This article is by Kurve’s Samuel Olsson, a B2C growth marketing expert specialising in mobile apps.
Knowing your Customer Acquisition Cost (CAC) enables you to optimise your user acquisition efforts, gauge whether your marketing campaigns are working, and understand if you’re on the path to long-term profitability.
But CAC is often an abstract concept, even for quickly-scaling companies. At the same time, it’s vital to understand it. If you don’t have a clear understanding of your CAC, before you know it, you’ll have spent thousands on campaigns that aren’t actually profitable for your company.
In this guide, you’ll learn exactly what CAC is, why it’s important, and how you can calculate it.
I’ll also show you why the CAC:LTV ratio is vital to track to ensure your mobile app acquisition efforts are paying off.
What is CAC and how do you calculate it?
CAC stands for Customer Acquisition Cost. It’s a fundamentally simple calculation:
Total cost of acquiring customers / number of customers acquired during a time period
The more you can optimise your CAC, the cheaper it will be to acquire new customers.
Your definition of a ‘Customer’ will vary, but it should be related to a revenue-generating action, like:
- Making a purchase
- Starting a paid subscription
- Viewing a certain number of ads
Despite CAC being a simple metric, there are a few ways people misunderstand it.
Common mistakes when looking at CAC
Sometimes, people include every user in their CAC calculations. But, CAC refers specifically to customers, not just users or total number of app installs.
For example, if someone downloaded your music streaming app but never purchased a subscription, they’re not a customer — but they are technically still a user. Different cohorts of users and customers will have different CACs and different LTV:CAC ratios (we’ll look at LTV:CAC ratio more below).
As well as that, growth marketers will often look at CAC for individual campaigns, only accounting for the money spent directly on advertising. This is an effective way to see if a campaign is working, but it’s not perfect.
To be as accurate as possible, CAC should include all the costs involved in acquiring customers, such as:
- Ad spend
- Fees for consultants or software
- Time spent on a campaign
If you ignore the extra costs, you can end up running campaigns that look profitable at a glance — but actually have a negative or zero profit margin. By looking at the overall CAC, you’ll be able to fully understand if your marketing has healthy profit margins.
It’s also vital to remember that CAC doesn’t exist in a vacuum. You have to compare it to the Lifetime Value (LTV) of your customers. If it costs more to acquire customers than they spend, your marketing efforts won’t be profitable, and you’ll need to find ways to lower your CAC or increase the LTV.
How should you use CAC in your mobile app marketing?
Most app marketers are familiar with metrics like Cost Per Install (CPI), and Cost Per Action (CPA) (e.g. cost per registered user). These are useful for campaign-specific comparisons. For example, both CPI and CPA could be used to tell you if it costs more to acquire installs or users on the iOS / Apple App Store, or the Google Play store.
However, these metrics can lead to you optimising for the wrong thing.
For example, if it costs £2.50 to acquire a user on the Play Store, but £10 on the iOS app store, you might want to funnel resources into more advertising on the Play Store. After all, having a low CPI will make you look great in your next meeting with your marketing team, CEO, or investors.
But here’s an example of why those high-level metrics can be misleading.
If the Android users you acquired for £2.50 spend an average of £5 in your app, they generate 2x what it costs to acquire them. On the other hand, if the average iOS user spends £30 over their time using your app, that means you make 3x what it costs to acquire them.
Clearly, in this example, advertising to iOS users is the more cost-effective approach with better margins — even though the CPI was technically higher.
This margin is what’s called the LTV:CAC ratio.
So, what is the LTV:CAC ratio and why does it matter?
The LTV:CAC ratio tells you if the app users you’re acquiring are helping your business make money. It tells you what kind of ROI you’re generating, and if you have healthy profit margins.
Ideally, you should aim for a LTV:CAC of 3-5:1. A LTV:CAC of 5:1 would mean that for every £1 you spend acquiring a user, you make £5 back.
You should always be looking to improve your LTV:CAC ratio, and assessing it to see if campaigns are delivering ROI or not.
If a campaign has a 1:1, or negative LTV:CAC, there’s a problem. You’re either spending too much to acquire users, or your users aren’t spending enough with you.
Some high-growth startups in competitive markets will have a negative LTV:CAC ratio and accept it, but, unless you have cash to burn, it’s usually not recommended. For example, companies like Uber are famous for spending huge amounts on user acquisition at a loss, but that’s a calculated strategy as they try to own a market they believe will be profitable in the future allowing them to eventually recoup those losses.
For most companies, you should aim for a positive LTV:CAC that allows you to cover your costs of doing business, and make a profit.
Improving your LTV:CAC ratio
You might already have realised that your LTV:CAC ratio is affected by a variety of factors. Luckily, that means you have several levers to pull if you want to optimise it.
The main ways to improve your LTV:CAC are:
- Reduce your costs: cut your spend on software, ad spend, reduce maximum CPI, etc.
- Improve your product onboarding: help your app users become customers, faster
- Raise your prices: Upping your prices should increase your Average Revenue Per User (ARPU)
Whenever you make changes to your business and marketing efforts to improve your LTV:CAC, it’s always important to look at your results with a critical eye.
For example, if you raised your prices, your ideal customer profile may have changed with it — and this new customer willing to pay higher prices may cost more to acquire in the first place.
When you start improving your LTV:CAC, it opens up new opportunities as you’ll have higher profit margins and be able to re-invest more into your sales and marketing efforts.
In summary: calculating CAC, and its role in your marketing
Your Customer Acquisition Cost is a vital metric for app marketers to track. It provides clear insight into the profitability and margins that your campaigns have.
You should also look at your LTV:CAC ratio, which compares the total lifetime value of a customer to the cost of acquiring them. It’s a north-star metric for many companies because it tells you how big your profit margins are, and if you need to work on improving them.
If you’re constantly measuring your CAC and can optimise it, you’ll be able to scale faster without spending more than you can afford on marketing.
Samuel Olsson is a curious growth marketer in the mobile app space. He is passionately focused on improving key metrics aligned with business objectives to drive value and scale.