September 20, 2015

How to Calculate your "Cost of Customer Acquisition" - The Most Common Question


Since writing a few articles about "Cost of Customer Acquisition" I have been asked several questions about it; the most common being, "How do I calculate my own Cost of Customer Acquisition?"  Lets try to answer this.

First, there are both many different scenarios and many ways to calculate Cost of Customer Acquisition.
The simplest of the scenarios is the Commissioned Salesperson. Take all the out-of-pocket (OOP) costs you have in a year (or any other time period) and add it to the amount you want to make - your desired income.  Then divide it by your new customers (or projected new customers); the result being your cost of customer acquisition.

Example:  I want to make $95K/yr and I have $5K in miscellaneous OOP expenses totaling $100K in expenses (your income is an expense to the business even if it is just you).  Take that total and divide it by your new customers - let's say 100 new customers - cost of customer acquisition - $1000.  Two factors I did not consider here are 'cost of customer maintenance' and 'diminishing returns' as both come more into play when you transition from sales person to small business.

A second example would be of a small business large enough to have a few sales people.  In this scenario, the owner will want to consider more of the costs as their will actually be more costs. Consider everything, from the cost or marketing, advertising, signage on the office, promotional pieces and lets not forget the base salaries, commissions and the costs of having salespeople employed as well.  All these things, and potentially more, can be included in the cost side of Cost of Customer Acquisition.  In reality, it's all up to the 'measurer' and his or her metrics and/or analytic desires.  I have never seen two companies measure it the same way, but I have also never seen a company inconsistent in the way it measured this metric - this is good.

So no matter what size company - know this metric, and measure it in any way you want.

The objective in using this metric is to, over time, reduce the Cost of Customer Acquisition.  This is accomplished, by either reducing costs or increasing the number of customers - if you know what I write about, you know where I lean.  Marketing efforts, sales pushes and product mix changes will also affect this metric.

A few final notes:
  • Diminishing returns are important to at least think about, especially if this number is going into a business plan.
  • High margin / big ticket items have different metrics as does service businesses that may get clients who come back forever,
  • Cost of Customer Acquisition is much different than Cost of Lead Acquisition / Generation.
I believe it is one of the best metrics for any growing business.
Cost of Customer Acquisition

Bob Leonard
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