What is customer acquisition cost? Customer acquisition cost is the price of winning a new customer or client for your business. Customer acquisition cost includes expenses like advertising, wages paid to salespeople, and overhead of the marketing and sales team.
Business experts have long said that it takes five times more money to acquire a new client than it does to keep an existing client. This old adage refers to the customer acquisition cost, the cost to acquire a new customer.
That five-times rule, in case you’re wondering, has largely been dismissed by today’s marketing experts as an old-school estimation. With the customer tracking systems available today, companies are able to get more precise calculations on their customer acquisition costs compared to their costs to retain existing clients. But it shows that businesses were interested in their customer acquisition cost long before our modern tracking systems became available.
Businesses have always needed to know their customer acquisition cost so they could make sure they’re not spending too much money to win a new customer.
The cost can be substantial as it includes expenses like:
- Marketing and advertising costs
- Wages and commissions for sales professionals
- Wages for marketing professionals (like designers, consultants, and executives)
- Overhead expenses of the sales and marketing teams (including software, hardware, and office space)
How to use customer acquisition cost:
Customer acquisition cost is typically used in conjunction with “customer lifetime value.” Customer lifetime value is the amount of revenue generated from a typical customer over the customer’s lifetime.
For example, a software company selling a software subscription receives multiple payments from a single customer. The lifetime value of the customer would be the total amount the customer spends on this subscription over the years. If the customer pays $29 per month for five years, the customer’s lifetime value is $1,740 ($29 times 12 times 5).
This number puts the customer acquisition cost into perspective. If your customer acquisition cost is $225, and you’re earning $1,740 from that client, you know your marketing and sales team is a good investment.
How to calculate customer acquisition cost:
To calculate customer acquisition cost, start by adding the different expenses you incur to get a new customer during a specific period (a week, month, quarter, or year). Then divide that number by the number of new customers acquired during the same period.
For example, if you were to spend $5,000 to land 200 new clients, your customer acquisition cost would be $25 (5,000 divided by 200).
Examples of customer acquisition cost:
- A real estate broker spends $250 in advertising and marketing materials to earn a single seller’s listing. The customer acquisition cost is $250.
- A retail shop spends $4,000 on salespeople’s compensation plus $1,000 on local advertising to earn 300 new shoppers. The customer acquisition cost is $17.
- A day spa spends $6,000 in sales team compensation plus $2,000 in advertising to win 120 new clients. The customer acquisition cost is $67.
What is a good customer acquisition cost?
The dollar amount of your customer acquisition cost is far less important than the ratio of your customer’s lifetime value compared to your acquisition cost.
A customer acquisition cost of $100 is good if the customer will pay you $500 over their lifetime. But the same $100 is not so good if the customer will pay you $150 over their lifetime.
A strong ratio is 3:1, meaning that the customer’s lifetime value is three times the customer acquisition cost.
Ways to improve your customer acquisition cost:
- Use SEO content. Content optimized for search engines has been shown to generate three times as many leads as traditional marketing while costing 62 percent less.
- Improve your customer retention rates to increase your customer’s lifetime value, whereby lowering your customer acquisition cost as a percentage of lifetime value.
- Test your ad copy. To make sure your advertising is effective, test different ads to see which ad copy converts better.