CAC 101: What Is The Customer Acquisition Cost? And Why It’s Important For Mobile App Developers
You are developing a mobile app, and are wondering whether that new feature or that marketing campaign could give you the edge you’re looking for. In order to make the right decision, understanding your Customer Acquisition Cost, or CAC is crucial.
Customer acquisition cost is one of the most important metrics for any business, regardless of its customers being other businesses or consumers. Calculation of this metric helps to evaluate the efficiency with which you acquire customers and whether they bring profits. We will cover the most commonly used definitions and formulas, but also give you some advice on how to calculate CAC for your own mobile app.
What Is Customer Acquisition Cost (CAC)?
Customer Acquisition Cost (CAC) is the cost of winning a customer to purchase a product or service. As an important unit of economics, customer acquisition costs are often related to customer lifetime value (CLV or LTV).* You can also read our article about lifetime value.
What Are Examples Of Customer Acquisition Costs?
By understanding what your customer acquisition cost is composed of, you can build a better strategy on how you should spend your money to acquire new customers. Your CAC will include all the promotional (advertising, sales, direct marketing) costs, online expanses (social media, website), pricing incentives, costs associated with data & analyses.*
Why is CAC Important For Mobile Apps?
Customer acquisition cost is one of the important metrics for mobile apps, just like Lifetime value. Knowing the worth of every customer and building your app in the most beneficial position for your top users can bring you to the next level in your marketing efforts. If you calculate the customer acquisition cost and understand its importance, you will make better marketing decisions and spend your money in the most rewarding way possible.
Considering that LTV and CAC metrics are both crucial for your app, these terms also affect each other. For instance, your app’s CAC is higher than its LTV, which means your app is losing money, and it’s not a good result.
Your customer acquisition cost should be lower than the lifetime value of your app. As you spend a lot of your money for acquiring new customers, you may not keep the existing ones and they may be leaving your app soon, this action won’t bring sustainable revenue for your app. Knowing your CAC, how much you’re spending, and its correlation with LTV shows where your app stands. You will make better financial decisions and have better budget management. And this is why CAC is important for mobile apps.
How Do You Calculate Customer Acquisition Cost?
For mobile apps, you can calculate customer acquisition costs in two ways: simple and complex. You can use these calculations if your users take an action that can help you generate revenue, such as buying a subscription or interacting with your ads.
1- Simple Method
To gain a simple understanding, divide your total cost of acquiring users by the number of users you’ve acquired during a specific period.
2- Complex Method
In a more advanced method, you can add all the wages and fees you pay to the total cost of acquiring users, such as sales, marketing, consultation, designer costs, etc. In the same way with the basic method, you can divide this number by the number of users you’ve acquired. As an outcome, you will have more precise metrics about your mobile app.
Why Is The LTV and CAC Balance Important For Your Mobile App?
As we discussed above, the customer acquisition cost is related to lifetime value and they’re both critical for your app’s longtime success and revenue. After you’ve calculated the LTV and CAC metrics, you should divide LTV to CAC to reach your LTV: CAC ratio. If you don’t know how to calculate your LTV, you can read our article to find your metric.
How should you review the ratio?
1:1 Or Lower
The LTV: CAC ratio should not be 1:1 or less, if it is, your app might be having financial difficulties or following the wrong strategy.
Between 1:1 and 3:1
If the ratio of your app is between 1:1 and 3:1, this means your app is not in the desired condition yet. The result cannot be considered as bad, but cannot be considered as a good, either. You should follow a better strategy and lower your acquisition cost.
3:1 Or Higher
If the result is 3:1 and higher, it means you’re on the right path and you are acquiring your customers with the right price, and have good potential to grow.
Customer acquisition cost (CAC) is an important metric that mobile app developers should know and track. The sooner you calculate and understand how it impacts the success of your product the better you will be prepared for the growth of your app. This metric can help you to assess how good an investment is for the next marketing campaign so that you can monitor your campaigns in a better way and make sure that your investments are worth every dollar.