What Is Cost Per Gross Addition (CPGA)?
Cost per gross addition (CPGA) is mainly employed by subscription-based providers and is also known as "subscriber acquisition cost (SAC)" and "customer acquisition cost (CAC)," and may be shortened to "cost per add" or "gross add."
Formula and Calculation of Cost Per Gross Addition (CPGA)
Cost per gross addition (CPGA) = (Cost of equipment + sales expenses) – equipment revenue / number of new subscribers
- Step 1: Add together the cost of equipment and any sales expenses.
- Step 2: Subtract revenue from the number derived in Step 1.
- Step 3: Divide the number by the number of new subscribers.
- Cost per gross addition (CPGA) is a ratio used to quantify the incremental costs of acquiring one new customer.
- Often, it is applied by companies that offer subscription-based services to clients.
- Cost per gross addition (CPGA) values help companies to set prices and compare cost efficiency among peer groups.
- A low number relative to peers generally signifies that the provider has an efficient marketing and sales approach, or vice versa.
What Cost Per Gross Addition (CPGA) Can Tell You
In order to grow and boost revenues, companies must increase the number of customers they have on their books. The problem is that securing new clients usually comes at a cost that, if not properly managed, can obliterate profitability.
The cost per gross addition (CPGA) ratio is used to get a grasp of how effective a business is at expanding its client base and sales reach without eating too much into its bottom line or take-home pay. This is achieved by tallying associated expenses such as sales, marketing, equipment discounts, or subsidies, and then dividing this sum by the number of new subscribers. What you are effectively left with is a figure showing how much it costs to acquire each customer.
How Cost Per Gross Addition (CPGA) Is Used
Often, the cost per gross addition (CPGA) ratio is applied by companies that offer subscription-based services to clients, such as wireless communication companies, satellite radio companies, and other subscription-based service providers, such as Netflix Inc. (NFLX).
These companies regularly use cost per gross addition (CPGA) values to set their prices and review whether current measures to win new customers make financial sense and are efficient enough. Investors will study them, too, comparing cost per gross addition (CPGA) over a reporting period, either quarter on quarter, or year over year, to establish who, within a peer group of similar companies, is better able to attract new customers at a lower cost.
Specifically, investors will be looking to see if the number is decreasing over these timeframes. If it is, this could be a sign that the company is attracting more customers for the same level of cost or that the subject is reducing its costs while attracting the same number of customers.
A low cost per gross addition (CPGA) relative to peers generally signifies that the service provider has an efficient marketing and sales approach in place to secure new customers. A higher cost per gross addition (CPGA), on the other hand, tends to indicate that too much is being spent to entice new users to sign up for a company’s service.
Example of How to Use Cost Per Gross Addition (CPGA)
The cost per gross addition (CPGA) of a wireless phone customer across all carriers is approximately $350 to $400. That sum covers all the costs associated with winning a new customer, which may include the following:
- Subsidized price of the phone
- Commissions paid to employees or agents
- Marketing costs
- Additional subsidies
Though the current trend in mobile phone service subscriptions is a leasing arrangement, there remains a cost subsidy to own most phones; even ones that are presented as free. This means that the mobile phone service carrier is down that $350 to $400 when a contract is signed and is motivated to earn that cost back as soon as possible.
It is also motivated to retain a customer for as long as possible since it costs three times more to win a new customer or earn a customer than it takes to retain an existing customer, a valuable bargaining chip for those who intend to negotiate a cheaper mobile phone service bill.
When examining cost per gross addition (CPGA), it’s important to remember that companies might calculate the number in different ways. The absence of a uniform method subsequently means that an apples-to-apples comparison is not always easy to apply.
Information on how cost per gross addition (CPGA) was computed may be disclosed in the fine print of a company’s financial statement. The footnotes are where companies reveal the practices and reporting policies of their accounting methods. They are often essential reading and, in this case, should be consulted to determine if a company's cost per gross addition (CPGA) is readily comparable.
It’s also worth bearing in mind that acceptable cost per gross addition (CPGA) values tend to differ depending on the type of business. For instance, service providers operating on a national scale are likely to spend more on advertising than those with a regional client base.