How to Determine Small Business Client Acquisition Costs and More Importantly Why Should You Know

What does it cost you to acquire and maintain a client?

During my 25 years in business, I am continually surprised that small business owners, entrepreneurs, sales personnel and even executives in larger organizations cannot quickly identify what it is costing the organization to secure new clients and to maintain existing ones. Ongoing efforts through a variety of vehicles including marketing, referrals and cold calling are never truly measured to accurately determine client acquisition cost(CAC). Without knowing CAC, you are ignoring return on your investment (ROI) for not only your fixed marketing costs, but more importantly your customer relationship management focus may be on the wrong customers.

So how do you determine client acquisition cost?

Simply speaking for every client, you delineate all costs associated to initially acquiring that client outside of fixed asset costs such as utilities, rent, equipment, support salaries, etc. This becomes the initial customer acquisition cost and serves as a base.

Then you total up all the sales for the most recent year or quarter, if you prefer, along with the gross profit (total sales less costs of direct products and services). Also in a separate column, total up any new client acquisition costs. New client acquisition costs include sales personnel salaries and all those expenses associated with customer relationship management or CRM. Then add initial client acquisition costs to any new client acquisitions costs and subtract the gross profit from this total. The resulting sum whether positive or negative is your current return on investment in dollars.

Now you have established your baseline for return on investment. Next keep track of all referrals from each client including the gross profit sales as well as gross sales. What you will see that in many cases a client may have a substantial negative return on investment especially if you are trying to get your foot in the door or make a name for your company. However as sales and referrals grow that negative return on investment should turnaround and become a positive one.

The real purpose of this article and activity is for you as the small business owner to begin to measure and then manage your ever growing customer base. Without knowing your CAC, you could be investing thousands of dollars in clients who have low return on investment and potentially ignoring those clients whose value was unknown. And in some cases, you may need to fire a client because the additional CAC is draining your bottom line. Again taking from a very old adage, if you can't measure it, you can't manage it.