Understanding Cost of Acquisition
At Recipi we understand that as a small business owner you are looking to understand and improve your marketing. Therefore, we want to share the simple, indispensable, and yet often overlooked statistic of Cost of Acquisition [COA]. Cost of Acquisition is the marketing expense it takes to convert a total stranger into your paying customer. This is part of our small business marketing 101 series where we share other information to grow your small business.
How to Calculate Cost of Acquisition
To find COA, divide all marketing expenses (e.g. media, salary, advertisements) by the number of customers gained in the same time period. For example, a company selling a $100,000 business-to-business service may spend $20,000 in marketing expense to convert one paying customer. Comparatively, marketing a consumer product, such as t-shirts, may cost $20,000 to acquire 5,000 customers.
B2B – $20,000(expenses)/1(customers) = $20,000 COA
B2C – $20,000(expenses)/5,000(customers) = $4 COA
To make things even more simple, you can measure COA using only the costs associated with the marketing dollars spent if you don’t want to include salaries or other complicated expenses. Let’s use Google Ads as an example. As a small business, you want to try new ways to grow your business and Google Ads is an attractive option. You set aside $2500 to test Google Ads and you acquired 10 new customers out of this test. The COA for Google Ads would be $250.
When calculating your COA, understand that costs vary greatly between industries and business. As COA is case specific, review this statistic in a lens fit to your business. You might be wondering how exactly to connect a marketing expense to a specific customer to calculate COA. This is where web analytics is crucial for determining COA. Without analytics tools on your site, you are guessing and you really can’t make a confident decision on whether a marketing tactic worked out or not. Analytics allow you to measure your advertising, calculate your COA, and optimize your marketing dollars.
Learn from Cost of Acquisition
You may choose to measure COA yearly for your entire operation or segment a specific geographic region over a six month period. COA is flexible and helps you ask and answer questions about your business. You may split customers by demographic (e.g. location, age, income) or analyze buyers of a specific product, from which you are learning traits of less or more expensive customers. COA may be used to evaluate entire campaigns or specific elements within. This metric is far-reaching and insightful. Just make sure you have a firm accounting of the costs associated.
Remember that Cost of Acquisition can be used to measure a specific marketing campaign, or your entire marketing efforts as a whole. Repeat customers, word-of-mouth, referrals and some other acquisition sources have a $0 COA. While it’s most attractive to acquire NEW customers, its important to remember that your current / past customers are an incredible source of business at a very low cost of acquisition. Tools like email marketing from Constant Contact help you nurture and grow your customer base and drive repeat business.
Recipi is a free tool that gives recommendations, insights and resources to help small businesses improve their web marketing and grow. We analyze your business website and other marketing touch points (social media, online reviews, etc) to give simple, understandable suggestions on how to improve your web presence. Go to Recipi.com to get your business “recipi,” today.