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Customer Acquisition Cost

level 23 course

What it costs to win a customer, and why ad revenue isn't ad profit.

In your head, jot if needed · no calculator why?

Opens at level 23.

Builds on: Funnels (not open yet)

the lesson

The idea, the techniques and a tip for each skill, right here. The Learn page adds worked examples for every skill and untimed practice.

Read the lesson · about 3 minutes

The idea

Customer acquisition cost (CAC) is what you spent to win new customers divided by the customers you won. Say which costs you counted: ads alone make customers look cheaper than ads plus sales salaries and software. Cost per lead divides by leads instead, so it answers a different question.

Return on ad spend (ROAS) is the revenue credited to ads divided by the ad spend. It is a revenue ratio, not profit. To see whether ads made money, multiply the revenue by the contribution margin (the share left after the costs that come with each sale), then subtract the ad spend.

Techniques

Divide by what the question asks

Cost per customer or cost per lead.

Add every cost the question includes: ads, sales salaries, software.
For acquisition cost, divide by new customers. For cost per lead, divide by leads.
Leave out the count the question doesn't ask about.

worked example

Example: A cleaning service spends $3,000 on ads and $4,500 on sales salaries in a month and wins 50 new customers. What is the acquisition cost per customer, counting both?

$3,000 + $4,500 = $7,500.
$7,500 ÷ 50 = $150.

Answer: $150

Contribution, not revenue

The return on ad spend, or whether the ads made money.

ROAS is revenue ÷ ad spend, given as a plain number.
Contribution is revenue × the contribution margin.
Subtract the ad spend. A loss takes a minus sign.

worked example

Example: Ads cost $3,000 and brought in $12,000 of revenue. Assume a 20% contribution margin on that revenue. What is the contribution left after paying for the ads? (Use a minus sign for a loss.)

ROAS: $12,000 ÷ $3,000 = 4.
Contribution: $12,000 × 0.2 = $2,400.
$2,400 − $3,000 = −$600, a loss.

Answer: −$600

Tips by skill

TipAcquisition cost per customer: Total acquisition spend ÷ new customers won. Leads don't go in the denominator.
TipCost per lead: Spend ÷ leads. The customer count isn't used here.
TipAcquisition cost with all the costs: Add every cost named (ads, salaries, software) before dividing by the new customers.
TipReturn on ad spend: Revenue ÷ ad spend, given as a plain number like 4.5, not a percent.
TipDid the ads make money?: Revenue × contribution margin, minus the ad spend. A loss takes a minus sign.

Watch out for

Dividing by leads when the question asks for cost per customer, or by customers when it asks for cost per lead.
Counting only the ads when the question includes sales costs. That makes customers look cheaper to win.
Reading a ROAS of 4.5 as $4.50 of profit per ad dollar. It is revenue, before the cost of what was sold.
Subtracting the ad spend from revenue as if revenue were profit.

skills · practice stats

From rounds of this course only: box, review and test-out answers are left out. Once a skill has 40 tries, it compares your first 20 tries with your last 20.

Acquisition cost per customer par 11 s not tried yet
worked example
An acquisition campaign costs $89,400 in total and wins 60 new customers. What is the acquisition cost per customer?

Answer: $1,490.00
1. Acquisition cost = spend ÷ customers won = $89,400 ÷ 60 = $1,490.
2. Always say which costs you included.
Cost per lead par 11 s not tried yet
worked example
An ad campaign costs $500 and produces 1,000 leads and 70 customers. What is the cost per lead?

Answer: $0.50
1. $500 ÷ 1,000 leads = $0.50 per lead.
Acquisition cost with all the costs par 20 s not tried yet
worked example
In a month you spend $6,300 on ads and $6,300 on sales salaries, and win 18 new customers. What is the acquisition cost per customer, counting both?

Answer: $700.00
1. ($6,300 + $6,300) ÷ 18 = $12,600 ÷ 18 = $700.
Return on ad spend par 16 s not tried yet
worked example
Ads cost $8,900 and are credited with $8,900 of revenue. What is the return on ad spend, as revenue ÷ ad spend? Answer as a plain number, not a percent.

Answer: 1
1. $8,900 ÷ $8,900 = 1.
2. It's a revenue ratio, not profit, and the ads may not have caused all of that revenue.
Did the ads make money? par 22 s not tried yet
worked example
Ads cost $2,900 and brought in $10,000 of revenue. Assume a 30% contribution margin on that revenue. What is the contribution left after paying for the ads? (Use a minus sign for a loss.)

Answer: $100.00
1. Contribution = $10,000 × 0.3 = $3,000.
2. $3,000 − $2,900 of ads = $100.
3. The ads more than paid for themselves.

rest ladder

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