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.
Businesses need to know their customer acquisition cost so they can 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, thereby 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.
Need help getting more customers and repeat sales? High-quality content can help you attract and retain customers year-round. Talk to a content specialist at ClearVoice today to get started.
