Many entrepreneur does not know what customer acquisition cost is to worry about how to decrease it.

This post is related to my thoughts on how to scale a business. I explained in detail what is meant by business scalability and gave few pointers to scale your business. In previous posts, I talked about using recurring revenue and decreasing the cost of incremental sale as two methods to scale your business. Today, I am going to give you another tip:

Find a way to decrease or maintain your customer acquisition cost!

Customer acquisition cost is the sum of all the cost that you bear to:

• Market your product
• Find a lead
• Courting with the potential customer
• Sale preparation, and
• Closing the deal

Now it is difficult to calculate the acquisition cost for each customer, therefore general practice is to work with averages i.e. take all the marketing, advertising, and sales cost and divide it by total number of customers. This will give you a customer acquisition cost. For example, let’s say you run an eCommerce business, your customer acquisition cost can be calculated as:

• Website development cost: $20,000
• Estimated Life of Website: 24months
• Monthly Promotion Cost: $2000
• Monthly Maintenance Cost: $250
• New Customers Per Month: 200

Customer Acquisition Cost = (20,000/24 + 2000 + 250)/200 = $15.4

This simple calculation shows that you are paying about $16 to acquire a new customer. The customer acquisition cost is a measure that you should be aware of all the time, just like cash flow. It readily shows you the importance of retaining customers; it also shows you the price structure you have to maintain. Always keep an eye on this measure.

How to use this measure as management tool is the topic of some other post. Today, I am frying a bigger fish. I am proposing that you can scale your business if you can find out a way to decrease the customer acquisition cost with the increase of your customers.

Let’s take a minute and see how sale happens. In the beginning you sell to people you already know or have connection with. In a short time you will reap all the low hanging fruits. Now customers are far and difficult to reach. To acquire them you have to bump up your marketing dollars, which will increase your customer acquisition cost. If you reap most of the medium hanging fruits, you will left with extremely hard to reach market, meaning you have to bump up your marketing dollars again. Do you see the trend? Customer Acquisition Cost is increasing as customer base is increasing. This is true for almost every business.

It is not difficult to reverse the equation, many companies like Hotmail, Google, My Space, and recently Facebook has done it. You can do it too.

Let’s take Facebook as case study. They are able to reduce the customer acquisition cost, simply by providing a simple yet efficient way to make every user their sales agent. When one sign up with Facebook, it provide them with an opportunity to invite ones friends. As a dutiful sales agent we invite all our friends to join Facebook which increases their customers without shelling a penny. Sweet isn’t it.

How you can reduce the customer acquisition cost? Well, you can also empower your customers to do word-of-mouth marketing for you. You can incorporate some network marketing element in your business model e.g. Affiliation Programs. Or you can adopt a Mary Kay’s business model.

If none of the above suggestions are applicable, you can try two things to scale you business:

1. Retain an existing customer as long as you can, and
2. Increase the total value of a customer by up-selling complimentary products.

When you are working on your business model, give special thoughts on how to reduce or maintain your customer acquisition cost. This is an excellent way to scale your business.

Share with me your thoughts and tactics that you have used in reducing your customer acquisition cost.

Keep Reading!

Related Posts

• How to Scale Your Business
• Reduce the Cost of Incremental Sale to Scale Your Business
• Can Your Business Generate Recurring Revenue?
• Is Your business idea is scalable and practical?
• Strategically Cut Cost to Speed Growth