Small Business Sales Advice

Customer Acquisition Costs

Written by James Garvin for Gaebler Ventures

Customer acquisition cost is as it states; the cost to acquire customers. Many new business ventures fail to accurately and properly analyze their true acquisition costs, but knowing your acquisition costs can help you improve your profitability and create more loyal customer base.

Customer acquisition (the cost and process of acquiring new customers) is a metric that many new start-ups fail to accurately measure and understand yet is one of the most critical factors that drive profitability for your business.

If you think you can just set up shop or a website and get customers coming, you'll need to think again.

There are several methods and strategies for acquiring new customers the best course being free word of mouth marketing from visitors and customers who do find you. However, the most prominent methods are still through paid advertising and direct marketing which represent the most established methods. However, not every start-up can or should spend on advertising and direct marketing. There are other, more effective marketing methods to acquiring customers for your new venture.

The advent of social media and social marketing has created a very powerful channel to help get your business get in front of potential customers providing free advertising and marketing. But with everyone doing social media today, how does your business differentiate itself and get noticed? Social media, the use of Twitter, Facebook, and others, is a must have, but it's not an end all to your strategies for acquiring your customers. There are hundreds of millions of Facebook and Twitter users and while they are free from businesses, you cannot be certain that you can get your business in front of the right customer base using these free tools.

Customer acquisition is much more than just acquiring customers. It is about acquiring the right customers, those customers that remain loyal to you and your company and even spread the word to their friends and family who also become your customers. Customer acquisition and customer loyalty can best be measured by analyzing an individual's Customer Lifetime Value "CLV", (the discounted future profits that each customer provides your business). Ideally, every one of you customers should have a positive Customer Lifetime Value. In other words, the revenues that each customer generates should be greater than the cost you spent on acquiring that customer, whether it be through advertising or other channels.

Today's marketing is about optimization and targeting the right customers rather than mass advertising and marketing. Marketing budgets may be better optimized by allocating budgets based on individual customer acquisition costs rather than as a % of revenues. This will help your organization measure each customer acquisition channel separately (e.g. how many customers did you bring in from Twitter by sending out coupons vs. how many customers came in with your print advertisement from the local newspaper?). As a new company, you'll need to try several methods of customer acquisition until you find the optimal combination of channels, but failing to analyze each marketing campaign separately will prevent you from properly analyzing your most efficient customer acquisition channels.

As a start-up, acquiring customers effectively has to come from creative and low-cost alternatives to mass marketing and advertising. There are tools such as guerilla marketing, online viral campaigns, and more that can help you quickly get your brand name in front of potential customers, but in the end, it is about having a product or service that customers will want to use. If you deliver a product/service of such great value, customers will spread the word and you will start to gain notice from the right customers.

James Garvin began his education studying biotechnology. In recent years he has turned his interest in technology to helping two internet startup companies. The first business was an online personal financial network and the second was an e-marketing platform created to help entrepreneurs demo their web sites. Currently a student at University of California Davis, James is spending his summer incubating two new online businesses and writing about his entrepreneur experiences.

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