What Are Allowable Acquisition Costs?
In our previous post on the five ways to increase profits, we talked about the idea of buying customers. To remind you:
Buying customers is a change in mindset that incorporates the idea of focusing on profit per customer, not profit per hours or profit per item. It’s a mentality that enables a more methodical approach to make any business profitable.
A key component to the idea of buying customers is understanding acquisition costs and the idea of profit per customer.
There are different ways to define acquisition costs, but for the sake of this post, we’ll talk about two main ways.
Allowable Acquisition Cost
Allowable Acquisition Costs is the amount a business can spend to bring in customers the first time they purchase from you.
Understanding Allowable Acquisition Cost and using that number to buy customers gives businesses the possibility of unlimited growth. If the number is low, businesses can afford to buy as many customers as possible.
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Investment Acquisition Cost
Investment Acquisition Costs is when businesses invest in customers even though they know they won’t make a profit on that customer at the first sale.
Some companies can afford to use an Investment Acquisition Cost strategy because they have the resources to absorb the cost of their customer acquisition.
Companies that explore this option commonly don’t have any cashflow issues and can afford a long-term investment because they know eventually their “purchase” of their customer will payoff.
Choosing the right strategy as the business owner isn’t what we’re focused on here though – we are instead looking to generate a massive profit per customer number.
Profit Per Customer
Your goal as the business owner is to bring in as many customers as you want, at a profit.
To create the right strategy, you must understand the concept of profit per customer and how it relates to acquisition cost.
Bigger companies have the luxury to use investment acquisition cost strategies because they’ll see a return long term.
Think about a company like Apple. Apple spend $1 million in advertising each year and most of their products are relatively inexpensive for the average consumer.
You may buy a $500 iPhone, which definitely does NOT cover the expense of the ad that put you in the store – but the fact is that the iPhone isn’t the end of the purchasing journey, it’s the beginning.
For that $500 you spent, Apple probably earns at least double throughout the entire lifetime of you as the customer.
For the small business owner or brand, you’ll definitely be taking part in a lower investment cost strategy. Say maybe, something like hosting a networking event.
The cost to host an event might be around $300, and you may do business with only 15% of the people that attend – but your profit off of those limited leads may lead to a nice profit over the long term.
How to Figure out Your Acquisition Cost
Your acquisition cost is the cost of a given marketing campaign divided by the number of those who bought from you.
Let’s say you spend $1,500 in Facebook Ads. From that campaign, you get 1,000 impressions, 200 clicks and then 10 customers.
Your acquisition equation would look like this:$1,000/10 = $100.
Is that $100 too much to spend to buy each customer, or is it a price that works for your business?
If your customer is spending a few hundred dollars and you profit more than $100 per month off of this customer, that $100 is an allowable acquisition cost, because the cost of buying the customer is covered in the profit.
Basically, if your Allowable Acquisition Cost is more than or equal to that $100 investment, you have a good campaign.
In contrast, let’s say you are spending $1,500 in a Google pay per click advertisement campaign and you plan that 200 people will fill out a form on your site, making your cost per lead $7.50.
If only 20 of those 200 people end up buying, making your conversion rate 10%. Your cost of customer acquisition is $1,500 divided by 20, making your CAC $75.
If your customers are spending $75 on their first purchase, you’re breaking even – so you better have a plan to get them back for repeat business in order to see any profit.
What you only profited $10 from their first purchase? You’d be losing money on buying your customer and would need to rethink your campaign, unless you have an Investment Acquisition Cost strategy and can earn profit on future purchases.
Know Your Numbers
As you can see, if you as the business owner don’t know your numbers, you could be digging your business into a deep hole and instead of buying new customers at a profit, you’ll be losing money on the customers you just worked so hard to get!