The Phantom Cost That Can Sink Profitability

If you own a business, you’re probably familiar with a P&L – a Profit and Loss statement. That’s the money coming in (your gross income) and the money going out (your total expenses).

But not all expenses are the same.

You’ve got fixed costs and variable costs; those are what most people are familiar with. But there’s an additional part of your spending that’s worth calculating into a dollar figure: it can mean the life or death of your business. What is it? It's your customer acquisition cost. 

On paper, most business models focus on the first two cost categories: what are the fixed costs of starting my bakery? Okay, rent, utilities, maybe leases on equipment. And then there’s cost of goods sold: flour, yeast, ingredients, maybe additional labor or sub-contractors, all that. And there’s some costs triggered by the point-of-sale, like maybe a credit card transaction fee. 

So you’ve got all that figured out. But what about getting new customers?

Oftentimes the novelty of opening the business carries momentum forward: it’s a big deal to start your own business, and leverage your network to promote yourself, talk about it, etc. You’re excited. Your friends are excited. Your family is excited.

But what do you do when that wears off?

It’s the one thing that falls off from the excitement of starting a business: the cost of maintaining the business, of growing the customer base.

And if you’re calculating profitability and looking at margins – like a good business owner does, right? – then you’ve got to include a Target Customer Acquisition Cost to stay profitable.

Customer Acquisition Cost in a Perfect World

In the marketing world, we’d love it if every single campaign dollar had attribution to a known purchase. You put out a campaign, you get new customers immediately as a result of that campaign. Spend divided by new customers gets you the Customer Acquisition Cost. Okay, simple: $1,000 spend, 20 new customers, $50 customer acquisition cost.

But that’s not always the case. 

Marketing dollars for brick-and-mortar businesses get lost in the “black box” of the unknown. Unless you’ve got e-commerce online ordering or merch sales, those people coming in through the door are an unknown variable. What’s working with marketing? What isn’t? That’s an incredibly tough nut to crack.

If your marketing is focused on lead generation, has a long sales-to-close pipeline, or a whole host of other goals, that can make it even more difficult to calculate a customer acquisition cost.

Even if you have an e-commerce business where digital campaigns can be directly attributed to online purchases, that’s not going to factor in the upper-funnel campaign spend. Remember, it takes several stages and several touchpoints with your brand to get one person to cross the finish line and make a purchase. The field is noisier and more crowded than ever.

So what’s the point? You might be asking. Because despite all this, you’ve got to know your numbers.

The simplest thing to do is this: take a longer view of your marketing spend. Take a look at last quarter, tally the marketing costs, and divide that by new customers. 

If you know your average customer lifecycle, from the top of the marketing funnel to the close of sale, you can shift spend. For example, if your lifecycle is 30 days to close, shift your spend one month prior: so Q1 customers would be the result of December, January and February spend, with March customers truly being attributed to those months. 

If you have repeat customers from prior to last quarter, strip those out. Make it a tougher, more conservative number to calculate net-new business.

The Bottom Line

Good business knows their numbers. But fixed and variable costs aren’t the complete picture. You’ve got to budget for marketing spend and know your acquisition cost.

If you don’t have the margin to cover an acquisition cost, you’ve got tough choices to make: raise rates, or cut costs. 

But if you want to grow, you’ve got to know.