For
information technology professionals, the concept of customer
acquisition costs might sound straightforward. But in the New
Economy, it can be as bewildering as entering the twilight zone,
thanks to all the nuances of online customers.
For example, what is a customer? On the surface, it appears to be
an easy thing to define. But if your company runs a Web site that
generates revenue purely by bringing in eyeballs to view banner ads,
then a customer might be somebody who registers at the site rather
than a casual browser, says Nicole Vanderbilt, an analyst at Jupiter
Communications Inc. in New York.
In contrast, online retailers prefer to think of a customer as
somebody who actually spends money, Vanderbilt says.
"Companies must define customers on their own terms using
criteria that drive their business goals," she said in a recent
report.
According to officials at San Jose-based Shop.org, a trade
association of online retailers, customer acquisition costs are the
amount of money spent on marketing that has been dedicated to
customer acquisition, including general brand-awareness efforts such
as posting a company logo on every highway billboard from New Jersey
to Nebraska.
Shop.org uses The Boston Consulting Group to study online
retailing trends. These include customer acquisition costs, the
salaries being commanded by marketing personnel and IT improvements
and maintenance that improve site navigation, says Julie Breen, an
analyst at the Boston-based consulting firm.
Shop.org doesn't include discounts on products that lure new
customers or free delivery when calculating customer acquisition
costs, Breen says.
Customer acquisition costs are much higher for pure-play Internet
retailers ($82 per customer) than for brick-and-mortar retailers
that sell across multiple channels ($31 per customer), according to
a survey of 221 retailers conducted by Shop.org.
Double-Digital Inflation
Online customer acquisition costs may continue to rise in the
short term, Breen says. However, she adds, those costs should
eventually drop as online companies become more recognized by
buyers.
In general, pure-play Internet retailers will spend 20% to 40%
more than retailers with physical stores to acquire customers,
according to a recent study by Bain & Co. in Boston.
Online grocers such as Webvan Group Inc. in San Francisco appear
to spend the most among electronic retailers to acquire customers,
averaging $84 per customer, compared with $53 for online apparel
retailers, Bain reports.
Nevertheless, Vanderbilt says she believes that most current
methods for deriving customer acquisition costs are flawed. For
example, some analysts simply divide the number of dollars spent by
a company per quarter on advertising and marketing by the number of
customers attained during that period.
However, Vanderbilt says, that method fails to account for
previous efforts to acquire customers and is "too short a snapshot"
for determining customer acquisition costs. She adds that it's both
wrong and naive for a company to count a targeted e-mail campaign as
a specific avenue for attracting new customers, because it's
possible that general brand-awareness efforts may have also had an
impact.
Vanderbilt says companies should attribute at least part of their
acquisition costs to customer retention. In addition, companies
should include the various methods they use beyond advertising and
marketing when calculating the costs of attracting customers,
including product discounts and free delivery costs, she says.
Jupiter analysts also note that relying on customer acquisition
costs to judge the performance of an online company can be
misleading. For instance, when a particular market, such as online
pet stores, is flooded with companies, that will typically drive up
the costs of acquiring new customers.
Those costs will vary depending on how difficult it is to land a
customer. For example, buying a book over the Web is easier than
opening an online stock-trading account, which helps explain why it
may cost an online bookseller only $30 to acquire each customer but
it may cost an online broker up to $400 to acquire a stock trading
customer, Jupiter says.
The Nasdaq Effect
The downturn in dot-com stocks throughout the first half of this
year is likely to have a negative impact on the amount of money
online companies spend trying to acquire new customers, says Lynne
Harvey, an analyst at the Patricia Seybold Group in Boston.
Harvey says online retailers need to examine the broader question
of whether customer acquisition costs are leading to profitable
customers - meaning people who spend more on products and services
than it costs a company to attain them.
"Many customers purchase once and not again," Harvey says.
"Sometimes, [the] IT costs to enhance a Web site and [the] other
costs to acquire an individual customer are so high that the value
is negative. Some retailers don't even call a customer 'a customer'
until he or she has purchased twice in a year."
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