Have you ever taken the time to sit down and figure out just how much it costs you to acquire a new customer? If you didn’t already know, every customer that you attempt to attract will come with a cost. Businesses are willing to accept this cost with the understanding that a customer can potentially turn into repeat business. This makes customer acquisition a gamble, but a necessary one to thrive in today’s competitive society. Check out the rest of this article to learn how you can determine new customer acquisition cost for your own business!
New Customers Come at a Cost
It might seem counterintuitive, but many businesses need to pay before they can earn a new customer. While you won’t write off a check or hand out money to prospective customers, you’ll definitely incur an indirect cost as a result of your efforts.
Most times the largest cost associated with customer acquisition is spent on actually getting people to notice your product or service.
If you’re an established company with a track record of success, you might have enough brand power to generate new customers without actively trying to. Even companies that have great brand awareness still look to interest new customers, which is typically done through advertising.
Most other businesses don’t have that luxury, which means they need to convince people to become their customer. One thing that can be said about any consumer is that they often don’t like to do anything for free.
There needs to be something that physically prompts someone into becoming your customer, because they won’t actively seek it out on their own. If a customer can’t see a benefit to purchasing your product or service over a competitors, they just won’t.
This means that customer acquisition cost is an innate part of business. You won’t bring in new customers without spending money, but you also can’t earn any money without attracting new customers. With this cost also comes the expectation that you’ll spend money on some people that won’t turn into customers.
Customer acquisition cost is definitely a gamble, but it should be structured in a way that is overall more beneficial than costly for your business.
What Makes Up Acquisition Cost?
With this in mind, you’ll want to know what actual expenses make up customer acquisition cost. In the broadest sense, new customer acquisition cost consists of every dollar you spend for advertising and marketing purposes.
If you run a smaller business, this probably would only include direct expenses like money you pay for advertising or pay-per-click campaigns. Larger business have far more complex and indirect expenses, like salaries for dedicated marketing employees.
Here are some of the most common components of new customer acquisition cost:
- Advertising Budget – All of your advertising budget will make up a large portion of acquisition cost. This includes payments made to advertising companies and anytime you pay for the right to advertise your product. The rise of media streaming services has diverted some of the focus of advertisements away from television and radio, but that doesn’t mean it is any less expensive.
- Online Marketing Campaigns – With so much new technology available, online marketing campaigns are quickly becoming the new ad. This typically looks like pay-per-click campaigns, in which you’ll pay for each click of traffic driven to your site. This can get extremely costly if you have a low conversion rate and fairly inexpensive service or product for sale.
- Research Time – Any time that you or your employees spend on researching your business, the market your operate in, your customers, or anything else directly relating to assessing the value of bringing in a new customer is also part of acquisition cost.
- Advertising & Marketing Salaries – Large companies have the ability to have employees dedicated to the sole purpose of doing advertising or marketing work. This often comes at a very high expense, meaning that you’d need to do a high volume of business just to cover their salary. Fortunately this cost is spread across all of the new customers you acquire rather than against each one.
How to Calculate Customer Acquisition Cost
Now that you know what goes into customer acquisition cost, you’ll want to know how to calculate it. The calculation itself is a fairly simple formula that divides your total marketing and advertising expenses by the number of new customers acquired, both for a given period of time.
While the calculation itself is fairly simple, determining every piece that makes up your total advertising and marketing expenses can be tricky. When you do go to calculate your cost, make sure you’re looking at information only for a given period of time.
If you’re calculating your customer acquisition cost for the prior year, only use expenses and new customer figures from that year. This will help to give you the most accurate calculation possible.
Once you’ve determined your customer acquisition cost, you’ll want to assess it to make sure your money is well spent. On paper it may seem like a business idea is profitable, but calculating the customer acquisition cost can quickly tell you how sustainable it will be.
One of the biggest reasons why startup businesses fail is because they fail to realize just how expensive online marketing campaigns can be. This is a direct result of failing to calculate your new customer acquisition cost.
A Thorough Cost Evaluation
With so much to consider with each new customer you earn, it can certainly be overwhelming to calculate how much it costs to acquire a new one. While it might seem counterintuitive to pay for customers, it’s a necessary evil of doing business to serve as a way of persuading customers to purchase your service or product.
Calculating new customer acquisition cost isn’t difficult, but it is harder to figure out everything that makes up your advertising and marketing costs. Usually this consists of your advertising budget, online marketing campaigns, research time, and dedicated marketing/advertising employees, but it can include anything else that relates to attracting customers.
If you want the reassurance of knowing your business model is both profitable and sustainable, then you need to consult the experienced accountants at the Felde CPA Group! With decades of experience in a wide variety of industries, Felde has the expertise required to analyze your business model better than anyone else! Get in contact with Felde today to see how we can help your business thrive!