Cost of Customer Acquisition – What Is It?
Feb 18 2008

dock.jpgOne of the interesting things about fundraising is the different perspectives you get from potential investors.  If they spend enough time to really understand what you are trying to do, they offer great feedback, suggestions, and advice.  They also sometimes ask a tough question or two.

I officially started the fundraising process a couple of weeks ago and have had a couple of meetings and a few more set up in the coming weeks.  Since many of these angel investors are really busy, getting on their calendar can take weeks!

One question I was asked had to do with the cost of customer acquisition.  It’s so hard to tell what that might be given the uncertainty and newness of many business concepts out there (including mine) today.  I searched and searched and oddly only found very dated ancient info (i.e., 1999 – 2001) figures for sites like Amazon.com.   At a high-level, the cost of customer acquisition is how much it costs to get a customer/visitor to your site.  My guess is for sites with successful viral uptake like facebook the cost is in the cents (i.e. [total marketing and some R&D costs]/number of unique visitors).  On the other hand I’ve heard that customer acquisition costs for companies like Vonage are in the hundreds of dollars.  Anyone who has seen their mailers and expensive TV commercials can see why that number is so high.  Last I heard I think it takes them at least 2 years to break-even on each customer they get.

I even had the MBA student who helped me create the financial model search his resources and no such luck.  I would be happy to get information on even what the amount that a magazine like O Magazine or Pregnancy Magazine spends getting one customer to sign up.  You’d think that as much has been written about facebook, that their cost per visitor would be somewhere on the Internet, but for some strange reason that information is not readily available.  Go figure!

In my quest, I happened upon the following links that might be useful for any other entrepreneurs looking for the same information. 

Calculating Customer Acquisition Costs  (an online calculator)

Customer Retention and Acquisition (definition and 1999 info on Amazon.com)

On Measuring The Cost of Customer Acquisition (a 1999 Entrepreneur.com article)

There may not be a satisfactory answer (or more likely I don’t have access to the money or resources to help me find it) but at least being aware that there could be an answer is probably not a bad thing.  I ended up backing into some numbers using the information in our financial model which to me, the ever optimistic entrepreneur, seemed reasonable enough. :-)

UPDATE: This post was re-published on Found|Read here. Check it out to see additional comments by their readers.

Author: | Filed under: angels, entrepreneurship, fundraising | Tags: , , , , , , , , , , | 2 Comments »

2 Comments on “Cost of Customer Acquisition – What Is It?”

  1. 1 Eugenio said at 11:47 AM on February 19th, 2008:

    Uhm…actually the “Cost of Customer Acquisition” is something you don’t have to guess. Instead you can use that as a parameter to deifine, for example, your marketing strategy. Based on this parameter (and on the number of customers you want to get) you can estimate your financial needs (just for customer acquisitions), of course.
    As per your example of Facebook: I would not consider R&D cost (neither part of) in CCA, and in anyway the number of unique visitors should go in that formula. COnsidering a more common example like Amazon (I didn’t check the link) I think the thruth lies between “registered users” and “registered users who bought something”.
    Congratulations for the article and for your site as well!

    Eugenio’s last blog post..Asso di Fiori – Grandissma Prestazione!

  2. 2 Aruni said at 8:55 PM on February 20th, 2008:

    Hi Eugenio – I was able to back into the number using my estimates but they are estimates so it would be helpful to get comparable numbers as well. I would not have thought to include R&D costs in the calculation either but the calculator link indicated that some costs of developing the website should be included. There are so many ways to look at this, that it certainly is hard to figure out!

    Thanks for stopping by!