Setting Expectations: How much does a customer cost to acquire?

In the past, we’ve discussed setting response rate expectations, and some of the metrics you should use to track your marketing and business in general. Today, we’re going to focus further on one particular metric.

If you ask 99.9% of American small business owners how much they spend to acquire a customer, they’ll either give you a blank look or simply tell you how much they spend on marketing. Knowing your cost to acquire an individual customer is one of the most fundamental business metrics that anybody operating a business should be able to tell you off the top of their head.

The cost to acquire a client is of particular importance to those of us that are professional practitioners. Why? Because a client for us isn’t a one-off transaction. Once we acquire a client, our objective is to keep that client for life, which means that client is providing us with revenue for years on end. There’s a metric for this, also: Lifetime Customer Value.

We are fortunate to be in a business where the investment we make to acquire a client can be quite large, since the payback to us in revenue is quite large, often from the very first transaction. Let’s run some numbers…

Let’s say we send 1,000 postcards to tax lien debtors. These are raw liens, in no way previously contacted by us. Our goal is to convert as many of these 1,000 tax liens into prospects that have actually contacted us.

Out of these 1,000 postcards, let’s say we get a below-average response rate of 0.5%, meaning we now have 5 prospects to work with. If we spent $1 each to send those postcards (about average for mailing lists, design, printing, and postage for “jumbo” postcards), then each lead cost us $200. Now that we have these leads, we obviously need to convert them to clients — this is the turn from marketing to sales, and is an important pivot point we will cover in depth in the future.

If we can then convert 2 of those 5 prospects into paying clients, then our $1,000 investment in marketing turns into $500 to acquire each new client. Since these are tax resolution clients in this example, the initial fee paid by each client will be several thousand dollars, meaning that our ROI per client is 5x to 20x, depending on your fee structure.

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$500 to acquire a client that will pay us thousands now and thousands more in the future is a BARGAIN. This is so important for you as a practitioner to understand that I will repeat it in a different way: You should be willing to spend hundreds of dollars to acquire a client that will pay you thousands of dollars.

Many readers will shudder at the thought of spending $500 to acquire a new client, but for tax and accounting practitioners this number is actually on the low side, especially given the thousands of dollars in Lifetime Customer Value (LCV) that client provides us. Using direct mail, the investment to acquire a client can vary widely, from under $100 to almost $1,000, but $500 per client is a good target to aim for when using direct mail to market tax resolution services.

Look at your existing business, and figure out what it costs you to acquire your clients. I’m sure you’ll be surprised at how much it actually costs you.

A few words on telemarketing: Many tax resolution practitioners that rely on the use of unlicensed telemarketing staff think that it’s the only and best way to conduct their marketing. However, most of these businesses never look at their cost to acquire a client. When you include opener wages, closer commissions (generally 20% to 30%), tax lien lists, and all other costs in acquiring clients, the costs to run telemarketing campaigns often exceeds the cost per client of doing direct mail. For the companies I’ve conducted this analysis for, cost of acquisition per client typically runs in the $700 to $1200 range.

I highly encourage you to conduct this analysis for your own practice. Services with a low sales barrier, such as tax preparation and payroll service, will have a far lower cost per client, which stands to reason since these services have lower price points. Service with higher price points will typically have higher cost per client acquisition, because there is greater sales resistance. Such services in include tax resolution, audit representation, international tax consulting, and business valuation.

You should conduct a client acquisition cost analysis for each service you offer as an entry point for clients into your firm. For most practitioners reading this newsletter, that will include tax preparation and tax resolution – run each cost analysis separately.