Cost to acquire customers is the sales and marketing costs necessary for acquiring a new customer. To determine the cost to acquire a customer, one needs to divide the costs incurred on the acquisitions by the number of new customers from those expenditures. In terms of a small business, I would calculate not only the costs of advertising but also the cost to acquire customers in general.
What belongs in customer acquisition cost?
Include the costs needed to acquire and convert new customers in your specified scope. Just measuring advertising spend without other costs is not accurate as the cost of agencies, software, commission, and sale personnel must be included.
A larger computation would involve media costs, acquisition-centric creative costs, agency costs, sales commissions, and the share of acquisition from sales and marketing staff. You can separate out any of the retention costs where feasible. Document your allocations as estimates rather than actual accounting.
Where a founder performs all sales functions directly and does not receive remuneration for such services, it appears as a small cash cost. Maintain another measure of time-based costs which will be needed as the company scales up and requires replacements for such labor.
Use one currency only. For an Indian company that receives its advertising bills in rupees, the costs of foreign software used need to be converted using a defined method before inclusion in the total sum.
How do you calculate customer acquisition cost correctly?
Split acquisition cost by number of new customers, although giving adequate time for the lead generation from the campaign to convert. Calculating last month’s acquisition cost by last month’s number of customers could mislead if sales are taking several weeks.
This is an example of a calculation: A cohort in an ad campaign costs ₹120,000 on media, ₹20,000 on creativity and management and ₹40,000 on sales allocation. If the cohort generates 12 customers, then the total acquisition cost will be ₹15,000/customer. Only ₹10,000 for advertising cost.
These are hypothetical inputs for the purpose of illustration and are not real data from an Aimers client. When there are still several opportunities to be closed, mark it as a provisional figure.
Google’s offline conversion guidance describes connecting later business outcomes with advertising. That connection is useful when customers buy after a phone call or proposal rather than directly on a website.
Why can cheap leads create expensive customers?
Low cost of getting leads and high cost of acquisitions may go together because of low conversion of enquiries to customers. I would evaluate the two campaigns on the basis of number of leads and number of customers before giving the reward to the campaign that gives the cheapest leads.
The below mentioned illustration involves two campaigns that use same advertising budget.
| Measure | Campaign A | Campaign B |
| Advertising spend | ₹60,000 | ₹60,000 |
| All leads | 100 | 40 |
| Qualified leads | 10 | 20 |
| New customers | 2 | 5 |
| Cost per lead | ₹600 | ₹1,500 |
| Advertising cost per customer | ₹30,000 | ₹12,000 |
Campaign B buys fewer enquiries and more customers. Use the Aimers ad performance calculator to examine advertising ratios with your own inputs, then add the sales and marketing costs outside the ad platform.
Do not confuse revenue with profit in your analysis. It is possible for a company to recoup its advertising costs through revenue, but still make losses in terms of profit.
What makes an acquisition cost affordable?
An acquisition cost within budget leaves some space for the customer’s contribution and satisfies the business’s needs for cash flows back. There is no universal safe number that works for all industries and business models.
For a single sale model, estimate the contribution which is left after covering the variable cost of delivering it to the customer. For recurring purchases model, think about the uncertainty of retention and about how long it will take you to generate the expected contribution.
I would recommend not trying to justify the current expenses by future revenue which may come from the clients whose retention is not yet proved. You should start with the existing customer behavior and try a pessimistic case along with the optimistic one.
Think about these questions before spending more money:
- Are the new clients truly new, without duplicates?
- Is the maximum period passed for the oldest leads to make their purchase?
- Is the total cost estimate including the efforts to convert the leads into customers?
- How much time will it take to cover the acquisition cost?
- Will the business be okay if the conversion rate or the frequency of repeating drops?
Which reporting mistakes should you correct first?
Correct inconsistent attribution, duplicate customers, and mismatched cost periods before changing a campaign. Otherwise the apparent improvement may exist only in the report.
Google Analytics explains attribution, which determines how credit is allocated. If two advertising platforms both claim the same customer, those claims should not become two customers in the business-wide calculation.
Maintain one customer record with its first purchase date and acquisition cohort. Report platform-attributed results separately when needed. Also distinguish advertising cost per customer from fully loaded customer acquisition cost in every dashboard label.
What should you calculate this week?
Choose a mature acquisition cohort and calculate both advertising-only and broader customer acquisition cost. Compare those figures with contribution and cash recovery time before approving a larger marketing budget.
