The Cost of Customer Acquisition
One basic metric that has always been used to determine how successful a business is its customer acquisition. As long as the business is, acquiring customers is a constant, as it has a huge impact on the business profitability. This basically makes it a recurring cost that cannot be put away. Though getting customers should be a continuous milestone to be celebrated by businesses, its cost should always be placed into consideration and reevaluated if need be.
Ordinarily, since acquiring customers is important, one would assume that the higher the number of business customers, should translate to the amount of revenue it generates and eventually the success of the business. In some cases, however, it usually does not play out this way. A good number of businesses invest a lot into acquiring customers, without overall determining the cost it takes to actually convert a prospective client to an actual paying customer. When a business downplays the need to determine how much it spends on acquiring its individual customer and go all out in spending with it when it comes to acquiring them, this eventually affects revenue at the end of the fiscal period and ultimately reflects on the profitability of such business irrespective of whatever flawless strategy it has planned. Hence the saying that, “growth is good, but growth at any cost is very, very bad”.
Cost of customer acquisition basically entails the calculation of how much a business expends on convincing a potential customer to buy/use a particular product or service. And to arrive at this, the business adds together the money spent on marketing and selling to a prospect (including the cost of transportation, souvenirs, materials, etc.) over a period of time, divided by the number of customers get from that effort. Once this is calculated, the average cost per customer conversion is gotten.
That is: Customer Acquisition Cost =
Total amount spent on sales and marketing
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Number of customers acquired
While the cost of customer acquisition might run as much as it needs to, it however becomes dangerous if the average cost invested in acquiring an individual is minimal in comparison with the customer lifetime value, the churn rate of the customers, and probably the return on the investment made.
This reality shows how much the business owner needs to calculate the cost and determine what is reasonable for customer acquisition cost as it relates to the customer lifetime value.
The customer lifetime value is used to refer to the amount of revenue that a customer will generate over a period of time. This would help a business determine how much to spend to get the customer and what it has left to retain such customers.
As a business owner, remember that customer acquisition costs will always be an important component in your marketing strategy, and depending on what the business is about and the industry, they will always vary. Hence, the relevance of customer acquisition cost to business operations.