Customer acquisition cost is the amount of money a business must spend to get a new customer. Knowing your customer acquisition cost helps a business measure the return on investment of efforts to grow their client base.
Customer acquisition cost is a key business metric that many businesses and investors look at. In fact, many companies end up failing due to a lack of understanding of their customer acquisition costs.
Your customer acquisition cost is calculated by adding all the costs associated with lead generation activities through converting prospects into customers, including expenditures such as marketing, advertising, wages of sales and marketing personnel, commissions, content creation, a share of general and administrative overhead, etc., and then dividing that amount by the number of customers acquired.
Types of Customer Acquisition Costs
Ad Costs – Ad cost is the money the business spends on ads. For many eCommerce businesses, advertisings is a popular way to attract new customers. Businesses that rely heavily on ads to get new customers are always looking for ways for their ads to resonate with their prospects and get them to click on a link.
Commission Costs – Commissions can be either an affiliate commission for a lead or a commission paid to salespeople.
Salary Costs – Salary and wages are often attributed to sales and marketing staff members; however, businesses need to account for wages of support staff as well such as technical sales support and personnel dedicated to supporting a live chat feature on a website. Moreover, salary costs need to account for content creators such as blog writers whose content is used both to achieve better brand recognition to facilitate sales and to have the content to build trust with prospects and create gravity for organic search through good SEO.
Technical Costs – Technical costs refer to the technology that your marketing and sales team uses such as the acquisition and maintenance of the business’s contact management and reporting software.
Production Costs – Production costs are the costs associated with physically creating content such as printing brochures, flyers, or door hangers. Additionally, more and more businesses are using videos in their marketing and sales. If you’re making a video, you need to buy a camera, create a set, edit the video, etc. These costs add up, especially if you’re paying a third party to produce your content.
Inventory Upkeep – For businesses that sell physical products, this cost would include utility bills and storage fees, or the use of services like Fulfillment by Amazon. If you’re selling software, this is the money you’d spend on UX/UI and patches to improve the user experience.
Examples of Customer Acquisition Costs
Every business’s customer acquisition cost is different and is based on things such as length of the sales cycle, purchase value, frequency of repurchases, and company brand awareness.
To give you an idea of how drastically customer acquisitions costs can vary, here’s a list compiled by FrontPageSage.
Industry
Organic
Inorganic
Addiction Treatment
$357
$506
B2B SaaS
$205
$341
Business Consulting
$410
$901
Commercial Insurance
$590
$600
Construction Supply
$212
$486
Consumer E-commerce / Retail
$87
$81
Financial Services
$644
$1,202
Higher Education & College
$862
$1,985
Industrial IOT
$557
$788
Law (Business / Commercial)
$584
$1,245
Luxury Real Estate
$660
$1,185
Manufacturing & Distribution
$662
$905
Medical Device
$501
$755
Oil & Gas
$710
$1,003
PCB Design & Manufacturing
$330
$658
Pharmaceutical
$196
$160
Point of Sale
$680
$841
According to the SBA, small businesses should allocate about 7 to 8% of their revenues to acquisition costs.
Customer Acquisition Costs to Customer Lifetime Value
Customer acquisition costs should be considered in conjunction with the lifetime value of a customer. Customer lifetime value expresses the monetary value that a customer is worth to the company throughout a customer relationship. A higher customer acquisition cost is acceptable if the customer lifetime value is higher.
“Customer acquisition cost is designed to measure and maintain the profitability of your acquisition teams. If your costs to get the customer through the door are higher than your customer lifetime value, then the business cannot be viable. The best rule of thumb is to be spending 33% or less of your customer lifetime value.”
For a start-up, the ratio of customer acquisition costs to the customer lifetime value can be of great importance depending on the type of market or product produced.
Customer lifetime value can also vary based on the transaction type. Some businesses are transaction businesses and others are relationship businesses. For example, if you are a roofer where your business is transactional, your customer acquisition costs and customer lifetime value have to be covered in a single job, compared to an accountant which is more of a relationship business that may retain a customer for many years. The customer acquisition cost can be spread across many years and the customer lifetime value will be much higher than a transactional business.
Strategies for Reducing Customer Acquisition Cost
Here are a few strategies you can use to reduce your customer acquisition cost.
Conversion Rate Optimization
Optimizing your website can increase your revenue and lower your customer acquisition cost by making it easier for visitors to convert. This is particularly important for e-commerce sites that might be losing out on sales even if their traffic is high. You should also continue to perform A/B testing on your landing page copy to find out what works best for your target market. Over time, the copy gets stale and needs to be refreshed.
Shorten Your Sales Cycle
The faster a new customer is signed up, the less time and resources your company has spent acquiring them. Take a closer look at your sales funnel to see where most abandonments take place.
Reward Referrals
If you can get consistent referrals from existing customers, your average customer acquisition cost will drop significantly. Implementing a referral program can get customers to spread the word about your business because you are offering them a healthy bonus or commission on a referral. It could be as simple as a discount code for their next purchase, a temporary upgrade to a premium service, or a cash payout for referring new customers.
Create Added Value
Even if your product is great, some consumers require an extra nudge in the form of an incentive to make a purchase. By enhancing the perceived value of your product or services, you’ll help customers feel more confident in their decision to buy, and thereby reduce your customer acquisition cost.
Have you computed your customer acquisition cost? Do you have a plan to reduce it?
