Customer acquisition cost
Customer acquisition is the cost that a business owner would incur in trying to convince a new customer to buy his product. The opposite or customer acquisition cost is the customer retention cost. The cost of customer acquisition is one of the costs that kill startups and one of the most expensive costs for running businesses. That said; it is clear why many businesses concentrate on retaining their existing customers.
Cost of customer acquisition is a combination of three main variables: the cost per lead- which is also the marketing costs, the touch cost- which is the staff salaries of the sales staff and the conversion rates. Cost per lead is the aggregate of product cost, cost of research, cost of making the product accessible to the market as well as the cost of marketing. It is imperative that the company measures the customer acquisition cost in order to plan for capital allocation. Only through knowing and understanding the customer acquisition cost a company can be in a position to budget for marketing, advertising and discount costs.
There are a variety of key factors to consider when determining the viability of customer acquisition cost.
- The first would be time. It’s important to determine whether the business is inherently monthly or annual. A company needs to determine what the rhythm of the business is, should they be targeting monthly customers or annual customer? For instance, a fast food chain would probably have monthly customer acquisition costs because their prices and markets are volatile. However, a company that offers internet service would have annual customer acquisition costs because they are targeting long term customers.
- Another key factor to consider in customer acquisition cost is determining the focus on a specific customer type, whether the company is keen on acquiring more customers with lower money spent per customer or is it concerned with getting more money per customer. For instance, is the company more keen on getting 1000 new customers who spend $1 each or would it prefer 100 customers who spend $10 each? These two different categories of consumers would have different costs of acquisition.
- Another key factor to consider when determining customer acquisition cost is to analyze the entire business and see whether the revenue acquired through acquiring new customers relates to the gross margin. If a company is adding new sales as a result of acquiring new customers but is spending more or the same amount of money in acquiring them, then the company is not being efficient.