Why factoring in an app’s monetization model is important for CAC calculations

CAC analysis is simple for free apps with no in-app purchases, and it ends with the installation.

CAC analysis works similarly for paid apps that do not offer in-app purchases (apps that require a one-time fee paid in the app store). To make your app profitable, simply price it higher than the CAC you estimate.

However, CAC analysis is more complex for 1) freemium apps, 2) premium apps with additional in-app purchases (often referred to as the "paymium" app monetization model), and 3) subscription apps because there is an additional category of users: "paying" users.

Installs are the first stage of acquisition for mobile apps that use the monetization models described above. A user who downloads the free version, for example, is only a "lead" in the context of a freemium app. Similarly, for a paid app that monetizes through in-app purchases, the initial install is essentially equivalent to generating a lead. Similarly, for a subscription app that offers trials, acquisition occurs only when a user successfully transitions from the trial to a paid plan.

For these apps, CAC is calculated by dividing spend by the number of paying users. Alternatively, such apps will calculate the CAC using standard formulas, but will also calculate the cost of acquisition actions (like making an in-app purchase) into the mix to get

How long does it take you to recoup your customer acquisition costs? All about CAC payback period and why it matters

One of the first questions you'll have after calculating your CAC is how long it will take you to recoup your CAC (i.e., the cost of acquiring a user).

This is significant because, clearly, you want to recover your CAC. Only after the CAC payback will a user contribute to your profits.

Enter ARPU.

ARPU, or average revenue per user, is a metric that indicates how much revenue you receive on average from each user. Divide CAC by ARPU to determine the payback period.

Assume your CAC is $10 and your monthly ARPU is $3.50. So, in this case, it will take approximately 2.8 months to recover your CAC.

But wait.

As we previously stated, CAC is calculated at the paid user level for apps that use in-app purchases. In this case, you'd use your ARPPU to calculate your CAC payback time. ARPPU is the average revenue you earn from paying customers.

Assuming your CAC for acquiring paid users is $50 and your ARPPU is $30, it will take you approximately 1.5 months to recoup your CAC.

Another question you'll want to answer after obtaining CAC payback is how much you make from each user.

How much do you make off each user? The CAC -LTV ratio

To calculate how much profit you make from each user, you must first determine their lifetime value (LTV). To ensure a profitable outcome, your LTV should be significantly higher than your CAC.

Let's use a real-world example to demonstrate this.

In this article on unit economics, we rehashed Calm's example, which the Pujji brothers used in one of their podcasts. Calm, a meditation app, was said to have an LTV of around $200 at the time, with $80 going toward app maintenance and content creation, leaving the actual LTV at $120.

Its CAC stood at about $40.

The LTV/CAC ratio reached approximately 3:1 ($120/$40). That is excellent. 3:1 is generally regarded as a profitable LTV:CAC ratio. This is especially true here, as Calm's CAC payback period is only about a year. This explains why Calm is a popular and profitable app.