Case 095Unit economicsCore

Padhvik Learning sells a Rs 60,000 test-prep course. It buys 2,000 leads a month at Rs 350 each, counsellors convert 8%, a counsellor costs Rs 60,000 a month and closes 30 sales, and 12% of buyers take refunds. What is the true acquisition cost per retained student?

The situation

Padhvik Learning sells an online test-prep course for government job exams at Rs 60,000. Students come through leads bought from ads and lead aggregators at Rs 350 each, about 2,000 a month. Counsellors call each lead, and 8% buy. A counsellor costs Rs 60,000 a month, salary plus incentive, and can close about 30 sales a month. Within the refund window, 12% of buyers cancel and get their money back.

The company's deck reports a customer acquisition cost (CAC) of Rs 4,375, lead spend divided by sales.

Your task

Work out the true acquisition cost per retained student, show how it differs from the deck's number, and say what you would watch as the company scales.

Quick check

What is the acquisition cost per retained student?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

The true cost is about Rs 7,244 per retained student, not the Rs 4,375 the deck shows. Leads cost Rs 7 lakh a month and counsellors Rs 3.2 lakh for the 5.33 people 160 sales need, Rs 10.2 lakh in all. Refunds cut 160 sales to 140.8 students who stay. At Rs 60,000 a course the true CAC is still only 12% of price, so the risk is in how the funnel holds as it scales.

Step 1What belongs in acquisition cost?

If a shop pays for flyers and also pays a salesperson on the floor, the cost of each customer is both, and a customer who returns the product next day was not really won. True acquisition cost is everything spent to win customers, divided by the customers who stay. Padhvik's deck divides only lead spend by all sales, which leaves out the counsellors, who do the actual selling, and counts students who later take refunds.

Step 2What does each stage add?

Leads: 2,000 at Rs 350 is Rs 7 lakh a month, and 8% convert, 160 sales. Counsellors: 160 sales at 30 per counsellor needs 5.33 counsellors, Rs 3.2 lakh a month. So winning 160 sales costs Rs 10.2 lakh, Rs 6,375 a sale. Refunds: 12% of 160 cancel, leaving 140.8 students. The money spent to win the refunders is gone, so the cost per retained student is Rs 10.2 lakh divided by 140.8, about Rs 7,244.

The relationship
True CAC=2,000×350+16030×60,000160×(1−0.12)=10,20,000140.8=7,244\text{True CAC} = \frac{2{,}000 \times 350 + \tfrac{160}{30} \times 60{,}000}{160 \times (1 - 0.12)} = \frac{10{,}20{,}000}{140.8} = 7,244
2,000 x 350monthly lead spend, Rs 7 lakh
160/30 x 60,000counsellor cost for 160 sales, Rs 3.2 lakh
160 x (1 - 0.12)students who keep the course
What it says in wordsAdd every rupee spent to win students, then divide by the students who stay.
Each stage adds cost or removes students; the true CAC is at the bottomLeads bought2,000Rs 7.0 lakh at Rs 350 eachSales, 8% convert160+ Rs 3.2 lakh: 5.33 counsellors x Rs 60,000Retained, 12% refund140.8no cost saved: refunded sales were already paid forCost per student, three waysLead cost / salesRs 4,375All cost / salesRs 6,375All cost / retainedRs 7,244
Adding counsellor cost lifts the cost per sale from Rs 4,375 to Rs 6,375, and dividing by the 140.8 students who stay rather than 160 sales lifts it to about Rs 7,244 per retained student.
Step 3Is Rs 7,244 a problem?

Not at this price. At Rs 60,000 a course, a Rs 7,244 acquisition cost is about 12% of revenue per retained student, comfortable for most education businesses. In practice the company cannot hire a third of a counsellor; with 6 counsellors the cost is about Rs 7,528. The deck's error matters less for today's margin than for what it hides about scaling, because the two costs it leaves out are the ones that move most.

MeasureRs per studentWhat it misses
Lead spend / sales (deck)4,375counsellors and refunds
All spend / sales6,375refunds
All spend / retained students7,244nothing in this funnel
With 6 whole counsellors7,528rounding up headcount
If conversion falls to 6%8,902lead quality at scale
The deck's Rs 4,375 understates the true cost by about 66%, and a fall in conversion from 8% to 6% would lift the true cost to about Rs 8,902.
Step 4What would you watch as Padhvik scales?

Three things. First, conversion: buying more leads usually means worse leads, and at 6% conversion the true cost rises to about Rs 8,902. Second, the refund rate by counsellor: counsellors paid on sales have a reason to oversell, and a rising refund rate is often the first sign. Third, counsellor capacity: hiring and training take months, so a jump in leads without counsellors lowers conversion. The limit of this calculation is that it ignores the cost of delivering the course and any partial refunds; for a full view, set the true CAC against contribution per retained student, not the Rs 60,000 price.

Where candidates lose it

Candidates stop at lead spend divided by sales, which is the deck's number. In a counsellor-led model the people closing the sale are a large share of acquisition cost and must be counted.

The second miss is dividing by 160 sales after adding counsellors. Refunded students cost as much to win as retained ones, so the denominator must be the students who stay.

What the interviewer asks next

  • Counsellors are paid a Rs 1,000 incentive per sale, clawed back on refund. Does that change the true CAC?
  • What contribution per retained student would you want to see against this CAC?
  • How would you check whether refunds come from particular counsellors or lead sources?
  • Lead prices rise to Rs 500. What conversion rate keeps the true CAC under Rs 8,000?

Company names and figures are illustrative.