The answer to the question “What is a good customer acquisition cost?” will be different across companies. One company's cost to acquire a customer may be considered good for their business but awful for another company or another industry.
If you advertise on Google, you get a sense of what companies pay to acquire a click or a lead. Some bid $20 for a click. If four prospects take no action after clicking on the link, it might cost the company $100 dollars to acquire a single lead. That may sound high, but imagine the advertiser is a wealth management company who will make tens of thousands of dollars off a single customer. In this case, the lifetime value of the client is one of the dominant factors that makes up a good customer acquisition cost.
Elements of Customer Acquisition Cost
The list of elements that make up your customer acquisition is large and varied. You may have costs in some of these categories and make no investment in others. The complete list of potential costs includes the following:
- Research expenses: Research expenses refer to the cost of conducting research and gathering data to inform your product development and marketing strategies. This can include market research, customer surveys, and other data-gathering activities. These expenses are essential to ensure that your product or service is well positioned to meet customer needs and to increase the chances of successful acquisition.
- Marketing and advertising expenses: The money you spend bringing attention to your company, products, and services may dominate your cost of acquiring a new client. Like all the elements of acquisition cost, the lifetime value of a customer determines if your marketing is expensive or reasonable.
- Product development: You might imagine a company like Apple spends millions creating a new product. The parts and expertise Apple relies on are spread across the world. This increases the cost of their product development, which means they need to sell large numbers of product to justify the investment. To ensure that their products succeed, Apple puts a lot of time and effort into researching their target market to figure out what customers are looking for in a product, creating prototypes and testing them in real-world scenarios, creating a marketing campaign to get the word out, and tracking sales trends to ensure they are meeting customer expectations. All these steps are necessary to ensure that they can recoup their investment and make a profit.
- Salesperson salaries: The salesperson you pay the most is almost always the least expensive. The cost of the sales force must be included in the cost of acquiring a customer. One company I know well has a highly paid salesforce. What they sell is expensive and the company has a ridiculously high retention rate. Because the price and retention are both high, the cost of acquiring is low, even though the total expense is high.
- Promotional programs: Some companies, including training companies, often present at trade shows. These costs can include sponsorships, travel expenses, sales collateral, and attention-getting giveaways. A good friend of mine stopped buying a booth and instead rented the bar for four hours. He saved no money, but he generated more leads and new relationships, lowering the cost of a lead.
- Websites: The leads that show up on your website are not free, even if your inbound approach makes them close to free. The website, its design, the hosting, and the content your marketing team creates must be included in the cost of acquiring a customer. Your website might also provide you with a CRM that is strategic, like HubSpot. Either way, the technologies you use are part of your costs. You also need to include the SEO services when calculating your costs.
- Lead generation: Any investment you make to acquire leads, whether buying a list, hiring a company, or building content to fulfill that goal is part of your customer acquisition costs. So are your social selling assets and time spent on the platforms.
- Referral programs: Paying for referrals works well in some industries. The CPA that refers their client to a payroll company may be paid for generating the customer. This is often an inexpensive acquisition.
- Incentive programs: The incentive you offer a prospective client is a discount for them and a cost to you. The companies that use incentives wouldn't make these offers if they didn't work or weren't baked into the client acquisition costs.
- Customer loyalty rewards: Loyalty programs help acquire clients, but they are also a strategy to retain clients. Client retention is a critical factor in ensuring an effective cost.
How to Assess Your Customer Acquisition Costs
For the cost of acquiring a client to be reasonable, the more you invest, the more that client will need to spend with you over their lifetime. The less you spend to acquire a customer, the more profitable that individual client is to your company. Totaling revenue, profit, or both can help you know if the acquisition cost provides a return. For example, an acquisition cost of $6,000 may be inexpensive if your customer spends $500,000 annually with a profit of $100,000. If that customer churns after the first month, the investment was wasted.
Most companies take the total cost of all the elements above and attribute it per customer on a quarterly or yearly basis, with some acquisitions requiring a greater expense and others costing much less. Using the average is useful because it provides you with a way to determine if you are spending too much or too little. It can also help you recognize which costs produce results, and which contribute too little.
A good customer acquisition cost is lower than the lifetime value of that customer. Additionally, customer acquisition costs should be balanced with other marketing and operational costs, such as customer retention and customer service. To assess customer acquisition costs, factor in all the elements that go into acquiring a client. Your acquisition costs should be considered alongside the lifetime value of your customers to determine if the cost is reasonable.