What is Customer Acquisition Cost?
Small businesses can be so concerned about making a sale that they forget to calculate how much it took to get that sale. How much it took to gain that sale in terms of money, time, and talent is referred to as customer acquisition cost. Sometimes that cost can be very, very high.
How is Customer Acquisition Cost Calculated?
Unfortunately, calculating customer acquisition cost can be tricky. Even though it may not be exact, every business needs to decide what specific sales costs will be the monitored. Some of the items that can be included in the calculation include:
- Phone costs
- Email marketing
- Customer entertainment
- Fees (credit card processing fees)
- Salaries and commissions for salespeople
- Salaries for sales support staff
- Public relations
- Travel and transportation
- Event fees (e.g., networking meetings)
- Website costs
The sheer volume of costs that influence a sale is so high and varied that it can be overwhelming! Monitoring select costs, especially those of a high dollar amount, would be a way to avoid the paralysis of analysis that comes with complex calculations. As well, some costs can also be classed as overhead, making it difficult to extract what portion is administrative and which is sales. So select those factors that have the greatest impact and the greatest cost.
For example, a business may choose to only monitor sales staff commissions and salaries, travel, advertising, and networking fees since those are major dollar outlays that are clearly tied to sales. Then it becomes merely a matter of adding up all the selected costs for a specified period, dividing it by the number of sales made during that period (week, month, year, etc.).
Example: A business finds that their customer acquisition cost is $1,000 and they made 10 sales during that period.
Customer Acquisition Cost Per Sale = Customer Acquisition Cost ÷ Number of Sales
In the example, that cost would be:
Customer Acquisition Cost Per Sale = $1,000 ÷ 10 = $100
So the example business knows that for every sale it makes within a specified period, it could cost them approximately $100 to acquire that sale.
In some cases, instead of figuring out how much it costs to achieve a certain number of sales, it may be more helpful to figure out the customer acquisition cost for every dollar of sales.
Continuing with the above example, say that the business spends the same $1,000 in sales costs for a specific period. During that period, they make $10,000 in sales. In this case, the cost would be calculated:
Cost Per Dollar of Sales Made = Customer Acquisition Cost ÷ Sales Volume
Plugging in the numbers:
Cost Per Dollar of Sales Made = $1,000 ÷ $10,000 = $0.10 or 10%
So the business can estimate that for every $1 dollar in sales, it will cost them $0.10. Looking at it from a percentage of sales perspective, the business can figure that sales costs are 10% of their total sales volume.
How to Use Customer Acquisition Cost in Sales Forecasting
Say that a business wants to increase its sales. Sales don't happen without investment! But you need to know what that investment might be for sales forecasting.
Using data from the above example, the business knows that it will cost them approximately $100 to gain each new added sale. If the business wants 100 more sales this year, they can budget customer acquisition cost spending to be:
Total Projected Customer Acquisition Cost = Customer Acquisition Cost Per Sale X Number of Sales Projected = $100 X 100 = $10,000
So to get 100 more sales, the business may need to spend up to $10,000 to achieve them.
The same principle can be used to figure out how many sales can be made for a projected increase in costs. Say the business has only $2,500 to spend on increasing sales. Using your algebra skills to solve the above formula for number of sales:
Number of Sales Projected = Customer Acquisition Cost Per Sale ÷ Total Projected Customer Acquisition Cost
Plugging in the data:
Number of Sales Projected = $2,500 ÷ $100 = 25
So if the business spends $2,500, they can forecast making 25 more sales within the target period.
Will these sales actually happen if a business makes these customer acquisition investments? Maybe, maybe not. But at least there's a benchmark to which results can be measured. As well, sales costs should be continually monitored in order to make necessary adjustments.
Time Cost of Acquiring Sales
While salespeople's and staffers' salaries and commissions can account for labor cost for customer acquisition, it doesn't necessarily account for actual hours, unless those are tracked. Small businesses and freelancers may not have salaries to pay, but do "pay" in time.
If time is a major cost in achieving sales, it might be worth using time, instead of dollars, to calculate cost. Using one of the formulas from the above discussion:
Customer Acquisition Cost per Sale in Hours = Hours Spent in Sales Activities ÷ Number of Sales
For example, if a freelancer spends 20 hours in pursuing 10 sales for the specified time period, her cost in hours would be:
Customer Acquisition Cost per Sale in Hours = 20 Hours Spent in Sales Activities ÷10 Sales = 2 Hours
So the freelancer can estimate that she'll need to spend 2 hours in sales activities to achieve each new sale.
It's All About the Profits
Unsaid, but obvious, from the above discussion is if it costs too much to achieve sales, it will decrease profitability. Therefore, businesses of all sizes need to continually monitor and optimize their sales cost investments.
Here's a real life example. I have tried a couple of freelance sites over the years for writing-related projects. On the one, freelancers bid on available projects. Not too much of a big deal with that. However, the freelancer must sift through pages and pages of open projects in order to locate ones that are a good fit. Then he has to prepare a proposal for every, single one of interest. This can amount to hours on end of chasing and proposal preparation, making the customer acquisition cost very high in terms of time.
Contrast that with another site I use where the buyer sifts through potential freelancers for their projects. If they locate one that is a potential good fit, they message the freelancer and the buying conversation begins. Essentially, the freelancer can spend time doing other things until the buyer makes contact. Of course, critical to getting hired is having an effectively written and positioned sales page on the site. But after the initial effort to make that as attractive to buyers as possible, the time required to pursue sales is minimal. To preserve my precious time, I'll choose to have the Law of Attraction efficiently working for me.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
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© 2017 Heidi Thorne