When it comes to business metrics, no metric is as important as the cost of acquiring a new customer. It is this metric that determines whether you are profitable or not.
For instance, if you spend $20 to acquire a new customer that buys a $12 product, then you are losing $8 on that customer – especially if you only have one product.
This is where the cost of customer acquisition gets sticky. Many small business owners don’t understand the high value of keeping a good customer. Service businesses are better at this than businesses that sell a product. You can take a loss on the acquisition of a new customer if you keep that customer coming back and buying more from you in the future.
Take the previous example: An $8 loss on a new customer can be turned into a gain if that customer buys your next product at $15. Now you’ve spent $20 to acquire the customer and turned that investment into a $22 win – a profit of $2.
There is a caveat. Your products and services have to be quality products and services to ensure that customers come back for more.
I’m not saying you should lose money on your first sale. If there is a way to control the cost of aqcquisition, and there usually is, then you should control that cost. If you can reduce the cost of acquiring a new customer from $20 to $15, then you might only lose $5 on the new customer. But you’ll still make up for it on subsequent orders.
Of course, if you can acquire a new customer for less than the cost of your first sell, that’s a better plan. But here’s the overall view: Keep your cost of acquisition low enough that your profit margin is worth keeping your customers. Manage that cost of acquisition. Lower isn’t necessarily better, but if it is too high you’ll never earn the profit you deserve.