Excerpt below is unedited draft prior to publication
Client Acquisition Cost
What is Client Acquisition Cost?
This has to be my second favorite topic, but admittedly I am a numbers guy. I am all about metrics, numbers, and financials. This chapter is about something simple, yet most business owners don’t think about it. Client acquisition cost is exactly what it sounds like: i.e., what does it cost you to get one new client?
You should have an idea what your cost is, and what a good or bad cost is, but these numbers vary from business to business. In my consulting for different types of businesses, I have seen sky high acquisition costs and really low ones.
As a starting point, you should divide your total advertising expenses by the number of new clients. That’s only a starting point, however, because you probably get some new clients’ from referrals or walk ins. Knowing this number is still useful.
I served on an Internet gaming company’s board for a while. Their subscribers paid $15 per month to play the game, and the typical subscriber stayed for 6 months—spending a total of $90. It’s easy to see that you cannot spend a lot of money to get a customer who only spends $90. However, that doesn’t preclude using higher priced media to attract $90 clients.
The gaming company’s lowest client acquisition cost was from TV commercials. Shocker! A commercial placed in the right television program cost $750 to run and netted the company 25 new customers, so they had a client acquisition cost of $25. (The $750.00 cost divided by the 25 new clients). With an average $90 sale, the company had a gross margin of $65—or a 61% gross margin and 39% cost of sales for the television ad campaign.
What you can spend to get a customer depends on how much you earn from each sale and the number of times that customer will buy from you. A new car dealer can spend hundreds to get a new client, but a company selling time shares in jet usage can spend thousands.
To get a rough idea of what you can spend, think about what you sell, what your gross margin is, and how many times the client will place order with you over the life of the relationship.
Prospects, Clients and Close Rates
As with client acquisition, prospect acquisition cost is similar. The difference between client acquisition cost and prospect acquisition is the close rate of the prospects. Divide your event cost by the number of leads you have generated. If you spend $500 to have an event and get 20 leads, then it cost you $25 per prospect or lead.
Close rate is also just what it sounds like. If you get 20 leads at a cost of $25 per lead, and you sell something to half of them, your close rate is 50%, and your client acquisition cost is $50. (Divide your prospect cost by the percent closed). In most industries, a 25% close rate is likely to be good, though yours may be much higher or lower. You probably know what good and bad close rates are for your sales team. If you don’t, you should track this metric every month for every one of your salespeople.
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