Customer acquisition cost is the fee associated with convincing a consumer to buy your product or service, including research, marketing and advertising costs. An important business metric, customer acquisition cost should be considered along with other data, especially the value of the customer to the company and the resulting return on investment (ROI) of acquisition. The calculation of customer valuation helps a company decide how much of its resources can be profitably spent on a particular customer.Content Continues Below
How to calculate customer acquisition cost
The first step in calculating customer acquisition cost is to determine the reporting period. Businesses typically calculate customer acquisition cost on a monthly, quarterly or annual basis. The formula for customer acquisition cost is:
(Sum total of all sales and marketing expenses) / (Number of customers acquired)
The values in the numerator and denominator determined must use the same reporting period.
For example, if the total of sales and marketing expenses in a month is $15,000 and a business acquired 150 customers that same month, the customer acquisition cost is $100.
What does customer acquisition cost include?
Customer acquisition cost includes the sum total of sales and marketing expenses, this includes:
- Salaries for sales and marketing personnel.
- Equipment used by sales and marketing personnel, such as computers, phones and printers.
- Software applications and tools needed, like customer relationship management (CRM) and marketing automation
- Third party consultants and agencies used for marketing, advertising or creative needs.
- Advertising, including online ads, direct mail, television advertising and out-of-home advertising.
- Event and conference sponsorships.
- Price discounting, when a product’s list prices are discounted to acquire a customer, the amount of the discount is added to customer acquisition cost.
Some businesses may incur additional sales and marketing expenses that are not listed above. In order to accurately calculate customer acquisition cost, all sales and marketing expenses must be added to the numerator. Omitting sales and marketing expenses, whether intentional or accidental, leads to an artificially favorable customer acquisition cost.
Complications due to long sales cycles
Complex products with long sales cycles can complicate the calculation of customer acquisition cost. If it takes a business an average of 18 months to close a sale, then the sales and marketing expenses incurred this month -- and possibly this quarter and this year -- will not influence a sale until later on.
To adjust for a long sales cycle, businesses can expand the time horizon for calculating customer acquisition cost. For a business with an 18 month sales cycle, customer acquisition cost could be calculated over a two-year horizon, so that sales and marketing expenses are associated with the customers they acquired.
Good customer acquisition cost example
Businesses that leverage customers for word-of-mouth marketing, or buzz marketing, can have favorable customer acquisition costs. Let’s consider a fictional company that makes stickers and decals. They create a bumper sticker for cars that has become popular. On the bumper sticker, they list a website URL where people can purchase them.
Because the bumper sticker is so popular, it is seen on a lot of cars, as they drive through towns and across highways. The prevalence of the bumper stickers lead to website visits, which lead to more purchases. This company does not employ sales and marketing personnel, they let the bumper stickers sell themselves.
Here, the sole cost to acquire customers is associated with the website, such as design, hosting and e-commerce transaction fees. As more people discover and purchase the bumper stickers, the business is able to lower its customer acquisition cost.
Bad customer acquisition cost example
At the height of the dot.com bubble, companies frequently ignored the calculation of customer acquisition in their pursuit of growth. For example, according to Optimize Magazine, at one point CDnow Online was spending about $40 to acquire each customer, although the average customer lifetime value (CLV) to them was only about $25. The Optimize article suggests that it is not good business sense to spend more acquiring a customer than the amount that customer will net the company in return.