How much can a company really afford to pay for a new customer?

Calculating customer acquisition cost against gross margin, average order value and returning-customer rate.

Most companies know what a customer costs them. Far fewer know what a customer is allowed to cost. Without the second number, it is impossible to know whether a campaign is succeeding or only looks good.

The basic calculation

Start from the average order value and subtract everything that is not profit: product cost, shipping, packaging, payment fees and VAT. What is left is the gross profit per order. That is the most you can pay for the customer without losing money on the first purchase.

An illustrative example: an average order of 320 shekels, of which 176 remain after all costs. If the company wants to keep half of that, the allowable acquisition cost is 88 shekels.

What changes the picture

• Returning customers. If some customers buy again without advertising cost, you can pay more for the first purchase.
• Product mix. Different products carry different margins, so the allowable cost is not uniform across the catalogue.
• Promotions. A twenty per cent discount does not reduce profit by twenty per cent but by much more.
• Fixed costs. Salaries, rent and systems have to be covered from the profit that remains.

From the number to the campaign

Once the allowable acquisition cost is known, it becomes the target of every campaign. A campaign that meets it gets more budget. A campaign that exceeds it is examined, fixed or stopped. This way decisions follow the company's profit, not what looks reasonable in the ad platform.