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User Acquisition Cost Model

The app marketing industry is greedy to acquire more users. Marketers are looking for a marketing strategy that aligns with various platforms while reducing the user acquisition cost. However, the abundance of platforms, channels, and cost models makes it a daunting task.

With this blog, we will help you in understanding various cost models that are popular in marketing and how you can use them to calculate your user acquisition cost for a profitable marketing campaign. You can click to quickly scroll to the section of your interest:

  1. What is User Acquisition Cost
  2. User Acquisition Cost vs. Customer Acquisition Cost (CAC)
  3. How Do You Calculate User Acquisition Cost
  4. How to Calculate Customer Acquisition Cost (CAC)
  5. User Acquisition Cost Model As Per Performance Indicator
  6. What is a Good User Acquisition Cost?
  7. Customer Lifetime Value (CLTV or CLV)

What is User Acquisition Cost

User Acquisition Cost refers to the amount spent in adding a new user to your business – sources could be on your mobile app, desktop website or mobile web and other such devices. User acquisition (UA) campaigns may involve paid as well as organic channels, and User Acquisition Cost generally works as a metric to measure the performance of your UA campaigns.

User Acquisition Cost vs. Customer Acquisition Cost (CAC)

Not every user is a paying customer. Marketers have to spend more budget to convert the user into a paying customer. The total budget spent to acquire a new customer is known as the customer acquisition cost. Therefore, in most likelihood, Customer Acquisition Cost is higher than User Acquisition Cost. These two metrics may be the same amount for some business models.

How Do You Calculate User Acquisition Cost

In the simplest interpretation, the user acquisition cost is the ratio of the expense of user acquisition campaigns and the number of users acquired.

How to Calculate User Acquisition Cost

However, calculating User Acquisition Cost or Customer Acquisition Cost is not that simple as modern-day marketing involves several complexities in terms of attribution of channels, cost models, KPIs, and tools.

How To Calculate Customer Acquisition Cost (CAC)

CAC includes the expenses of acquiring the customer as well as the conversion. So, it is the sum of user acquisition cost and sales cost.

How to Calculate Customer Acquisition Cost

Consider the following factors while calculating the CAC:

  • Accuracy of Attributes: As different channels and mediums charge you differently, it is crucial to calculate their contribution to your acquisition cycle individually. Along with a better understanding of the campaign performance, it gives you the scope of optimization to ensure the increase in the rate of customer acquisition and hence reducing CAC.
  • Tools Used: Marketing tools come at a cost and some of them can be hefty ones. Do not miss out on including these invoices in your campaign calculations.

User Acquisition Cost Model As Per Performance Indicator

Effective calculation of customer acquisition relies on the user acquisition and conversion ratio.

To calculate that user acquisition cost, you will have to keep in consideration of various formats, channels, nature of the business, and cost models. Depending on your business vertical, you can define different performance indicators for your campaigns and accordingly choose a payment model for it.

Here are popular cost models along with the suitable verticals:

Cost per Acquisition (CPA)

For apps that have specific user acquisition parameters (like – registration, starting the trial account, etc.), the number of acquisitions is an indicator of the performance. Therefore, Cost per Acquisition (CPA) is a reliable cost model.

Customer Acquisition Cost

 

It means that the advertiser will pay to the channel for every user who installs and registers on the app with email or phone number. Calculations in this model are fairly straightforward as ads run on the pre-defined CPA.

Effective Cost per Thousand Impressions (eCPM)

While you are running a user acquisition campaign across different cost models, Effective Cost per Thousand Impressions calculates the total expense applicable for every thousand views. It’s an average CPM for various cost models. Relying on the standard conversion rate with the eCPM, you can calculate the user acquisition cost.

Cost per Click (CPC)

Cost per Click is among the most basic cost models in the digital marketing industry. Relying on the number of clicks as the performance indicator, In this model, the advertiser pays for every click on the ad. The calculation of user acquisition cost relies on the conversion percentage to further stages in the marketing funnel.

Cost per Install (CPI)

For various apps, user acquisition is simply the installation of an app. Cost per Installation (CPI) works fine as a user acquisition cost model for such app marketers. The rate for each install is predefined by agreement between advertisers and ad platforms. Depending on the industry standards and target audience, the CPI rate may vary.

Cost per Engagement (CPE)

Cost per Engagement involves attracting engagement in the installed app. This payment model is helpful in a situation where a potential user has installed the app they are not engaging with. The calculations for this cost model depends on certain conversion rates (based on industry standards or previous results) for stages that follow later in the funnel. For example, this cost in case of video ads could be cost per user for engaging with the video for at least 10 seconds.

Cost per Sale (CPS)

Cost per Sale relies on the number of transactions that the user is making in the app. You have to pay to the publisher or ad network for every sale. This customer acquisition cost model works regardless of the amount of sale. Calculations of CAC in this model are almost similar to the CPE model. You can pick a standard conversion rate for the number of sales and the number of customer acquisitions to measure the CAC.

What is a Good User Acquisition Cost?

Different industry verticals and regions have varying customer value, which means a good user acquisition cost can’t be a definite number. But you can still standardize a figure for your marketing efforts and develop a profitable business plan. It means you need your expenses (Customer Acquisition Cost) to be much lesser than the earning (Lifetime Customer Value). The higher the ratio of LTV to customer acquisition cost, the higher the ROI.

Customer Lifetime Value (CLTV or CLV)

Customer Lifetime Value (CLTV or CLV) is the amount that your paying user (customer) spends on your services/products during the entire relationship with your business. 

It is a metric to quantify the value of a customer for the business when a futuristic relationship is taken into consideration. For different regions, platforms, and campaign models, the paying capacity of the customer can be different. It means you can calculate the LTV for them separately.

To learn more about mobile marketing, read Affle’s Mobile Marketing Glossary

You can compare CAC and LTV to understand your business performance. If your monetization (LTV) is exceeding acquisition cost (CAC), then your plan is on the right track.

User Acquisition Strategy

In case your business model doesn’t align positively, you can try to reduce your user acquisition cost or work on enhancing LTV. However, this also depends on the stage of business. In a very initial phase, you could focus on spending more, only to have high retention, resulting in higher LTV over some time.

Steps to Reduce User Acquisition Cost:

Target the right set of audience

If you are running user acquisition ads to reach the audience that’s not meeting your appropriate userbase, then it is draining down your marketing budget. Ensure that you are using the right audience filters to reach the target group at the right stage in the marketing funnel for your ad campaigns to efficiently utilize the cost. One of the methods of creating a very focused user base is to use a DMP – Data Management Platform that powers your campaigns with a very refined consumer data points.

Automate your marketing errands

You can automate several marketing tasks, such as sending welcome emails, sharing price quotations, and more. Implementing such automation in the app marketing saves you time and workforce, which brings down your expenses.

Continuously optimize your campaign to enhance conversion rate

While you are running campaigns, you can always look for ways to optimize it to gain more users at a faster rate. Along with the utilization of an ad fraud-free programmatic user acquisition tool that helps you at the top of the funnel, you can also do optimizations using A/B testing with ad copy and landing pages to understand which ones perform better for your business. It can eventually gain a higher ROI for your campaign.

Steps to Enhance Lifetime Customer Value:

Build a retargeting strategy

While marketers are working on user acquisition plans, they generally tend to neglect the retention strategy. If you are making the same mistake, it means you are missing out on the customer’s worth or you might have to spend again on acquiring the same client. Build a retargeting strategy in sync with the user acquisition strategy so that you can leverage the efforts already made. So look for the best retargeting platform.

Implement multiple touchpoints to reach existing clients

Your users can be having a conversation with your brand across various platforms, which means you can reach them across channels to share updates on your products, latest arrivals, trending, back in stock and more to boost upsell and cross-sales.

Plan your support delivery to focus to upsell

An acquired customer can reach your support team for various reasons depending on your vertical and business model. You can train your support team to follow a sales-oriented approach so that they leverage the right opportunity for upselling. Eventually, it gives an opportunity to increase your LTV significantly.

Wrapping Up

Amid the rising complexities of multichannel interactions with customers, maintaining overall business profitability with user acquisition requires detailed as well as accurate cost models. Regularly audit your campaigns and LTV to ensure that you are doing the right job. Also, having a good integration of DMP, fraud-free user acquisition and retargeting platform could enable you to drive a higher ROI for your business. You also stay sure that user acquisition ( why the user became your customer) and user retention – why the user wants to stay connected with you are in sync and not isolated. 

What are the other user acquisition cost models that you are running campaigns on? Are you measuring a channel-wise ROI or an effective overall ROI? Let me know in the comments below.

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