What Is Your Cost of Acquisition?

Customers are king. But how much is it costing you to build the kingdom? In other words, what does it cost you to acquire your customers?

This is an important metric that best companies monitor and manage. With this you can answer some key questions such as:

• Are your marketing efforts productive?
• Are your acquisition costs going up or down?
• How do the costs match up against the expected profit contribution from the customers?
• How do these costs vary?
  • product line?
  • type of customer?
  • channel?
• How long does it take before you recoup your marketing costs?
• Have you budgeted enough for these costs going forward?

 To calculate this number, you would look at:

Your acquisition costs. This includes all marketing and sales costs directly tied towards generating new customers. Some marketing costs could have residual effects on existing customers and you might need to do some allocations. While the allocation may be arbitrary, you are still farther along than not doing any acquisition cost analysis at all.
The number of new customers generated
Divide the acquisition costs by the number of customers to see the cost per customer.

Then compare the costs against the expected contribution. Clearly the contribution needs to exceed the acquisition costs. In some cases, the opposite is true- acquisition costs could be very low. It might then be worthwhile to invest more in marketing and pick up additional business. If not you, then someone else could. Beat them to it.

Dig deeper if you can if the costs appear too high. There could be certain customers or product lines that are too costly to pursue. If those customers were dropped, will the numbers look more attractive for the rest?

Where do you get the most return for your bucks out of marketing? Are there nonproductive areas that don’t generate much volume? Prune here and your acquisition costs can get back in line.

This is also terrific prospective analysis, such as for budgeting. It can be a better way to look at your marketing costs and holding marketing accountable for productive spending towards new customers. If you just look at marketing costs as a percentage of sales, you could be asking your current customers to carry some of your load of your marketing costs towards new customers. Have marketing include acquisition costs in your budget templates. You could find that marketing will make better judgment calls and tweaking to the budget even before it comes up for your review.

Over time, best firms work acquisition costs into their mindset. Rather than thinking to budget marketing costs just as a percentage of sales, they instead think what amount of money they want to spend in marketing to acquire customers, then work back to fill in the details of the marketing plan.

Here are some cases where we have used this for clients.

Business Plan. For a healthcare client, we built this into the financial model used for raising funds and budgeting. Acquisition costs were broken down by lines of service to see where marketing efforts were most productive and where plans needed to be changed. The clients also used these acquisition costs to establish marketing costs up to three years ahead as they planned for the number of key corporate accounts they would land.

Pricing and Monitoring. For a telecom client, we used acquisition costs both before and after the fact. In marketing, acquisition costs were factored into analysis of new rate plans or modifications to rate plans. The rate plans had to be priced attractively enough to cover a fair return on the acquisition costs. Afterwards, actual acquisition costs were reviewed against different customer classes, such as by region or by credit score, to see if any segments were falling out of line.

Build customer acquisition costs into your analysis and see your marketing costs in a new light. Ingrain this method into your culture and you could lead to even more productive use of your marketing dollars and better returns to your bottom line.