In the world of DTC brands, understanding and optimizing your New customer acquisition cost (nCAC) is crucial for evaluating advertising profitability and driving sustainable growth. nCAC reveals how much you’re spending to acquire each new customer, providing a clear picture of your advertising efficiency.
What is nCAC?
New customer acquisition cost (nCAC) is calculated using the formula:
nCAC = Total Marketing Spend / Number of New Customers Acquired
Having a clear understanding of your New customer acquisition cost target is essential to ensure you are growing your brand profitably through advertising. However, many brands make mistakes when calculating this critical metric. Let’s see what are some of the common pitfalls and how to avoid them.
Common Pitfalls in Calculating nCAC
1. Not looking beyond the first sale
One of the most frequent errors brands make is focusing solely on the first sale when calculating nCAC. While the initial purchase is important, it doesn’t provide a complete picture of a customer’s value to your business. Instead, you should consider the average Customer Lifetime Value (CLV), which takes into account the total revenue you can expect from a customer over their entire relationship with your brand.
2. Using Average Order Value (AOV) Instead of CLV
Many brands mistakenly use Average Order Value (AOV) instead of CLV to calculate their nCAC target. This can result in underestimating the amount you can spend to acquire a new customer, leading to missed opportunities for growth.
CLV is calculated as:
CLV = Average Order Value × Purchase Frequency × Customer Lifespan
The Correct Way to Calculate nCAC
To accurately calculate your nCAC target, you should use CLV and determine the percentage of CLV you’re willing to spend on acquisition. The formula is:
nCAC target = CLV × Percentage of CLV you’re willing to spend on a new customer acquisition
Example
Let’s illustrate the difference with an example:
Average Order Value (AOV) = $105
Customer Lifetime Value (CLV) = $210
Percentage you’re willing to spend = 30%
1. nCAC target using AOV = $32
2. nCAC target using CLV = $63
To put this into perspective, consider advertising on Meta in the US market, where the average CPM (cost per thousand impressions) is $16.
In the first scenario (using AOV), you must convert a new customer within 2,000 ad impressions.
In the second scenario (using CLV), you have a threshold of almost 4,000 ad impressions.
By using the correct metric (CLV), you avoid shutting down ads prematurely and missing out on potential growth opportunities.
Final Thoughts
Guided by a faulty metric, brands often miss the mark on optimizing their advertising efforts. Using CLV instead of AOV when calculating your New customer acquisition cost target ensures you’re making informed decisions that support long-term growth and profitability.
When selecting a performance marketing agency, it’s essential to ensure they have a comprehensive understanding of critical metrics like nCAC and CLV. An experienced agency will help you optimize these calculations to maximize your advertising ROI.
If you are looking for performance marketing agency that will help you grow your business, reach out through the form on our website and let's have a chat!
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