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User Acquisition Cost

What is User Acquisition Cost

The User Acquisition Cost is a metric used in app business to estimate the cost incurred to acquire a user or customer. User Acquisition Cost is the cost spent on sales and marketing to gain a user over a specific period of time. This estimate will help app businesses budget their costs while attracting new customers.

It is also instrumental in gauging performance and Return On Investments (ROI) in digital marketing app promotion activities. In doing so, User Acquisition Cost helps focus on high-performing content to drive conversions.

Factors included in User Acquisition Cost

User Acquisition Cost includes the following aspects.

  1. Costs to advertise the app or website: This involves expenses related to advertising and promoting the app or website to potential users. It encompasses various channels like online advertising (Google Ads, Facebook Ads, etc.), offline advertising (print media, billboards, etc.), and even influencer marketing.
  2. Cost of marketing and sales team: It is crucial to build and maintain a marketing and sales team to attract relevant users and retain them. This includes the salaries of in-house employees responsible for tasks like content creation, social media management, email marketing, and customer support. Additionally, it includes costs associated with hiring and managing external personnel, such as consultants or marketing agencies.
  3. Inventory upkeep: These costs may not be immediately obvious but are relevant for businesses that sell physical products or maintain a substantial digital inventory. However, in the case of digital products, it involves server costs and hosting expenses.

What to include in User Acquisition Cost calculation

User Acquisition Cost includes two important metrics:

  1. Sales and marketing expenses: This expense typically involves the salaries, tools, and spending incurred for sales and marketing.
  2. New customers acquired: This metric only involves the new customers who have been onboarded.

How to calculate User Acquisition Cost

The formula to calculate User Acquisition Cost is as follows.

User Acquisition Cost = Cost of Sales & Marketing/ Number of new users acquired

Let’s simplify the formula further.

User Acquisition Cost= (Sales & Marketing Cost 1+ Sales & Marketing Cost 2+...+ Sales & Marketing Cost 'n')/ (User Acquired 1 + User Acquired 2+...+ User Acquired 'n')

Let's illustrate this better with an example:

An app developer spends $8,000 for app store advertising and $3,000 for influencer collaborations. The user has onboarded 500 new users. In this scenario, User Acquisition Cost can be calculated as follows.

User Acquisition Cost = ($8,000 + $3,000) / 500 = $22

Importance of User Acquisition Cost

  1. Budget allocation: User Acquisition Cost can help app marketers allocate their funds depending on how much it takes to acquire a user.
  2. ROI evaluation: User Acquisition Cost helps app developers assess their ROIs and compare their lifetime value (LTV) to determine if their marketing efforts are yielding returns.
  3. Campaign performance: Tracking User Acquisition Cost will help developers measure how successful their marketing campaigns are and identify trends or variations.

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