Understanding Customer Acquisition Cost

Where do your customers come from? It’s an interesting question, really. Most contractors generally say the same things–a combination of word-of-mouth, drive-bys, Angi/Thumbtack, web, social media, and lead companies. But what’s interesting about those responses is that they rarely know exactly how much business they get from each area. As long as the revenues keep coming in, they’re good.

And that’s a problem.

What if 70% of your customers came from a lead management company, but the cost per customer was 400% higher than a referral? Or if too many leads came in from Google search ads and you’re paying $70 per click, most of those clicks don’t turn into customers. Or what if your average margin on a social media lead is lower because those customers are quoting many people against each other?

Wouldn’t those facts be good to know? You want the most customers you can reasonably execute for, but you also want the most profitable customers coming in for the lowest cost to acquire them. After all, this is not just about revenue; it’s about profit.

Here are four fundamentals to consider:

  • Track the source: You should measure each area you acquire business separately, starting with tracking where the business originates.
  • Understand the real cost of the source: Drive-bys, for example, are unlikely to work without signage (truck, yard, etc.). It’s a low-cost and effective ad method, but you should include it in the cost of customer acquisition. Making sure you factor in all the expense factors (even in the indirect ones like your time) is important.
  • Develop goals and measure against them: What is the cost of customer acquisition you feel comfortable with? Benchmarks preserve profitability and keep your growth strategies accountable.
  • Try new things: There is NO MAGIC FORMULA for growth. If there was, everyone would do it, and every pretty good contractor would be a multi-millionaire without help. Success and lowering the cost of customer acquisition requires trying many things and finding the right mix for your company.

An interesting stat and story about ‘word-of-mouth’:

Word-of-mouth is the best form of customer acquisition and costs almost nothing. But it’s a limited way to grow because only about 60% of VERY HAPPY customers will tell a friend about you. Here’s the insane thing, only 37% of contractors ask for referrals. A tree service company in the northeast got tired of playing the Google game and offered a $200 Visa gift card for any customer that referred a friend. They tripled business in 19 months and lowered customer acquisition costs by over $24,000 annually.

It turns out that asking for help from people you’ve made happy is a good thing.

If you need help with insights or a model to do this, we have a facebook group (which some of you may have come from to read this) that we invite you to join. No sales pitches, just building a community of contractors where we can all discuss and share financial best practices, tips and tools to help you become a multi-million dollar contractor.

Check out the group here, and if you have any questions about developing a real plan to acquire customers at a cost that makes sense, give us a call. Sadoff can help.

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