In a recent post about the Lifetime Value of a Customer, I mentioned the importance of understanding your ‘customer acquisition cost’ and said I would explain what I meant by that.
Customer acquisition cost refers to the cost of acquiring a new customer for your business. This is the cost of your marketing, advertising, promotions and direct sales efforts. It can include events, product giveaways and the salaries of sales staff and is averaged out on a ‘per customer’ basis.
For example, let’s say you spend $1,000 per month on these marketing costs and typically acquire 10 new customers per month. This means the acquisition cost is $100 per customer ($1,000 divided by 10). However, if you only attract two new customers per month then the acquisition cost is $500 per customer.
Is this bad?
It depends and will vary considerably depending on the type of business. Your decision needs to take into account the Front-End, what you make on the initial customer purchase and the Back-end, what you make on subsequent purchases. The combination of the two gives you the lifetime value of a typical customer for your business.
If you are in the tourism industry providing hot air balloon flights you will need to make your money at the Front-End because you are unlikely to get repeat business.
On the other hand, if you are a hairdresser or an insurance company you can take a longer term view… provided you have an excellent customer nurturing and customer retention policy.
For example, some years ago we worked on improving the customer experience with an insurance company. They explained to us that due to the high Customer Acquisition Cost in their industry it wasn’t until the third year that a new customer became profitable.
They had an unusually high attrition rate of customers at the end of Year One and Year Two, far higher than the industry average. So for them, improving the customer experience to ensure customers felt looked after and appreciated and stayed well beyond Year Two became top priority.
The message from this is, look after the customers you’ve got. You have already invested in acquiring them. Make sure you give them reasons to stay with you. The added benefit is they then become your word-of-mouth ambassadors… reducing your acquisition costs!
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