Thinking Through Customer Acquistion Cost
February 2, 2009
Customer acquisition costs take into account all the costs associated with persuading a consumer to buy your product or service, including research, marketing, and advertising costs. It is part of a business metric often referred to as customer valuation. Customer valuation basically tells a marketing and/or sales manager what level of resource to expend in trying to obtain that customer. In very loose terms, the customer valuation can be derived by dividing the customer ROI (often referred to as the total customer value – TCV) by the cost that were expended in acquiring them. This ratio can be very valuable in allocation of resources. The higher the ratio the more profitable your customer is. Therefore, if your company has multiple product lines, priority should be given to those product lines with the highest customer valuations.
For the purposes of this post, I am focusing on the element involved in determining the Customer Acquisition Cost (CAC).
There are four large buckets to examine:
1 Lead generation/advertising – Costs here can be quite hefty. They include all marketing efforts used to build your brand that compels your customer to finally fill out a web form or respond to some other type of direct response medium. Some of these items show up in a different part of the budget, but should not be ignored.
2 Follow up / qualifying – There is often a good deal of sales time spent here. These costs may be captured in the salary and commissions bucket. This is sometimes managed by third party resources. These costs should be identified and included here.
3 Proposal preparation / demonstration – These costs are all over the map in varying industries. They also can range a great deal depending on the complexity of the product. Take a hard look to include every cost that may be included here.
4 Salary and commissions – These costs should be straight forward. Be sure to include any spiffs or referral fees as well.
Good analysis of your CAC will assist you greatly in fishing in the right ponds. An accurate evaluation of the customer valuation will make clear that every potential customer is not worth pursuing. Conversely, some of your customers may be very profitable and worth additional allocation of time, resources, and manpower.
Posted in Cost of Sales, Strategy
