How to Calculate Customer Acquisition Costs

 Blogging for Customer Acquisition 

The cost of acquiring a customer can make or break a business.  An early indication that a business has found the right model is when the costs associated to acquire a customer are less than the revenues generated from the customer.  In order to clearly account for acquisition costs, businesses must consider the following metrics:

(1) Costs to Acquire a Customer (CAC): take the businesses's costs of sales and marketing over a particular time period (include salaries and other expenses) and divide it by the number of customers acquired in the same time frame.

(2) Average Revenue Per User (ARUP): Total Revenue / # of Subscribers

(3) Lifetime Value of a Customer (LTV): Average Revenue Per User/Customer (ARUP) for the lifetime of the business.

(4) Subscriber Churn: the number of subscribers to a service that discontinue their subscription to that service in a given period.

   

The ratio of CAC to LTV is a good measure for evaluating the effectiveness of the business and the market in general. A good rule to follow for online is CAC should be less than LTC (3x's appears to be a rough minimum for SaaS businesses). In terms of subscription businesses, CAC should be recovered in less than 12 months. In short, it's important that all startups find a way to make their CAC less than their LTV. Otherwise, there's no real hope for profitability.