I was speaking with a new client last week and we were looking at where his clients came from the last 12 months, how much he invested to acquire them and where to focus his time and energy this year to accelerate his sales.
We had such an eye-opening discussion on the whole conversation around cost of acquisition and the effect this was having on the ROI of his time and money.
Customer Acquisition Cost (CAC) is the cost associated in persuading a consumer to buy a product or service from you. This cost includes costs associated with product development, marketing, research, and sales.
The reason this is important is so we can measure whether the investment we are putting in to attract and acquire new customers is paying off. It can be very exciting to have a new customer and we sometimes are so focused on looking at the sales that the entire cost is not factored in.
There are some costs that are kind of obvious like Direct Mail campaigns, advertisements, or Pay Per Click.
And there are others that are not so obvious and tend to be forgotten, especially for service based businesses.
Customer Acquisition Cost: A Simple Example
Here’s a way to look at an activity most business owners are involved in- networking. Let’s assume you are in a leads group, chamber or other group where you have a membership. Let’s assume the cost of the membership is $575 per year and you got 3 new clients for total sales of $10, 000. I’ve seen people say yep that’s a great investment. I spent $575 and got $10,000.
Well – maybe.
And here is the trap people fall into – looking only at the financial cost- membership.
Let’s say over the course of the year, you attended 45 meetings and each meeting is one and one-half (1 ½) hours so that’s 67.5 hours of your time.
Let’s say you had a bunch of coffee dates with members of the group to get to know them and share what you do in a deeper way. That’s an additional twenty (20) hours of your time.
Now, I know it is your time, not a physical cost. But your time is worth something, and you are an expert so it is worth a lot!
Just because I like easy math, let’s say an hour of your time for this activity is $100 per hour. So for 87.5 hours that would be $8, 750.00 for the 3 new clients ($2916.67 each). This is a lot more than $575.00.
And it may be worth it (especially after factoring in what they might buy next etc.. but we are not discussing that today).
The point I want you to takeaway is when evaluating where your clients are coming from and what are the best investments of time and money, you have to look at costs in totality. It’s not as simple as looking at sales minus hard expenses.
Items to Consider
So grab a note pad and start looking at where you made investments this past year to acquire new customers so you can identify how much it costs you to acquire a new customer. Ideally, you should account for everything you did to get that new customer so you can have a picture of the true cost so you can monitor it this year. This will also give you a picture of what you need to charge to cover all your costs and be profitable.
Here is a list of the typical costs to include (depending on your type of business):
- Facebook ads
- Advertisements in newspapers, journals or online publications
- Google AdWords
- Trade shows or vendor events
- Giveaways like pens or water bottles
- Direct Mail campaigns
- Pay Per Click campaigns
- Cost of meetings, events
- Networking group costs, membership or dues
Here is a list of “forgotten” costs to include:
- Time you spend on social media outreach
- Time spent at networking events
- Time spent converting a warm lead to a client: if you are in service based business you are most likely offering complimentary consultations- this time also adds up for the cost of client acquisition
- Time to develop proposals and work through the procurement process if your client is an organization
- Graphics or logos used in on-line and off-line advertising: development or purchase of
- The time it takes to move people to your sales pipeline- this could be your time as well as time of team members involved in the sales process
- Time to create and proof read copy for marketing
After my clients do this exercise, two things become really clear:
- Prices may need to increase to cover all the costs,
- Having a strategy to retain these customer’s is an absolute must (for more tips and tools on this, check out the 5 Star Customer Service Summit)
What insights or takeaways did you have after calculating the cost of acquisition for your clients? Share below!