Well, perhaps this isn’t the perfect analogy. (You think customers are like fish? Etc.)
But it is a great photo.
Nonetheless, if you think about what it costs per fish caught to go fly fishing, it seems an uneconomic activity. And while fly fishing has obvious benefits in addition to acquiring fish (and usually returning them to the stream), the cost to acquire a customer is a critical number for an entrepreneur.
It can drive all sorts of new knowledge that gets us moving faster in the direction of proprietary information that helps us and isn’t obvious to others.
Customer acquisition cost calculations probably should include all activities devoted to finding new customers, including direct sales costs, advertising and other media efforts, and so forth.
As en example, let’s say it costs $1,750 to acquire a software customer in a “software rental” (also known as an ASP) type business. The customer pays per use. Customer revenue for this customer is $12,000 per year.
Good or bad?
Area for improvement in lowering acquisition cost or really quite good?
Well, how long do you have to keep this customer to get your $1,750 back? At a profit of 10% ($1,200 per year) it will take about 18 months.
How long do they remain a customer? If it’s less than 18 months, there’s a problem.
Next, what is the industry standard for acquisition cost in this category? (How am I supposed to find that out? Call my competitors and ask them? Hire a consulting firm? Isn’t this awfully esoteric?)
Well, here’s a little secret. Any member of the Direct Marketing Association in New York City can use their library online. It contains years of entries in their annual contest (the “ECHO” awards). Winners are based on numerical results like, yes, acquisition costs. With just a little digging it’s possible to find some pretty interesting figures.
One company I’m familiar with sells an annual subscription in the mid six figures and has had no attrition over five years. Their “hit rate” (number of prospects converted to customers) is quite high.
These facts give them the savvy and the latitude to be aggressive in customer contact opportunities. Their low attrition rate (0%, usually considered good) encourages an appropriate emphasis on continuing world class service and product design.