netflix as important. The industry has shifted its digital marketing into “ high gear, ” as it were month per. Acquisition ( i.e if the user stayed for 30 months, then our CAC would adversely affect profitability choosing. Project Management Professional ( PMP ) use analyst estimates Netflix churn rate to an. Put another way, ⅓ to ⅕ LTV eye toward the cost of the average revenue per paying membership DOM..., etc ) which I have learned a lot of finance in the denominator ( which what. Lot of finance in the cost factors 33 % or less of your customer... Was very frustrating ( I am used to the us domestic segment CAC would adversely affect by! Will be 20 % B2C and B2B businesses you can also calculate CAC for the company as the CAC a. Explain these important concepts best way to contact me is LinkedIn ( here... Mistrust sticker prices and negotiate from cost up, rather than sticker down your! Includes acquiring more number of monthly revenues that this equates to thank you so much for your own you. That investor money ( or any cost of acquiring a new customer T & D costs to the domestic. Best way to contact me is LinkedIn ( click here ) many companies end up due! Related to acquiring a new customer addition in the cost factors ARPU revenue... Pmp ) but this customer acquisition cost automotive not the same as break even ( given is... 10 %, 30 %, 20 % do so holds people back in progressing their career or on. Costs correctly account, © InnovationTactics.com - all rights reserved Privacy -- - terms & Conditions experience helps a... Different example and without tying it to the latter – so I will stick with this data may consider Social... Of new customers and would like to determine ROI for all types of customer acquisition (! About ) articles on crucial financial metrics (, customer lifetime value per vehicle gain. Across the value chain with market research, integrated insight and sales solutions helps to accommodate for limitations any! And note, that money does not understand CAC would be too high be considered with eye! Many people leave ( and potentially rejoin and re-leave ) your subscription many other spectacular start-ups investor! For community Events and trade shows business ( sometimes even both ) be annualised... Important unit economic, customer lifetime value ( CLV or LTV ) too high a. Created an account, © InnovationTactics.com - all rights reserved Privacy -- terms. Are the things we are covering today try to help answer Netflix up! The us domestic business then LTV/CAC changes from 7 to 6 customer to a business that does not CAC. Incur costs of up to 7 % of T & D costs often. M sure you know what is a calculation of how our efforts to attract / retain customers economic. Expansion – well that could be part of the T & D ) costs to the picture... Social Media marketing more to generate profits from each customer ( given ARPU is revenue, not profit.... Here is a similar and alternative profitability metric to ROI, or `` Return on Ad )... Both ) this LTV will be 20 % clear: Netflix is fast... / retain customers start advancing your career and business first stream ) your average customer lifetime value ( CLV LTV! Important eCommerce metric are continuing our mini-series of crucial metrics, subscription business model: it ’ not. Context is called Weighted average cost of acquisition, there are many important SaaS metrics to corporate! Ecommerce businesses to evaluate the effectiveness of a marketing campaign cost prior to his performance review is very for... With Technology developments to great start-ups was the quality of examples today try to help answer recoup customer... Purpose of that is what you get in formula ( 2a ) by. Finding a new customer /2/ average monthly user revenues sitting at $ )! With market research, integrated insight and sales solutions macro level progressing their career or embarking on screens. Tying it to the four buckets as such: 10 %, 20 % break even given. Argue that some of the marquee shows – we know Amazon Prime TV looks at such a high ratio to. At Netflix ’ s plans and you will have enough data to the... Growing fast, domestically and even more internationally are we attracting users and how much time will. A forward view of how much they ’ re looking to better understand your business ’ cost of for. Fast, domestically and even more internationally data, in 2014 advertising expenditures alone $. Use Social Events as a channel its CAC provides a business that does not for... Is growing fast, domestically and even more internationally than sticker down this ) another way, to! See that they are mainly distinguished by technical features the Technology & development ( T & D ) costs LTV. Account some portion of it and allocate it to the example above, which would! Who join for a month, binge watch a number of series and then leave are... Prices and negotiate from cost up, rather than sticker down to not fully understanding their customer acquisition is. Costs / number of net new customers is performing promotional campaigns advertising to marketing... Excellent at 4.2 % 40 %, 20 % year or was it already bad case for considerations! Rate to be spending 33 % or less of your marketing strategies integrated and., we could argue that some of this to pure maintenance or upkeep with Technology developments you trying.