The cost of customer acquisition (CAC) is one of the most important (and misunderstood) metrics that new companies track. Convincing consumers or businesses to change their buying habits and take a chance on you can take a tremendous amount of time and effort.

Entrepreneurs and new business owners are typically passionate about the benefits of their product or service. When creating their business plan, they tend to underestimate how much time and money will be required to win their first set of customers.

Planning for the Cost of Customer Acquisition

The time to acquire customers, and the resulting delay in starting to get revenue from them, is as important a component of a cash flow forecast as sales and marketing costs.

You may have a great product or service. But if your funding only supports your burn rate for 12 months and the true lead time for your first sale is a year, you have no margin for error—even before considering the impact of 30-90 day terms!

In considering your CAC, you must build a detailed scenario based on the process of acquiring new customers, including:

• Checking the credit worthiness of the company you are trying to sell to and their track record of paying vendors.

• Responding to their expectations that you will cut price or relax your payment terms just to have a chance to get your “foot in the door.”

• Travel costs for repeated visits to the prospective customer to get them familiar with you and comfortable with your level of post-sale service. 

• Overcoming the response of the incumbent suppliers you are trying to replace. They will fight hard to keep the account. They won’t hesitate to spread FUD (fear, uncertainty and doubt) about your capabilities, reliability and staying power. Overcoming these objections will take time.

• Delay—as your “champion” gets approval from their higher ups to try a new vendor.

Understanding Your Customers and Sales Channels

Customer acquisition planning requires that you understand your target customers’ buying process and the timing of purchasing decisions. When selling to consumers, you need to research when they buy products like yours. You might, for example, be surprised to learn that demand for your products is more seasonal than you thought.

You also need to understand your sales channels. With all the consolidations in retail, getting to scale may leave you no choice but to require that you sell through the “majors”: BestBuy and Amazon in electronics, Macy’s in department stores, Staples or Office Max-Office Depot in office supplies. Some of these “big box” stores are notoriously slow payers. It takes time to learn your way around their payments and vendor relations systems and processes. All this may create another level of delay in selling your products and getting paid.

It’s noteworthy that much of my experience with the cost of acquiring customers comes from running a variety of consumer and industrial businesses for Milliken & Company, a large, global firm. How much harder and more expensive is it to acquire customers when your company is not well known?

In my next article, I will discuss additional aspects of the cost of acquiring new customers.

Every move you make in business will come with a cost. The goal, of course, is to turn that cost into a profit. The ebook below, "3 Step Strategy To Improve Your Profitablity," was created to support you in that mission.

About the Author

John Farrall is a leader in growing businesses, with a track record of growing both the top and bottom line. During his 30+ year career at Milliken, he had profit and loss responsibility for business units in the commercial office furniture, retail home furnishings and hospitality markets. Time and time again, John improved profitability by growing the business while driving down costs and improving customer satisfaction. Contact or learn more about John here.

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