A coffee shop spends $300 on Instagram ads in a month, and that month 40 people who had never bought there walk in. $300 divided by 40 is $7.50: on average, that is what each new customer cost. That number is the customer acquisition cost, or CAC.
To know whether the ad made money or lost it, you compare CAC with the profit that customer brings in over the visits that follow. That math is further down, with the same coffee shop.
The formula: what you spent to attract, divided by new customers
CAC for a period is everything you spent to bring in new customers during that period, divided by the number of new customers who arrived. You count every new customer, including the ones who would have come in without the ad, so CAC comes out a bit lower than what each customer the ad brought in really cost. Use a calendar month; if an ad at the end of one month brings people in the next, put two or three months together and the numbers even out.
The spending side includes everything you did to get someone new through the door:
- Ads on Instagram, Facebook or Google.
- Flyers and posters, including printing, design and whatever you paid to hand them out.
- What you paid a local Instagram page, blogger or influencer to post about you, in cash or in free product.
- Welcome discounts, grand opening deals and free samples.
A discount counts as the dollars you took off the bill: 20% off a $3 coffee is $0.60 for each customer who used it. A free item counts at what it costs you to make. A free coffee that sells for $3 but costs you $1.20 in coffee, milk and cup goes in as $1.20.
The free coffee on your punch card, and anything else you spend to bring back people who already bought, stays out of CAC. That is a retention cost, and it includes whatever you pay for a loyalty system. Your regulars collect most of those rewards, so adding them in would make new customers look more expensive than they are.
Counting new customers is the hard part
The spending is on your credit card statement (that is where Instagram and Google bill you), plus whatever you paid in cash or in product. New customers, on the other hand, blend in with your regulars in the 8:30 line, and someone has to write them down. Two simple ways:
- Ask “is this your first time here?” and make a tally mark on a sheet by the register every time someone says yes. That counts every new customer.
- Put a word in the ad, like “say SUNRISE for a free cookie,” and have staff make a tally mark every time someone says it. That counts only the people the ad brought in, so your CAC comes out higher.
Pick one and stick with it, so you can compare one month with the next. Neither tells you whether those customers came back. For that you need to recognize each customer on later visits: write down a name and phone number the first time and add a mark each time they return. With a line out the door that is slow, which is why shops use a customer card that gets scanned at every purchase, like the one described at the end.
What to compare CAC with: what each visit brings in
The comparison takes two numbers from your business. Your average sale (some point-of-sale systems call it average ticket) is what a customer spends per purchase: your sales for the month divided by the number of transactions. Your gross margin is the share of each sale you keep after paying for what went into it. With the coffee from before, which sells for $3 and costs $1.20, you keep $1.80, or 60%. For the whole shop, divide what you spent on ingredients and supplies in a month by your sales for that month; if your bookkeeper gives you a cost of goods sold (COGS) percentage, it is the same number. A COGS of 40% means a 60% gross margin.
Average sale times gross margin is the gross profit each visit brings in. For the coffee shop, with a $6 average sale and a 60% margin, each visit brings in $3.60. Rent, wages and utilities still come out of it.
Now the math for one new customer. Bringing them in cost $7.50 and their first purchase brought in $3.60, so you are still behind. After two visits they have brought in $7.20, 30 cents short. The third visit brings it to $10.80, and only then have you earned back what it cost to attract them. If the customer tries you once and never returns, the ad cost more than it brought in: a month with the shop full of new faces can be a month where the ad lost money.
How much a customer needs to bring in: LTV
What a customer brings in while they keep buying is called customer lifetime value (LTV): gross profit per visit times the number of visits they make. For a shop, measure it over a fixed window, such as each customer's first six months: what happens after that is hard to predict, and the ad money is already spent.
If you do not track visits yet, do not estimate it from your regulars. They are the ones who stayed, and many first-time customers come in only once. Use a low number, like two visits, and correct it once you start keeping track.
How high should LTV be? If it does not reach CAC, the ad lost money. Between one and three times CAC, the ad paid for itself but left little for fixed costs, and a few customers who do not come back as expected are enough to turn it into a loss. The three-to-one rule comes from subscription businesses; for a shop, it works as a safety margin.
For the coffee shop, three times CAC is $22.50. At $3.60 per visit that takes 6.25 visits, so your new customers need to come in seven times on average in those six months, counting the first purchase.
The same ad loses or makes money depending on how often customers return
The platform sets the price of your ads, and it goes up when more businesses want to reach the same people, for example everyone who lives near your shop. How often a customer comes back depends on what happens inside your shop. With the same 40 customers, the same $300 and their first six months:
- If each one comes 2 times, that is 80 visits. 80 × $3.60 = $288, which is $12 short of what the ad cost.
- If each one comes 7 times, that is 280 visits. 280 × $3.60 = $1,008: for every dollar of the ad, those customers brought in $3.36 of gross profit, above the three-to-one rule.
- If on top of that each one adds something to the order and the average sale goes from $6 to $7 (how, further down), each visit brings in $4.20 and the 280 visits bring in $1,176.
A customer who comes back often also helps lower CAC. They recommend you and leave Google reviews, and anyone who arrives that way, without you paying for an ad, adds a new customer without adding spending. For that to show up in your math, count every new customer, not only the ones who say the word from the ad.
A loyalty program gives customers a reason to come back
A loyalty program rewards customers for coming back. The best known is the punch card: one stamp per purchase and a free coffee after ten. In a points program, each purchase earns points based on what was spent, and points are traded for rewards. Either way, when a customer is close to the reward, they have a concrete reason to pick your shop next time.
The reward is cheap next to CAC. If the free coffee costs you $1.20 to make, the card costs you $1.20 every ten visits from one customer, or 12 cents a visit. If that customer stops coming, finding another to take their place costs $7.50 in ads, and nothing guarantees the new one comes back.
You pay those 12 cents on every visit from every customer with a card, including the ones who would come anyway. So the math that decides whether the program is worth it is a different one: each extra visit the card brings in earns you $3.60, and the program pays for itself when it brings in more visits than it costs. A system that costs $39 a month pays for itself with 11 extra visits a month ($39 divided by $3.60).
To make each visit worth more, the program can reward spending: the customer earns based on how much they spend, for example one stamp for every $5. A customer who spends $8 gets one stamp; if they add a cookie and reach $10, they get two and reach the reward sooner. With one stamp per visit, the average sale stays the same and what goes up is how often they come.
The reward comes out of your gross margin, so it needs a limit. A quick check: divide the cost of the reward by the visits it takes and compare that with what each visit brings in. In the example it is 12 cents against $3.60, a little over 3%. How much each type of shop can spend on rewards, from a coffee shop to a grocery store, is in how much a loyalty program costs, and the loyalty program calculator builds a card from your average sale and your margin.
How to track new and returning customers with Rewa
Rewa is a loyalty system for shops that replaces the paper punch card with a stamp or points card on the customer's phone. The card lives in the Wallet app already on the phone (Apple Wallet on iPhone, Google Wallet on Android), so customers do not download anything.
Here is how it works. You print the poster with the QR code Rewa gives you and put it on your counter. The customer scans it with their camera, leaves their name and email, and saves the card to their phone. On every purchase, someone on your staff scans that card with their own phone, signed in to Rewa with their own login, and the visit is recorded. There is nothing to install and no hardware to buy.
The dashboard, the Rewa screen where you see your numbers, shows for each period the new customers, how many came more than once, visits and rewards redeemed. With that, your monthly CAC is what you spent attracting people divided by the new customers on the dashboard. For LTV, each customer's profile shows when they joined and every visit, so you can count how many times the customers who signed up in the month of the ad came back.
Two cautions with those numbers. In the first months, your regulars sign up too and show as new, so start calculating CAC from the second or third month. And the dashboard counts the customers who sign up: if your staff does not offer the card to everyone who does not have one, your CAC comes out higher than it really is.
There are two plans: Basic, at USD 39 a month for one location, and Pro, at USD 79 for up to three locations. On both, when a customer reaches the visit you choose (the fifth, unless you change it), their card shows a message with a link to leave you a Google review, once per customer. Pro adds messages you send yourself: they show up on the phone's lock screen, like a notification, for example to customers who have not been in for 30 days.
Every account starts with a free 14-day Pro trial; if you do not pick a plan when it ends, the account is paused. Create your account and put the QR code on your counter. During the two-week trial you will see how many customers sign up; from the second or third month, how many are truly new; and at six months, whether they reach seven visits.