Perpetual Traffic Podcast Summary: "The 5 Step Formula to Determine Your nCAC"

Release Date: January 28, 2025
Host: Ralph Burns and Lauren Petrullo
Episode Title: The 5 Step Formula to Determine Your nCAC

Introduction to NCAC

In this episode of Perpetual Traffic, hosts Ralph Burns and Lauren Petrullo delve deep into the intricacies of determining New Customer Acquisition Cost (nCAC), a pivotal metric for scaling any business effectively. Emphasizing the distinction between superficial metrics like Return on Ad Spend (ROAS) and the fundamental financial health indicated by nCAC, the hosts set the stage for a comprehensive exploration of this critical concept.

Ralph Burns [04:50]:
"ROAS is the appearance of getting new customers, but the true measure of whether you're growing your business is how much money you have in the bank and the cost at which you acquired those customers."

Understanding nCAC

Lauren Petrullo introduces nCAC as the total cost incurred to acquire a new customer, highlighting its significance in making informed marketing decisions. Without a clear grasp of nCAC, businesses face challenges in scaling and sustaining growth.

Lauren Petrullo [05:51]:
"This is the math that makes you money. If you're still focusing on fake numbers, that will only last you so long."

The 5-Step Formula to Determine nCAC

Ralph and Lauren present a 5-step formula to accurately calculate nCAC, tailored primarily for e-commerce businesses but adaptable across various industries.

1. Calculate Customer Lifetime Value (CLTV)

Definition & Importance:
CLTV represents the total revenue a business can expect from a single customer account. Accurately determining CLTV is essential as it informs how much can be invested in acquiring new customers.

Methods to Calculate CLTV:

• Direct Calculation:
  If you have a data analyst, leverage their expertise. For those without, Ralph provides a straightforward method using Shopify data.

  Ralph Burns [09:10]:
  "Total revenue divided by unique customers equals LTV."

• Estimation:
  For newer businesses, an estimated CLTV between 2x to 8x the Average Order Value (AOV) serves as a practical benchmark.

  Lauren Petrullo [08:31]:
  "Whoever is willing to pay the most will win every time. Knowing your AOV and lifetime value is mission-critical."

• Using Tools:
  Tools like By the Numbers can automate CLTV calculations by integrating with your Shopify store.

2. Adjust for Refunds and Cancellations

Factoring in refunds and cancellations gives a Net CLTV, providing a more accurate financial picture.

Ralph Burns [27:25]:
"Subtract refunds and cancellations. We use a 10% benchmark to ensure realistic projections."

3. Subtract Cost of Goods Sold (COGS)

COGS includes all expenses directly tied to the production and delivery of goods, such as manufacturing, shipping, and labor costs. Accurately accounting for COGS prevents underestimating expenses.

Lauren Petrullo [31:09]:
"Include shipping and handling in COGS. Not accounting for these can lead to significant financial miscalculations."

4. Factor in Overhead Expenses (SG&A)

Selling, General, and Administrative (SG&A) expenses encompass all non-production costs, including marketing, salaries, and utilities. Subtracting SG&A from gross profit provides a clearer picture of profitability.

Ralph Burns [37:26]:
"Subtract overhead to understand the true profitability per customer."

5. Determine Your nCAC

With the adjusted CLTV and after accounting for COGS and overhead, you can now determine the maximum amount you should spend to acquire a new customer without eroding profit margins.

Lauren Petrullo [25:00]:
"If your CLTV is $1,000 and you have a 10% refund rate with 40% COGS, your gross profit is $540. Your nCAC should be well below this to ensure profitability."

Practical Examples and Case Studies

To illustrate the formula, Ralph and Lauren discuss real-world scenarios:

• E-commerce Supplement Company:
  A business with a CLTV of $1,000, a 10% refund rate, and 40% COGS results in a gross profit of $540 per customer. This sets a clear threshold for nCAC to ensure sustainable growth.

• Seasonal Products (e.g., Mattresses):
  Businesses with long purchase cycles require a longer look-back period (7-12 months) to accurately calculate CLTV, ensuring that seasonal fluctuations are accounted for.

Ralph Burns [33:28]:
"A 40% COGS is high and leaves little margin for marketing or profit. Aim for 15-30% to maintain healthy profit margins."

Common Pitfalls and Best Practices

Underestimating Expenses:
Many businesses fail to account for all aspects of COGS, such as storage and shipping, leading to inflated nCAC estimates.

Overreliance on ROAS:
Focusing solely on ROAS without considering nCAC can mislead businesses into believing they are profitable when they might not be.

Adapting to Business Models:
Different industries require tailored approaches to nCAC calculation. For instance, subscription-based models versus one-time purchase models necessitate different CLTV calculations.

Lauren Petrullo [25:00]:
"Even if you're operating out of a garage, factor in the cost as if you were renting a storage facility. This ensures scalability without hidden costs."

Tools and Resources

Ralph recommends utilizing tools like By the Numbers for automated CLTV calculations, especially beneficial for Shopify users. Additionally, the hosts offer downloadable slide presentations and checklists to aid listeners in implementing the 5-step formula.

Ralph Burns [08:25]:
"Download our free slides at perpetualtraffic.com/NCAC and visit our YouTube channel for in-depth tutorials."

Conclusion and Next Steps

The episode wraps up with an encouragement to apply the 5-step formula diligently to uncover accurate nCAC figures, which are crucial for sustainable business growth. Ralph and Lauren also invite listeners to engage further by offering free consultations to help determine individual businesses' nCAC.

Ralph Burns [37:47]:
"Leave a review, subscribe, and visit perpetualtraffic.com for all the resources we discussed today."

Key Takeaways

1. nCAC is Essential: Understanding and accurately calculating nCAC is vital for scaling and maintaining profitability.
2. Comprehensive Calculation: Consider all factors, including refunds, COGS, and overhead, to determine true acquisition costs.
3. Use Reliable Tools: Leverage tools like By the Numbers to automate and ensure accuracy in your calculations.
4. Adapt to Your Business Model: Tailor your nCAC calculations to fit the specific needs and cycles of your industry.
5. Continuous Monitoring: Regularly review and adjust your nCAC to align with changing business dynamics and market conditions.

By implementing the strategies discussed in this episode, businesses can gain a clearer financial understanding, optimize marketing spend, and drive sustainable growth.