Perpetual Traffic Podcast: Episode Summary
Title: Part 2 - The 5 Step Formula to Determine Your nCAC
Release Date: February 4, 2025
Hosts: Ralph Burns & Lauren E. Petrulo
Introduction to nCAC
In the second installment of their series on determining the nCAC (New Customer Acquisition Cost), hosts Ralph Burns and Lauren E. Petrulo delve deeper into the intricacies of calculating this pivotal metric. Building on the foundation laid in Part 1, this episode emphasizes the importance of accurately determining nCAC to ensure sustainable business growth and profitability.
Understanding nCAC and Its Importance
Ralph begins by reiterating the significance of nCAC, highlighting that it's distinct from ACAC (All Customer Acquisition Cost). He states:
“nCAC is the cost to acquire a new customer, while ACAC encompasses the cost to acquire all customers, both new and returning.”
— Ralph Burns [00:01]
Determining nCAC is crucial because new customers typically incur higher acquisition costs compared to returning customers. Accurately assessing nCAC allows businesses to allocate marketing budgets more effectively and strategize for scalable growth.
Key Factors in Calculating nCAC
1. Refunds and Returns
Ralph emphasizes the need to account for refunds when calculating nCAC. He explains that refunds directly impact the net revenue per customer, thus affecting the overall acquisition cost.
2. Cost of Goods Sold (COGS)
The hosts discuss COGS as a fundamental component in determining nCAC. COGS includes all direct expenses related to the production and delivery of a product or service. Ralph shares:
“COGS is the cost associated with the delivery of your product.”
— Ralph Burns [06:52]
3. Overhead Expenses
A significant portion of the discussion centers around overhead costs, which include payroll, management layers, utilities, accounting, legal fees, and software expenses. Ralph notes the complexity in categorizing these expenses, stating:
“There’s no one answer to whether you should subtract overhead when determining nCAC.”
— Ralph Burns [07:35]
Lauren adds that overhead allocation can vary based on the role of team members and their direct contribution to service delivery.
4. Desired Profit Margin
Determining an appropriate profit margin is crucial. Ralph suggests aiming for a profit margin between 10% and 30% of the Customer Lifetime Value (LTV), citing examples from major companies:
“In E-Commerce, a good profit margin to shoot for is between 10 and 30% of LTV.”
— Ralph Burns [11:56]
Lauren emphasizes adjusting this margin based on industry standards:
“There are different profit margin benchmarks based on your industry.”
— Lauren E. Petrulo [12:49]
She advises businesses to align their profit margins with industry norms to remain competitive.
Step-by-Step Formula to Determine nCAC
Ralph outlines a five-step formula to accurately calculate nCAC:
- Calculate LTV: Determine the Lifetime Value of a customer.
- Factor in Refunds: Subtract expected refunds from LTV.
- Subtract COGS: Deduct the cost of goods sold from the adjusted LTV.
- Determine Desired Profit: Decide on a profit margin to include in the calculation.
- Calculate nCAC: Use the adjusted figures to establish a target nCAC.
He provides a practical example:
“With an LTV of $1,000, subtracting 10% for refunds leaves you with $900. After removing COGS at 40%, you have $540. Factoring in a desired 20% profit brings your nCAC to $360.”
— Ralph Burns [17:XX]
Lauren concurs, adding that the range for nCAC should be flexible based on business specifics:
“Using 20% as a base makes sense, but ensure it aligns with your industry standards.”
— Lauren E. Petrulo [12:49]
Incorporating Overhead into nCAC
The conversation shifts to integrating overhead costs into the nCAC calculation. Ralph acknowledges that traditionally, overhead is not subtracted in the classic nCAC formula. However, he argues for its inclusion to gain a more accurate and actionable metric.
“Overhead is a cost that you're spending money on and it's costing you money no matter what.”
— Ralph Burns [08:10]
Lauren elaborates on categorizing overhead, particularly distinguishing between roles that directly contribute to service delivery and those that support it.
nCAC Zones and Flexibility
Ralph introduces the concept of nCAC zones, proposing that businesses shouldn't rely on a single nCAC figure. Instead, they should operate within a range to account for variables such as seasonality and market fluctuations.
“If your nCAC is 110, you can scale significantly. However, if it approaches 360, you need optimization.”
— Ralph Burns [20:37]
Lauren supports this by highlighting how different periods, like Black Friday, can influence acquisition costs:
“With seasonality, acquiring customers during peak times may require adjusting your nCAC expectations.”
— Lauren E. Petrulo [21:45]
Practical Application and Final Thoughts
Ralph wraps up the episode by summarizing the formula and encouraging listeners to apply the steps to their businesses. He presents a final example:
Final Calculation Example:
- LTV: $1,000
- Refunds (10%): -$100 → $900
- COGS (40%): -$360 → $540
- Desired Profit (20%): -$180 → nCAC: $360
However, he advises treating this as a range, suggesting a target nCAC between $110 and $360, with $110 being ideal for scaling purposes.
Lauren concurs, emphasizing the importance of understanding and customizing the nCAC based on individual business contexts and industry standards.
Conclusion and Resources
The hosts conclude by urging listeners to perform the nCAC calculation for their own businesses, highlighting its importance in strategic decision-making. They announce a complimentary nCAC checklist PDF, available by visiting perpetualtraffic.com or emailing tjir11.com, and offer an exclusive opportunity for listeners to receive personalized consultations.
“Do this for your business. I implore you to figure this out because I guarantee you just doing the exercise will be enlightening for you and your team.”
— Ralph Burns [24:49]
Lauren adds:
“The first person to comment about this episode on Spotify gets a free 30-minute consultation with us.”
— Lauren E. Petrulo [26:36]
Key Takeaways
- Accurate nCAC Calculation is Vital: Understanding the true cost of acquiring new customers is essential for profitability and growth.
- Incorporate All Relevant Costs: Beyond COGS and refunds, consider overhead and desired profit margins to get a comprehensive nCAC.
- Flexibility with nCAC Zones: Utilize a range rather than a single figure to accommodate business dynamics and market conditions.
- Industry-Specific Benchmarks: Align your nCAC targets with industry standards to remain competitive and sustainable.
For more insights and strategies on acquiring leads and sales for your business, subscribe to Perpetual Traffic and stay tuned for future episodes that delve into advanced traffic and marketing tactics.