Working out what a customer actually costs you to acquire

4 days ago
3 min read

Updated: 3 days ago

Introduction

Acquisition cost is usually calculated as advertising spend divided by new customers. It is a reasonable starting point and it is badly incomplete for a small business, because in a small business the largest input is not money. It is the owner's time, and the owner's time does not appear on any invoice.

A figure that ignores the four hours spent on site visits for a job worth six hundred pounds will tell you that the job was profitable. Include the hours at any sensible rate and it frequently was not. This is how businesses stay busy and unprofitable for years without the numbers ever showing it.

The calculation is not difficult. It is only unusual.

1. Working out what a customer actually costs you begins with direct spend

The easy half.

Advertising, listings, print, sponsorship, anything invoiced. Sum it for a period. This part everybody already does. Use a quarter rather than a month so one-off invoices do not distort it.

2. Add the tools that support acquisition

The forgotten subscriptions.

Website hosting, booking software, email platform, the CRM. A share of each belongs in the calculation. Annualise them and divide. Half of a website's cost is usually a fair allocation to acquisition.

3. Count the hours

The part that changes the answer.

Enquiry handling, quoting, site visits, follow-up, the calls that went nowhere. Log them for a fortnight and extrapolate. Most owners are surprised by the total. Half a day a week is common in a small service business.

4. Value the hours at a real rate

The valuation decision.

Use what you would have to pay someone to do the work, or what you could have earned doing billable work instead. Either is defensible; nothing is not. The rate you choose should be written down beside the figure.

5. Include the losses

The denominator correction.

The time spent on the enquiries that did not convert is part of the cost of the ones that did. Dividing only by the wins is the whole point. Otherwise you are costing quotes rather than customers.

6. Divide by new customers, not by all customers

The definition.

Repeat business did not need acquiring. Mixing them in makes the figure look far better than it is. Count new customers only. If the split is hard, count first invoices rather than customers.

7. Do it by source

The useful version.

A single company-wide number cannot guide any decision. Per-channel figures can, and the differences between channels are usually large. This is the calculation worth the extra hour. A factor of five between two channels is not unusual.

8. Compare against value, not against price

The judgement.

A customer costing eighty pounds to acquire who spends four hundred once is very different from one who spends four hundred a year for five years. The comparison must use lifetime value where repeat business exists. Otherwise you will cut the channels that produce loyal customers.

9. Recalculate when something material changes

The maintenance.

New channel, new price, new person handling enquiries. Twice a year is enough for most businesses. Keep the old figures for comparison. A doubling between reviews is the signal to investigate.

Be careful about treating the resulting number as precise. The hour estimates are rough, the allocation of shared costs is arbitrary, and the value is entirely in comparing channels and in noticing when a figure doubles rather than in the figure itself.

Conclusion

Add the hours to the spend and divide by new customers only.

Include the subscriptions that support acquisition, log your time for a fortnight and value it at a rate you write down, count the effort spent on enquiries that never converted, exclude repeat customers from the denominator, calculate it separately for each source so it can guide a decision, compare the result against lifetime value rather than a single sale, and recalculate whenever a channel, a price or a person changes.