I used to think that doing what everyone else did to bring in new clients was the way to go. Little did I know how interesting it is to drill down into the cost of acquisition and the opportunities it brings.
The cost of acquisition is the amount of money you need to spend on acquiring a new customer. In simple terms, it’s the total amount you spend on advertising and marketing divided by the number of actual new clients you attract.
It is a critical factor that every business must know – especially a business in the service industry. Why? Because aside from having the right service for the right market, the cost of getting that market is most likely going to decide over success or failure.
Unfortunately, we often don’t know how much it actually costs us to attract a new customer, because we don’t put those numbers together. And we don’t recognize the even higher number which is the cost of conversion – how many of those we attract actually become our client.
Knowing your CAC allows you to budget in advance and also measure the effectiveness of your marketing and advertising over time. You can calculate it over the actual total cost of your marketing, networking, promotion etc. and you can calculate each individual strategy. For example, the number of clients gained by a radio campaign over 3 months vs. the cost or the number of new clients from a Facebook ad campaign. The cost per se of any advertising is irrelevant, what matters is the effectiveness. I may pay $1,000 for a newspaper insert that reaches 50,000 people but might only get 2 customers or I may pay $1,000 for Facebook ads and get 20.
These costs of customer acquisition, are often hidden but when added up are surprisingly high. Not only because marketing activity often does not lead to immediate results, but because we do not add in all the aspects involved including our time that we need to sit down with the client and consult with them.
Some of the costs involved in acquiring a new client can be:
◆ Referral fees
◆ Advertising fees
◆ Payroll costs
◆ Presentation fees
◆ Website and other online service fees
◆ Customer purchase (for example from another provider)
◆ Discounts – yes discounts from Groupon to Mother’s Day are costs
Rehab clinics have to pay up to $5,000 for a validated patient. And then they still have to sign the patient up. In a competitive market, the cost is usually higher. A massage therapist can get a new client by passing out a business card to her existing clients at a few dollars cost.
Either way, these costs are real and need to be kept in check. Often by coming up with more creative strategies and becoming more focused on a niche. The only way to identify opportunities though is to know where your costs are.
To be an entrepreneur requires great optimism and a very strong belief in how much customers will love your service. Unfortunately, this same attribute can also lead entrepreneurs to believe that customers will beat a path to their door to purchase that service. This frequently causes them to grossly underestimate the cost it will take to acquire customers.
On the other side, you also need to know the value of your client. In other words, how much money they will typically spend with you over time. This is called the Lifetime Customer Value or LCV or Lifetime Value (LTV). Easy, if it’s a one-time affair, but that is unusual in the service industry. More common is that we have that client a few years. This means the spend on acquiring the client has to be seen in relationship to the total value of the client for the business.
If we take your revenue say over a year and divide it by the number of individuals you have seen, you can estimate what the average client brings into the business which is a good start. If you track how long a client stays with you, you can create a very precise number.
So here’s what I think you need to do to make this a reality in your business:
To establish the average cost of acquisition in your business:
1. Track your expenses for every advertising and marketing in a given time period.
2. Track how many new patients book a procedure as a result of your marketing.
3. Divide the sum of advertising and marketing costs by the total number of new patients.
The resulting number will tell you the cost per acquisition. For example, if you ran an ad in a local newspaper for $1,000 and you gained 10 new customers, your CAC would be $100.
ABOUT THE AUTHOR
Nicolay H. Kreidler is an entrepreneur and strategic consultant in the health and wellness space who focuses on turning around distressed businesses and re-positioning them for success.