Customer Acquisition Cost madduckuser 26/09/2022

Customer Acquisition Cost

Customer Acquisition Cost (CAC) is the amount of money a company spends to get a new customer. 

This usually includes the money spent on advertising channels, the cost of sales and marketing efforts as well as any property or equipment needed to convince a customer to buy your product.

CAC is a very critical metric since it represents one of the biggest costs in the subscription business. Understanding the components of your CAC and making small adjustments can make a huge difference in your path to success.

To simplify this concept for our purposes, we will use CAC just to indicate the marketing dollars spent on advertising channels. So, for example, if you spent a total of 1.000$ last month on various marketing channels, and acquired 100 new customers, your CAC will be 10$.

However, let’s not forget that CAC is just a business construct and that there is no store on earth that lets you walk in and purchase customers off the shelf. Therefore, to be able to understand the components of CAC, we must imagine the path of a potential subscriber:

There are four main steps to complete for a user to become a subscriber:

1- See advertisements/ search results (Click or not)

2- Visit the app store page (Install or not)

3- Subscribe to the app (Click on “Subscribe” or not)

(4-) Continue subscription after introductory offers (Cancel subscription or not – valid for introductory offers only)

Example:

To simplify even further, we can divide the whole process into two main steps: the first would include everything until a user installs your app, and the second would go from the install to fully paying subscribers. But more on that at the end of this article.

Each one of these steps becomes a cost, and each transition becomes a ratio to follow and improve constantly.

The first step is the advertisement: The user sees your advertisement (number of impressions) and decides whether or not to click on it. The money spent on advertisement, divided by the number of clicks becomes your Cost per Click (CPC) or more precisely Cost per Tap (CPT) for mobile. The ratio of how many people saw your ad to how many clicks is your Click Through Rate (CTR). 

Please click to learn more about CPT & CTR as well as how to improve them.

Then comes your AppStore Page: after clicking on your ad, the user lands on your AppStore Page and sees your description as well as the screenshots you chose for the Store. The decision for the user is whether to install your app or not. The money spent on ads, divided by the number of users who install becomes your Cost per Install (CPI) and the ratio of AppStore visits to. Installs is your Conversion Rate (CR).

Please click to learn more about CPI & CR as well as how to improve them.

Once the users install your app, they are likely to launch your app and get a feeling of it (although even that is not guaranteed). They experience your onboarding pages and are greeted with your paywall, which is the page where you show your potential subscribers the packages & prices available to them. This third step is the most difficult one to get the users to cross because this is where (s)he decides whether to pay or not. Apple’s Introductory offers (more on that in our ItS article) enable developers to offer a trial period with no or lowered fees to make this step easier. Based on your usage of these offers, the user can become directly a paying subscriber or start an introductory offer which, once expired, will renew and make the user a “real” paying subscriber. Since the decision at this point is not a definite subscription decision, we call it “Activation” and the cost associated with it (Money Spent on Ads divided by the number of activations) is called Cost per Activation (CPA). The ratio of Installs vs. Activations is Install to Actvatiion (ItA).

Please click to learn more about CPA & ItA as well as how to improve them.

The optional 4th step is the one where the users on introductory offers become “real” subscribers and start to pay the full price.  To illustrate the ratio from introductory to “real” subs, we use the term Intro to Subs (IntS). This is also where we can at last determine your Customer Acquisition Cost (CAC). 

Just divide the Money Spent by the number of total subscribers (both “direct subscribers” who signed up without introductory offers and “indirect subscribers” who passed through introductory offers). And the ratio of Installs to Total Subscribers is called Install to Subscribers (ItS). 

To clarify, in a case where you don’t use Introductory Offers, your ItA will be the same as your ItS and your CPA will be the same as your CAC: This is because when you don’t have an Introductory Offer your activation is to become a standard price subscriber.

Please click to learn more about IntS and how to improve it.

Each of those steps is actionable and the transformation ratios can be improved which offers a very wide range of possibilities to reduce your CAC. These steps can also be broken down even further: for example you can compare the number of users who click one of your paywall options to the number of people who actually subscribe, or the number of people who install your app vs the number who launch it for the first time. However, we do not recommend it before mastering both CAC and LTV. 

On the contrary it might be easier to break down this whole funnel into two main components as mentioned earlier: the first component would go until the installation of your app and represented by the Cost per Install (CPI) and the second one would go from the install to the subscription stage and be represented by your Install to Subscriber ratio (ItS).

To summarize, CAC is one of the most important metrics in the subscription business and must be monitored constantly. It has many components that can be improved and Madduck Insights offers a wide range of pain points throughout your funnel and offers ways to improve them.

All the insights regarding CAC can be accessed from the “Acquisition” tab in your dashboard.