Ralph Burns and Lauren Petrullo bring you part two of their deep dive on nCAC (New Customer Acquisition Cost)—because knowing what it actually costs to land a fresh customer is kind of important (who knew, right?). They break down the hidden costs, debunk common myths, and explain why understanding nCAC isn’t just about crunching numbers—it’s about scaling smart. Whether you’re a finance geek or just someone who wants to make sure you’re not throwing cash into the marketing void, this episode serves up valuable info you can immediately put into action. Plus, there’s a special challenge for Spotify listeners that could land them a one-on-one strategy session—because who doesn’t love a little bonus ROI?
Chapters:
- 00:00:03 – Buckle Up: The Perpetual Traffic Lift-Off
- 00:00:13 – nCAC? Yeah, You’ll Want to Know This
- 00:01:51 – The Sneaky Costs That Could Sink You
- 00:03:55 – Margin Showdown: Contribution vs. Gross
- 00:05:49 – The nCAC Formula That Changes Everything
- 00:15:48 – nCAC Danger Zones (Proceed with Caution!)
- 00:20:19 – A Surprise You Didn’t See Coming
LINKS AND RESOURCES:
- Episode 663: How to Make Your Present Better by Making Your Future Bigger
- 10x Is Easier Than 2x by Dan Sullivan and Benjamin Hardy
- Tier 11
- Mongoose Media
- Tier 11 Jobs
- Perpetual Traffic
- Get Your nCAC Calculation Guide Now!
- Marketing Performance Indicators™ Checklist
- Perpetual Traffic on YouTube
- Tier 11 on YouTube
- Connect with Lauren on Instagram
- Connect with Ralph on LinkedIn
- Follow Perpetual Traffic on Twitter
Thanks so much for joining us this week. Want to subscribe to Perpetual Traffic? Have some feedback you’d like to share? Connect with us on iTunes and leave us a review!
Mentioned in this episode:
AppSumo – 13% off with code traffic13
Read the Transcript Below:
Part 2 – The 5 Step Formula to Determine Your nCAC
Ralph: [00:00:00] Hello and welcome to the Provincial Traffic Podcast.
Ralph: This is your host, Ralph Burns. I’m the founder and CEO of Tier 11. And today’s episode is part two of our two part series on how to determine your NCAC. If you don’t know what NCAC is, it is the cost to acquire a customer, the cost to acquire a new customer. And today we’re going to get into the last half of it, where we tie it all together here and talk about some of the more important aspects of figuring out your NCAC.
Ralph: Obviously we’ve talked about refunds. We’ve talked about cogs. Here, we’re going to be talking about other factors that play into how to determine your NCAC. And if you do a Google search for this, you won’t find a whole lot on it. You will find how to determine it after the fact, but how do you establish it?
Ralph: It’s probably a better way of explaining this. How do you establish it so that you can ultimately scale and grow your business? And figuring out your NCAC is super, super [00:01:00] important. And then obviously you need to know. What that new cost to acquire a customer is and the ACAC, which is the cost to acquire all customers.
Ralph: Cause they’re not one in the same because you always have new and returning visitors. Whenever you’re running any sort of paid traffic campaign, whenever you’re obviously doing an email campaign, when you’re doing a SEO campaign, no matter what it is, there’s always two different types of traffic and new customers are usually more expensive than ones who have either.
Ralph: Bought from me before, or are familiar with your brand and visited your website at some point in time. So we’re going to get into all those details here
Ralph: So here we are with part two of how to determine your cost to acquire a new customer.
Ralph: So you just talked about a 1 million distribution facility that is not a cost of goods sold. That is a fixed cost. [00:02:00] It doesn’t matter how much you’re manufacturing or how little you’re manufacturing, how much you’re selling or how little you’re selling. That’s a fixed cost. That lease, that I assume they probably leased it.
Ralph: They probably didn’t pay cash for it. So they’re paying interest payments. They’re paying their principal payments. that is a fixed cost. That’s the kind of stuff that can put you out of business very quickly if you’re not watching it. And if you get caught up in cogs, and I see a lot of businesses, it’s the reason why we have this slide in here.
Ralph: Should you subtract overhead as a part of this, trying to determine what your NCAC is. And there’s no one answer. And I’ve talked to my CFO about this, who worked at KPMG for 10 years. he’s owned and operated 16 different companies. He’s worked with hundreds of different companies and he even debates this.
Ralph: So let’s talk about some of the things that overheads. All right. So you’ve got your LTV, You’ve got your refunds, then you factor in your cost of goods sold, which is basically the cost associated with the delivery of your product. Then you have overhead. Overhead includes things like [00:03:00] payroll, You’ve got a layer of management, you know, you have an admin, your utilities for the office, your accounting expenses, your lawyer expenses, maybe software, we’re just going through software expenses. earlier today, myself and my CFO, I’m like, why the hell are we spilling, you know, 100, 000 in all of these individual softwares?
Ralph: They have nothing to do with, increasing our profitability or increasing our productivity.
Lauren: I bet you there’s a lot of tech solution overlap.
Ralph: my God, there is like, we just did a merger with another company. They have the, some of the same systems. I’m like, Oh my God, it was just killing them, pulling my hair out. Anyway, the point is, is like that kind of stuff.
Ralph: Those are your overheads. If you didn’t factor those in, those are still things you’re paying for every single month. So do you factor it in the classic way of determining NCAC? You don’t, however, you have to think about it. So, Here’s a slide. I think that a lot of people get very confused about contribution margin versus gross profit.
Ralph: [00:04:00] This is not a course in accounting or high finance by any stretch, but there’s two different things. Contribution margin. People throw these terms around. Contribution margin subtracts the variable cost for producing a single product from revenue. So contribution margin for a product. Let’s say you have one skew that costs you, you sell it for 100 bucks.
Ralph: And your cost of goods sold is 30, your contribution margin on that is 70%. However, your gross margin of the business might be in aggregate. We just did an example of this live on our tier 11 live this past week is that there are individual products that were 70%. margin contribution margin, but the gross margin of the business was only 41%.
Ralph: So gross margin includes revenue and direct production costs. Doesn’t include, like I said, operating expenses to sales, marketing taxes, and loan interest and all that sort of stuff, which is basically SG and a, which are your overheads. So you have to factor it in and As we’re going to get to [00:05:00] the next couple of slides, we will keep that in mind.
Ralph: Even though in the classic sense, when you’re trying to figure out NCAC, you don’t necessarily use it in the letter of the law, according to, many financial resources that I’ve talked to as well as private equity groups when they’re assessing our business, but you have to figure it out. it’s a cost that you’re spending money on and it’s costing you money no matter what.
Ralph: Now, this is the way that I do it. I love, we do this all the time. We’re pricing. We factor in before we actually give a price, we factor in our desired profitability into our pricing. We don’t see like what’s kind of leftover. We put the profitability because we know that of healthy business is one that is creating profit, increasing cash.
Ralph: You know, No profit, no people. So you have to have profitability here. The question is on a first time purchase for NCAC, are you going to go break even on that initial sale? And are you going to look as a longer [00:06:00] term in order to grow and scale the business?
Ralph: Like you said, the beginning of the show, it’s like he or she who is willing and able to spend more to acquire a customer wins, especially in competitive markets. So subtracting desired profitability is a good step. However, you shouldn’t get too greedy here. So let’s get into this one. And, this is the question that we get.
Ralph: A lot is when we’re trying to determine and KAC, what should my net profit goal be? Well, we’re going to be using in this particular case, this is an e commerce business, your desired profit depends on a lot of different things. First off your business model, your industry, your cashflow situation, and many more, how much money you’re sitting on.
Ralph: do you have a million dollars in cash that you can, put into, that you can sustain the business while you make money back off your first purchase? If that’s the case, your profit. May or may not be one that is in line with what we’re going to [00:07:00] be talking about here in this example here. So it depends on a lot of different situations and there’s a lot of like how you actually view your business and your comfort level in a lot of ways.
Ralph: It’s very emotional. It’s an emotional decision. And what we found is that an e commerce, a good profit margin to shoot for us in between 10 and 30 percent of LTV 30%. I think it’s on the high end. I mean, if you look at like some of the biggest companies in the world. So, for example, Apple, their net profit is 21%.
Ralph: Tesla is 17%. lot of these big companies, their profit margin is not like 2030 40 50%. You know, when Microsoft first came on the market with Microsoft windows, I believe the net profit was in order of About 50 percent like net as time went on, it came down to the 20s. So you want to figure out what this bake this into the cake because you do want profit, but you don’t want so much profit that it’s going to hamper your ability to [00:08:00] acquire new customers and beat out the competition.
Ralph: So here’s what you’d look like. Here’s what you’d look for in our example. So if 10 percent is of 900 is obviously a 90 profit. 20 percent is 180, 30 percent is 270 per customer. And so for our purposes here, we’re going to choose sort of the middle ground, a nice 20 percent profit on that 900 LTV.
Ralph: So we’re going to bake that into the cake here as we determine our NCAC. Thoughts, comments, confessions, concerns,
Lauren: 20 percent is great. I know that there’s a range in that 10 to 30%. So using 20 percent as a base makes sense. There are different, profit margin benchmarks based on your industry. Full disclosure. So. Running with having that as a baseline, I think is a really good place to start, but I would recommend that depending on your industry evaluating if there’s also an opportunity to see where you fit because we’ve had clients that are operating at, these margins that are significantly above their industry.
Lauren: And then we’ve had others that are operating below [00:09:00] the small thing I would add in is just double check. Like if you’re in the service space industry, 30% Is like the holy grail kind of situation. So, you want to just make sure you fall within where your industry is. because that drastically looks different if you’re selling things like in the cannabis space versus if you’re selling, low price CPG products.
Lauren: Like an Amazon basic stapler.
Ralph: for sure. For sure. yeah, I mean, in this, like we used, think this was actually drawn from Shopify for this example here. I was like, you know, what is the average? I think it’s about between 10 and 20%. And Shopify, this is where we actually got these numbers in e commerce specifically, for all their stores, it’s anywhere between 10 and 30%.
Ralph: So it’s about average for e commerce. It might be different for you. Digital products. I
Lauren: Oh, for sure. Digital products. you’re probably looking at a 50%. That should be your minimum target if you’re doing that. And if you’re an individual coaching consultant or a single person service provider, you really want to be aiming for like 70%. [00:10:00] Like, so again, like, I know this is so based on e commerce.
Lauren: I’m mindful of we’ve had different industries that we have worked with where they’ve entered that industry specifically because it’s an 80 percent profit space, but make sure like this 20 percent I’m super okay with makes a lot of sense, super clean and easy triple check your industry because there are some industries that have like 5 percent like
Ralph: or less,
Lauren: Or hire, like, oh gosh, or less, oh my gosh, find a different industry.
Lauren: Immediately find a different industry.
Ralph: supermarket, you know, the supermarket industry is about 3%. Like that’s
Lauren: Wait, no, we’ve worked with a lot of grocery brands. Maybe that’s brick and mortar supermarket, but we’ve worked with a lot of online, grocery brands.
Ralph: once again, like that’s e commerce.
Ralph: So in the case of a physical store, like Shaw’s supermarket here in Massachusetts, they’re constantly teetering on the edge of bankruptcy. And 3 percent net profit. Because they are [00:11:00] constantly dealing with inventory. That’s perishable, which is crazy to me. It’s like, why you would go into that business?
Ralph: I don’t know. I would probably have like daily panic attacks, but the point is, is that 10 to 30 percent in the e commerce space, just like what you said, I think is, we’re going to use 20 percent as our sort of target here, but we also know that that has a little flexibility. So when you’re looking at an NCAC, we’re going to give you a number here.
Ralph: It’s also going to be a range. Cause you sort of know where your breakeven point, like where your, where your profit, your ideal profit point is, but also, you know, as a business owner, maybe you can go a little bit higher on your NCAC, maybe you get to 17 percent profit, which is still pretty good in this space, especially if you’re in a highly competitive niche.
Ralph: So there is a little bit of variability here, but we’re going to go with 20 percent just to make things easy. All right. So step five here in the five step process to determine your NCAC is last but not least determine. Your NCAC, how about that? [00:12:00] target NCAC 540, like, all right, we’re using 180 profit per customer.
Ralph: Okay. We have our 540 after we take out refunds, after we take out cost of goods sold. We’re not using SG& A here. We’re not using overhead as of yet, but we are going to factor it in just a second here. So your target NCAC with 180 profit margin is 360, which seems rather high to me, Lauren E. Petrillo.
Ralph: However. If your overhead, let’s say in this million dollar business, this is just another example, okay, the million dollar business, your overheads, 250, 000, which is about 25 percent of your total sales are 250 per customer. Thereabouts, actually, my math is a little bit off there because it’s really, it’s 900 per customer, so it’s about 232 thereabouts.
Ralph: The point is, is that. That 25 percent I know, for example, like our sales and marketing department alone, which is [00:13:00] part of SG and a is running us in and around 17 to 18 percent of our monthly revenue. So I know this 25 percent isn’t far off for overhead, and that’s just one department of our business, and we look at cogs.
Ralph: People are basically our cogs as you look at it. I’m sure your accountant probably does the same way because we’re in a service based business, slightly
Lauren: a hundred percent. You look at my books and like labor is my cogs
Ralph: Labor is your cogs, not your management layer, which is always sort of something that I always debate with our CFO about, but because they’re managing the labor, but they’re a management layer, so they should be in overhead. Yeah, a hundred
Lauren: on, are they contributing to performance? So our entire performance marketing team crosses cogs. So the delivery of the service and then our admin, like my assistant project manager, people that don’t have a touch on delivery, but are supporting. They count. So in manager positions, if the manager is also responsible for some accounts [00:14:00] and then it’s like.
Lauren: The overseer, if they are on like principal accounts, for example, they 100 percent account for those that are just managers like in an HR capacity. I don’t count them. But if you have people on your team that are managers and not actively touching accounts, then yeah, I would put them in a separate category.
Lauren: But for us, that’s how we figured out we use evolved finance. And there were a lot of calls and they’re great. No affiliate commission whatsoever. Recommend them Thoroughly, however, it was a serious discussion we had to go through as well,
Ralph: get into customer accounts as well. I get into customer accounts as well. So technically, could I be a part of COGS? Yeah, I suppose. But the majority of my time is doing CEO stuff, which I don’t really even know what that is. All I know is that I’m back to back on calls every
Lauren: but you touch accounts. I don’t count my Salary into it because I’m not personally responsible for any of it and my delivery is in that managerial position where I’m like Overseeing and supporting the strategy side of it all so for me, I don’t [00:15:00] have an account to my name
Ralph: me neither. All right, so determine your NCAC once again. So we just did target NCAC, which is 360, but I’m going to put in logical NCAC here because I’m going to factor in that 254 overhead. And the reason I do that is that I think first off, it’s a logical number. It’s a number that’s actually you’re paying out and it’s reasonable.
Ralph: Because when I look at how much you can pay to acquire a customer, this is far more in line when you have a net LTV of in and around 900. This is probably something that you’re going to have some wiggle room on. Like, if I could get it to 110, I would scale the shit out of this kind of thing.
Ralph: Like, that’s a great NCAC. my friend, Scott, who’s been on the program many times, introduced me to the concept of NCAC zones, which I really like, we’re going to have to have him on the podcast. You know, like he kind of thought of this, I [00:16:00] think he was, I think he was smoking some sort of, you know, sativa or something like that.
Ralph: But anyway, he came up with the idea of zones of NCAC
Lauren: It makes sense.
Ralph: totally makes sense. So it’s like, you shouldn’t have one number like, Oh, if you’re one 10, if you’re one 11, you know, you suck agency. No, I know that one 10 in this particular case, we’re printing money. Because we’re taking into factor full force SG& A.
Ralph: We’re already making profit. I know it’s 20%. I’m acquiring a customer for 110 and they’re paying me 900 over the course of 12 months. Life is good. The logical end cat care. So this is like a logical best case scenario. could you go all the way up to 360? That’s kind of your range.
Lauren: with the zone, you factor in like Black Friday time period, if you’re acquiring new customers at Black Friday, knowing that you’re getting rid of all your margins so that they can become repeat buyers offseason, I’m so in favor of this range because you have [00:17:00] seasonality, like if your cost to acquire a baseball glove customer in August. when season’s over. that’s significantly different and I, oh my gosh, so I’m glad for the sativostivia, whatever,
Ralph: That’s some sort of marijuana. I don’t said it came to him in a dream. I was like, I know how you came up with that. But anyway, it’s a great idea. So anyway, so this NCAC range here is really, really wide. My guess is if I were to redo these slides, I would probably take that 110 and double it to 220 and that would be my range.
Ralph: So this is where a lot of subjectivity comes into play here. Cause we’re factoring in full force costs. And I think we have a, a final analysis here. One 10 is absolutely fabulous. Scale it to the moon, like figure out, like buy as much as you possibly can. Back up the truck. As they always say, I always find it’s never the Brinks truck.
Ralph: It’s usually the dump truck for some reason when customers say that to us. But anyway, the point is, is back [00:18:00] up the truck at that range. Three 60 you’re bordering on, you don’t want to stay there. For your NCAC, you need to do some optimization, but you know what the top end of that range is.
Ralph: So I would almost do like a green, yellow, red, and we’re going to have to have Scott on here to sort of talk about that, which I sort of stole that idea from him just recently. If we do the summary here, let’s add it all up. The final math. first off LTV is a thousand dollars in our fictitious company.
Ralph: It’s a million dollar company in the e commerce space. Refunds minus 10%, take out a hundred, you got 900 left. Then you take out your cogs 40%, as Lauren and I talked about, that’s a bit high. So, this, example is not. Necessarily accurate in all businesses. However, it’s a million dollar business with a 1, 000 LTV.
Ralph: It’s a little bit on the higher side. Makes the math a little bit easier here. Take out your desired profit. We decided that 20 percent would probably be about right, which is about 180. So [00:19:00] therefore. Your NCAC is 360, but like I said, I would look at this as a range more than anything. And I would say between 110 and 200 for me in this particular, weight, like 110 is scale, is optimized, but we’re still in a good scale range.
Ralph: But if you’re going 250 and above on your NCAC, you really do need to optimize it to get it down into a lower range. So. I think this is really basic math. Like this is where it comes back to, on the summary here, a lot of this is subjective. A lot of it is, is a bit of a feel because the 20 percent profit margin can be calculated up and down, down to 10, maybe up to 30.
Ralph: How much do you factor in SGNA? You know, SGNA is going to be there no matter what, there’s a lot of different ways to look at this.
Ralph: So the point is this, is that this is really instructive more than anything else. Do this for your [00:20:00] business. I implore you to figure this out because I guarantee you just doing the exercise will be enlightening for you and your team. If you haven’t done it already.
Ralph: Maybe we should create a lead magnet download for this, Lauren E. Petrullo, maybe that would be a good idea.
Lauren: I think that’s a great idea, Ralph.
Ralph: think that is a
Lauren: But I’m also going to put this as a, if someone wants it, the first person who talks about it and puts it on the Spotify, Ralph, I think should get a call and get it personally. they should get the first sneak preview to what the download looks like,
Ralph: I think they should. Absolutely. I think that’s a great idea. So, we’ll offer that as a download.
Ralph: All right, so we do have this as a downloadable PDF. However, we didn’t think of doing this prior, so it might not be live by the time this episode goes live, but you can get it over at perpetualtraffic.
Ralph: com forward slash NCAC. That is the letter N C A C. And download your, uh, N CAC checklist, the entire presentation that I did here. Now, if it’s [00:21:00] not live, you should email tj@tiereleven.com and get your free copy. That’s tj@tiereleven.com, and he’ll send you the PDF version of it as well
Ralph: And you’d like to do a special offer for someone sort of outside of that realm, Lauren?
Lauren: I mean, I am being very transparent.
Lauren: I have no problem bribing people to check out on Spotify because when I learned that one in four podcast listeners are using Spotify, we’re only one in five are using Apple podcasts. I was floored. And then now I’m personally mad that we don’t have a bigger Spotify following. So I’m like, okay, Spotify listeners, show me who you are.
Lauren: Let me love you even more. The first person that comments about this episode and getting to the NCAC page and letting us know what you think of the lead magnet itself, or whether you got it from TJ directly, if you comment. Ralph, I am committing. I will at least show up for 30 minutes, but I’m going to convince you to also [00:22:00] come on and we’ll do a 30 minute call.
Lauren: You and me and whoever’s the first person to comment on the Spotify episode.
Ralph: Done.
Lauren: Done. Okay. 30
Lauren: minutes with both of us and we’ll go through it
Lauren: personally.
Ralph: Wow. that is quite an offer. Lucia, like, she sucks me into these sorts of things.
Lauren: That’s what
Ralph: I’m I’m very vulnerable. It’s late on a Friday. It’s been a long week. No, uh, seriously. so for anyone who come, the first person to comment on Spotify on
Lauren: On this
Lauren: episode, talking about the NCAC lead magnet, and like, whether you got it or whatever that kind of component is, you have to comment on the thing, and, we’ll do it. And then I would say like, first, first we’ll automatically get it, and then we can randomly choose another person to get a second half hour, and then we can go through their NCAC number specifically with them, and then help make sure that they understand it personally.
Ralph: All right, done. All right. So the first person to comment on Spotify, just to summarize here, gets the checklist obviously, but they also get a free 30 minute consultation with Lauren and [00:23:00] myself. To help you determine your NCAC or talk about whatever you want to talk about. So really appreciate you all listening here today.
Ralph: And, I think this is one of the more important episodes that we’ve done. One of the foundational episodes that we’re going to keep referring back to, I think the entire year here, because this is. In my opinion, it’s, it’s the most important number and it’s this and media efficiency ratio and a couple of the other MPIs.
Ralph: But this is one that I think a lot of people really struggle with and there is a lot of variability to it.
Ralph: All right. So, uh, wherever you listen to podcasts, make sure that you do leave a review and a rating and a comment. Of course, especially on today’s episode and all of the resources that we mentioned are over at perpetualtraffic. com. So on behalf of my amazing cohost, Lauren Ipatrullo,
Lauren: Who will also be talking to you on one of two calls, because the first person guaranteed gets it, and then another person will also get it.
Ralph: until next show, see ya. [00:24:00]
