Determining New Customer Acquisition Cost (nCAC) involves a 6-step process that accounts for Customer Lifetime Value (CLTV), refunds, cost of goods sold (COGS), desired net profit margin, and overhead. Follow this guide to calculate your client's nCAC effectively. If the client does not have their exact numbers, we'd recommend using our calculator instead.
Step 1: Calculate Customer Lifetime Value (CLTV)
CLTV represents the total revenue a customer generates for your business over their lifetime.
Formula
CLTV = Total Revenue / Number of Unique Customers
Key Considerations
Lookback Period: You will need to determine a lookback period to look at the total revenue and number of unique customers. A 12-month period can be used as a standard, but adjust based on business model, customer retention, subscriptions, seasonality, and other factors.
Service-Based Businesses: If customers typically make a single purchase, CLTV will be the Average Order Value (AOV) unless there are some repurchases.
Higher CLTV = More Flexibility in Acquisition Costs: If customers buy repeatedly, you can afford a higher acquisition cost since you'll recoup expenses over time. This makes retention and repeat purchases extremely important.
New Businesses Without Historical Data: If unsure, estimate CLTV using:
Initial Order Value × 2-8 (4 is a reasonable assumption if you expect some returning customers).
Example Calculation
For the rest of this article, we’ll walk through an example e-commerce client using a 12-month lookback period.
Total Revenue = $1,000,000
Unique Customers = 10,000
CLTV = $1,000 ($1,000,000 / 10,000)
Step 2: Subtract Refunds
Refunds represent the percentage of orders refunded, reducing the effective lifetime value to your business’s Net CLTV.
Formula:
Net CLTV (NCLTV) = CLTV - (Refund % × CLTV)
Key Considerations:
Refund rates vary significantly depending on the business and category.
If refund data is unavailable, 10% can be used as a starting point.
High refund rates reduce your profitability, so keep this factor in mind.
Example Calculation:
Refund Rate = 10%
NCLTV = $1,000 - ($1,000 × 10%) = $900
Step 3: Subtract Cost of Goods Sold (COGS)
COGS includes all costs related to manufacturing and delivering goods or services and results in your business’s Gross Profit.
Formula:
Gross Profit = NCLTV - (COGS % × NCLTV)
Key Considerations:
COGS includes materials, manufacturing, labor, utilities, shipping, handling, and processing fees.
A typical COGS range is 10-50%, with 40% being a reasonable estimate.
For service-based businesses, the largest COGS factor is often labor costs.
Example Calculation:
COGS = 40%
Gross Profit = $900 - ($900 × 40%) = $540
Step 4: Subtract Desired Net Profit Margin
Your desired net profit margin ensures sustainable business growth.
Formula:
Profit = NCLTV × Desired Net Profit Margin %
Key Considerations:
Net profit margin targets vary significantly by industry and business model but typically fall between 5-30%.
This is the profit retained after covering all costs.
Example Calculation:
Desired Profit Margin = 20%
Profit = $900 × 20% = $180
Step 5: Subtract Overhead Costs
Overhead includes all additional business costs that haven’t been accounted for yet. This is often categorized as Selling, General, and Administrative (SG&A) expenses, including:
Rent, utilities, office supplies, and insurance
Employee salaries (excluding direct labor costs in COGS)
Marketing, sales, and advertising expenses
Accounting, legal fees, travel, and meals
Formula
Overhead Cost Per Customer = Total Overhead Costs / Number of Unique Customers
Key Considerations
Use the same lookback period as your CLTV calculation to determine total overhead.
This helps ensure that all business expenses are accounted for in your final nCAC.
Example Calculation
Total Overhead for 12-month period = $250,000
Unique Customers in that period = 1,000
Overhead Cost Per Customer = $250,000 / 1,000 = $250
Adjusted nCAC = Previous nCAC ($360) - Overhead Cost Per Customer ($250) = $110
Step 6: Determine Your Final New Customer Acquisition Cost (nCAC)
nCAC is the maximum amount you can spend on acquiring a new customer while maintaining profitability.
Formula
nCAC = Gross Profit - Desired Net Profit - Overhead Costs Per Customer
Example Calculation:
nCAC = $110 ($540 Gross Profit - $180 Desired Net Profit - $250 Overhead)
Step 7: (For Service-Based Clients Only) Determine Your Final Cost Per Lead (CPL)
CPL is the maximum you can spend on acquiring a new lead while maintaining profitability, provided that closing rates are consistent
Formula
CPL = nCAC * Close Rate
Key Considerations
This step is for service-based businesses only that have a step between the lead and the sale. E-commerce clients can skip this step.
Example Calculation:
CPL = $11 ($110 nCAC * 5% Closing Rate)
*Note that this number looks too low as the CLTV for these businesses is typically much higher than our starting number.
Final Example Calculation
Here’s the step-by-step breakdown of the example:
CLTV = $1,000 (Total revenue of $1,000,000 ÷ 10,000 unique customers)
Refunds (10%) = $900 Net CLTV ($1,000 - $100 refund adjustment)
COGS (40%) = $540 Gross Profit ($900 - $360 for COGS)
Profit Margin (20%) = $180 Desired Net Profit ($900 × 20%)
Overhead Costs ($250 per customer) = $250
nCAC = $110 ($540 Gross Profit - $180 Desired Net Profit - $250 Overhead)
CPL = $11 ($110 nCAC * 5% Closing Rate)
E-Commerce: Your New Customer Acquisition Cost (nCAC) is $110, meaning you can spend up to $110 per new customer while maintaining your profit and covering all business expenses.
Service: Your Cost Per Lead (CPL) is $11, meaning you can spend up to $11 per lead while maintaining your profit and covering all business expenses.