Cost of Customer Acquisition

“5x is the cost of acquiring a new customer over retaining an existing one. Retention marketing has today become a core business requirement”. –

In the previous exposition, we talked about the importance of developing your employees, not just from the perspective of their growth but also for the success of the company. Engaged employees pass on the enthusiasm and empathy, to the company’s customers, who in turn remain loyal to and profitable for the company. Anyone running a business knows that customer churn is their worst nightmare, as it would be at least 5 times harder and costlier to gain new ones. Yes – the cost of customer acquisition is indeed extremely hazardous and detrimental to the health of a company. Most companies do not even understand or calculate the cost of customer acquisition, which further complicates matters and leads to disastrous results. Not calculating the cost of customer acquisition is akin to shutting your eyes when faced with an oncoming large object that could potentially cause fatal injuries!

Of course, companies want and need to acquire new customers, but this must not be a mindless or overnight activity. It is essential to maintain a balance between this activity and the resources and investment that your company would need to put in – that is the cost of customer acquisition. Costs like the time and effort to source a customer, the number of hours required to work towards convincing them, the costs of freebies and or discounts, and other costs that may not be as obvious or apparent immediately. The cost of customer acquisition should include things like research, advertising, marketing, and the setting up of certain specific services including customer service. It should also include the current value of the customer for the company and the expected return on the initial and on-going investment.

With the advancement of technology, tracking the cost of customer acquisition has become simpler and more effective. Companies can, through the internet, find consumers and produce effective advertising campaigns to help them make decisions. Companies can track the progress of customers from being slightly interested to actually becoming long-term profitable customers – the tracking would involve understanding the amount of resources and time the process takes, making it easier to assess the cost of customer acquisition for each individual customer. Investors too find this information highly useful when deciding which company to fund and invest in – the lower the cost of customer acquisition, the more interested investors, and venture capitalists would be to collaborate with a company. Does your company know how to calculate the cost of customer acquisition? What does this cost mean for your company?

As mentioned, investors are extremely keen to understand what the company’s profitability would be, by carefully analysing the amount of moolah that can be raked in through a particular customer versus the amount it took to acquire them. Obviously, the ratio should be high for the incoming versus low for the acquisition, in order to attract more investors, great talent, and other stakeholders. The market is now far too competitive and tough for investors to rely only on promises made by the company with regard to what they can gain. By calculating the cost of customer acquisition, a company can provide solid evidence of the kind of profits and returns that investors and others can expect. The company would also be more efficient and effective in the allocation of their resources for the various aspects that help the cause of acquiring a customer at the lowest possible cost and effort.

As mentioned, measuring the cost of customer acquisition is a lot easier now. The simple rule is to divide the costs incurred on acquiring the customers by the actual number of customers acquired during the period of the costs. It is not possible to manage any business decision unless you measure its efficacy. The cost of customer acquisition, as a rule, should be measured at least twice a year and definitely post any major campaign undertaken to acquire more customers. Despite the importance of measuring the cost of customer acquisition, many companies still fail at it or ignore it completely.

When companies fail to measure the cost of customer acquisition, they would not be able to determine why their investment did not give them the kind of return they expected. The customer demographics could have changed, customers may have changed their line of business or found similar offerings closer to their location and at a better price, a particular promotional campaign could have failed, and other such reasons could have prevented the company of gaining the expected ROI. When a company keeps all these aspects in mind, they would be able to make a more accurate assessment of the cost of customer acquisition and make a better allocation of its resources.

Interestingly there are some factors affecting the cost of customer acquisition, which seem to be common across most industries. Costs such as labour, communication, person-hours, leadership effort, and other such costs would be ones that most companies would need to spend in order to gain customers. In addition, there are pro-rated costs of the phones, technology, electricity and other such costs, without which, no company can run effectively and would be utilized when trying to gain more customers. There are also the costs of ad campaigns and public relation drives – all these may lead to more customers, but unless a company factors them in, they would not be able to ascertain accurately the collective cost of customer acquisition for each individual customer.

The effort required to gain even a single new customer can strike panic in the heart of even the most seasoned professional and a highly successful company. Therefore, every aspect of this drive must be accurate, analysed, and assessed. Companies that ‘sacrifice’ the step of assessing the cost of customer acquisition, could end up with customers that would be costing them a lot more than the actual business they provide. Over time, this would most certainly lead to an imbalance in the company’s finances and lead the company towards a shrinking bottom line.

Companies have teams of people dedicated to communicating with everyone outside of their company, using social media, and other channels. They offer free content, ideas, and suggestions and promote the offerings of their company in a variety of ways. These teams cost the company money and even though their efforts could help your company to attract attention, the fact is these costs must not be overlooked when assessing the cost of customer acquisition.

It would help to have a checklist of things that must be included when calculating the cost of customer acquisition. Costs of hiring a new sales person for a particular assignment; time, and effort required to reach out to potential customers via social media and networking events; the effort and time spent on finding a potentially interested persons and then converting them to actual spenders; the costs of communication and sales channels and other such costs; are what most companies forget to include when calculating customer acquisition costs. The fact is that learning the correct method to calculate accurately the cost of customer acquisition, is not that difficult, but ignoring it could easily mess up your company’s finances and lead to irreparable damage.

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