What Does Acquisition Cost Mean For My Business Anyway?
WHAT DOES ACQUISITION COST MEAN? More importantly, how does it affect your business? Just the other day I had an interesting conversation with a person who sells marketing.
We were looking at marketing costs and sales for a certain company.
Just for now we'll call that company ABC.
She was all excited about profits from a certain advertisement ABC had placed.
She said, "This is great! They spent only $2000 for the advertisement and their sales were $12,000.
They profited $10,000!" Right away my little mathematical mind started turning, and I said, "But that's almost a 17% acquisition cost.
" And she said, "Huh? They spent $2000 to get $12,000.
That's a good thing, right?" I hated to spoil her little victory speech, but she needed to know about the ACQUISITION COST, one of the MOST important numbers in running business! In very simple terms, acquisition cost means "cost of getting a sale.
" I knew a little bit about ABC.
For example, I knew that in their budget they planned: 10% Marketing - That means 10% off the top of each sale goes toward marketing 10% Commissions - That means 10% off the top of each sales goes to pay commissions 10% Overhead - This is where you get the money to pay for a roof over your head, the phones, the heat, the air conditioning, trucks & maintenance, etc.
55% Cost of Sale - The hard costs that go into providing a service or product: labor & material If they followed through on all this, then ABC would generate and could plan for 15% PROFITS.
So again my little mathematical mind says, Ok, on $12,000 in sales I should generate about $1800 in profits.
Let's see where that $12,000 for ABC Company actually went.
Follow me as I do the math: $ 12,000 Total Sales -2,000 Ad Costs (16.
6%) -1,200 Commissions (10%) -1,200 Overhead (10%) -6,600 Cost of Sale (55%) $ 1,000 TOTAL PROFITS According to their budget, ABC should have been able to plan on $1800 in profits.
But now with these numbers they can only plan on a best case scenario of $1000 in profits if the job goes well...
and that allows no room for error.
As you can very well see, this is a far cry from the original $10,000 profit the marketer was talking about.
But when you don't know your numbers, it is easy to be fooled by a word such as "profit" that is tossed in front of you so carelessly.
Well, maybe not even careless.
Let's give them the benefit of the doubt.
They just don't know! And you won't either...
if you don't have a tracking system in place.
So far, the only profit I could see was what that marketer was making.
It is only when you know your numbers and know your profit margins that you can intelligently visit with those marketers that knock on your door.
You owe it to yourself and your business to know exactly what acquisition cost you can afford in order to profit from the work or service you provide.
And when you have an effective lead, sales and marketing tracking system in place, you can be confident that you know exactly what you are talking about.
As we always say, WINNERS KNOW THEIR NUMBERS! P.
S.
There are things that could have been done to lower that acquisition cost while spending the same amount of money.
Think on that one...
until next time!
We were looking at marketing costs and sales for a certain company.
Just for now we'll call that company ABC.
She was all excited about profits from a certain advertisement ABC had placed.
She said, "This is great! They spent only $2000 for the advertisement and their sales were $12,000.
They profited $10,000!" Right away my little mathematical mind started turning, and I said, "But that's almost a 17% acquisition cost.
" And she said, "Huh? They spent $2000 to get $12,000.
That's a good thing, right?" I hated to spoil her little victory speech, but she needed to know about the ACQUISITION COST, one of the MOST important numbers in running business! In very simple terms, acquisition cost means "cost of getting a sale.
" I knew a little bit about ABC.
For example, I knew that in their budget they planned: 10% Marketing - That means 10% off the top of each sale goes toward marketing 10% Commissions - That means 10% off the top of each sales goes to pay commissions 10% Overhead - This is where you get the money to pay for a roof over your head, the phones, the heat, the air conditioning, trucks & maintenance, etc.
55% Cost of Sale - The hard costs that go into providing a service or product: labor & material If they followed through on all this, then ABC would generate and could plan for 15% PROFITS.
So again my little mathematical mind says, Ok, on $12,000 in sales I should generate about $1800 in profits.
Let's see where that $12,000 for ABC Company actually went.
Follow me as I do the math: $ 12,000 Total Sales -2,000 Ad Costs (16.
6%) -1,200 Commissions (10%) -1,200 Overhead (10%) -6,600 Cost of Sale (55%) $ 1,000 TOTAL PROFITS According to their budget, ABC should have been able to plan on $1800 in profits.
But now with these numbers they can only plan on a best case scenario of $1000 in profits if the job goes well...
and that allows no room for error.
As you can very well see, this is a far cry from the original $10,000 profit the marketer was talking about.
But when you don't know your numbers, it is easy to be fooled by a word such as "profit" that is tossed in front of you so carelessly.
Well, maybe not even careless.
Let's give them the benefit of the doubt.
They just don't know! And you won't either...
if you don't have a tracking system in place.
So far, the only profit I could see was what that marketer was making.
It is only when you know your numbers and know your profit margins that you can intelligently visit with those marketers that knock on your door.
You owe it to yourself and your business to know exactly what acquisition cost you can afford in order to profit from the work or service you provide.
And when you have an effective lead, sales and marketing tracking system in place, you can be confident that you know exactly what you are talking about.
As we always say, WINNERS KNOW THEIR NUMBERS! P.
S.
There are things that could have been done to lower that acquisition cost while spending the same amount of money.
Think on that one...
until next time!
Source...