How Much Should You Spend to Acquire a New Customer? More!

Last Updated Oct 18, 2011 11:58 AM EDT

Most small business owners back into their sales budgets. They estimate total sales, subtract fixed and variable costs, and grudgingly decide based on whatever is left what they can afford to spend on advertising and sales.

That's why sales budgets are often based on, "Well... that's all I can afford."

That's also a mistake. You should almost always spend more to acquire new customers than you think, especially if you can land the right customers.

The key to growing your business is to approach customer acquisition costs like you would any other business investment. Don't treat sales costs like a line item to tweak so your overall expense budget "works." Treat sales costs as an investment intended to generate a reasonable short-term return and a significant long-term return.

We'll use me as an example. I'm a ghostwriter and I also photograph weddings. (If you're curious why I do both, this is why.) To keep things simple, assume we spend $5,000 a year on sales, we book 20 weddings a year, and the average price of a wedding package is $4,000. Quick math:

Sales: $80,000

Sales cost per transaction: $250

Sales cost as a % of sales: 6.25%


Are we happy with those results? Let's start by calculating whether we generate a reasonable short-term return on our sales investment; the definition of "reasonable" is the minimum we're willing to make. We add all our fixed and variable costs (including cost of sales) and spread them across the 20 weddings. Say we want, at minimum, to net 20% on each wedding; if we do, we're content -- and shouldn't spend more on sales, right?

Wrong. There's a lot more at play:

  • Couples often spend more than what they originally paid for a package; on average, about $500 extra per wedding. (More albums, extra photographer time, additional photos, etc.)
  • Family and friends typically order photos and albums after the wedding; on average, about $600 per wedding.
  • Couples often contact us, sometimes years later, for family portraits, sessions with their children, etc.
  • About 70% of our bookings come from referrals from past clients.
What is the cost of sales for the items above? Roughly speaking, zero. We already spent the money to land the client so follow-on sales and referrals are in effect free. Adding in just the post-wedding sales ($500 from couples and $600 from their families) bumps the average wedding sale to $5,100, reduces our cost of sales to 4.9%, and increases our overall profit margin. Plus each booking is the gift that keeps on giving, since over half the time we get new bookings through referrals, which further reduces our selling costs.

So what do we actually spend to acquire new customers? Contrary to the title of this article, currently almost nothing: some website expense and a little labor when potential clients call to inquire. Why? Because we spent a lot in the early years to land clients. We spent more and targeted a reasonable profit level per wedding because we knew:

  • If we did a great job clients would purchase additional albums and photos
  • If we did a great job clients would contact us in the future
  • If we provided great service clients would refer us to others, allowing us to eventually reduce customer acquisition costs
The same logic applies to your business. Very few customer relationships, regardless of the industry, are one-off, unrepeatable events. Say you run a restaurant: if a new customer tends to return at least two times, shouldn't you be willing to spend more to acquire that customer since you'll spread their acquisition costs over three or more visits?

First determine the reasonable short-term return you are willing to accept. In some cases, reasonable can be as low as break-even; as long as the likelihood of future business is high your initial costs will be offset by future revenues. Then focus on ways to expand your products and services -- and consistently deliver great service -- so you can further leverage the value of an acquired customer.

Above all, don't see customer acquisition costs as simply a cost or line item. Analyze the big picture and view the cost of sales as an investment.

If spending more returns more... what are you waiting for?

Jeff Haden is a ghostwriter who has ghostwritten four Amazon #1 bestsellers... and a wedding photographer as well.

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Photo courtesy Stuart Miles and freedigitalphotos.net
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    Jeff Haden learned much of what he knows about business from managing a 250-employee book manufacturing plant. Everything else he picked up from ghostwriting books for some of the smartest CEOs and leaders in business. He has written more than 30 non-fiction books, including four Business and Investing titles that reached #1 on Amazon's bestseller list. Follow him on Twitter at @Jeff_Haden.