Do you know what your new business acquisition costs are?

Growth | April 23, 2019
Adam Hooley

Each business has a strategy or priority when it comes to new business aspirations. Smaller companies often grow organically through referrals and local branding, while larger firms spend much of their time fending off natural attrition before they can even get runs on the board. What is important though, is to know exactly what you are willing to contribute to growth. To do this, you need to know how much capital you are sinking into each door. This is called the acquisition cost.

The acquisition costs are calculated by simply isolating all of your new business salaries, commission payments, support staff, and marketing costs separately into your profit and losses. You can prorata it manually, but that does take a heap of work and may involve a bottle of wine and a late night. You then calculate your gross growth or new doors into the business over the past 12 months, or whatever period you wish to calculate, and divide this into the total costs.

Now there has been some debate in the past around whether you should calculate this on net growth or gross growth... There was no bloodshed, but it has sparked some heated conversations in the past. I like to use gross doors for two reasons. Firstly, you want a true understanding of what financial effort is required to bring in a new door, so you can budget and benchmark over time. Secondly, attrition is a separate and more complex problem to solve, and I don’t think you are doing the business any favours if you dump lost business into the growth budget and call it quits.

Each business will have a dollar value in mind for the cost of a new door, regardless of whether they have been tracking it in the past or not. When I speak to business owners, I ask them how much they would pay for the new business. Bearing in mind, many are happy to go out and buy managements off the shelf, so I imagine the figure is somewhere between zero and market value. If you are in growth mode and your priority is to build your asset, then the cost of acquisition may be high, 50-60% of market value. If you are more cash focused and not striving for substantial growth, you may consider it to be 10-20% of the market price.

A business must have an understanding of what each door costs to bring into the company.

It means being able to benchmark these costs year on year. As a business owner, this allows you to set a budget for marketing, commission payments, forecast staff numbers and so on. Growth itself is a game of science, let's at least know how much we are spending on this science project.

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