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Summary:

Editor’s Note: Contributor and serial founder Aruni Gunasegaram has written recently about her experiences fundraising for her current startup, BabbleSoft, in My Funding Toolkit and A Founder’s Tale: Angels vs. VCs. Today Aruni shares with us her insights on another major founder’s challenge: the cost of […]

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Editor’s Note: Contributor and serial founder Aruni Gunasegaram has written recently about her experiences fundraising for her current startup, BabbleSoft, in My Funding Toolkit and A Founder’s Tale: Angels vs. VCs. Today Aruni shares with us her insights on another major founder’s challenge: the cost of acquiring customers.

One of the interesting things about fundraising is the different perspectives you get from potential investors. If they spend enough time to really understand what you are trying to do, they offer great feedback, suggestions, and advice. They also sometimes ask a tough question or two.

I officially started the fundraising process a couple of weeks ago and have had a couple of meetings and a few more set up in the coming weeks. Since many of these angel investors are really busy, getting on their calendar can take weeks!

One question I was asked had to do with the cost of customer acquisition. It’s so hard to tell what that might be, given the uncertainty and newness of many business concepts out there (including mine) today. I searched and searched and oddly only found very dated ancient info (i.e., 1999 – 2001) figures for sites like Amazon.com. At a high-level, the cost of customer acquisition is how much it costs to get a customer/visitor to your site.

My guess is for sites with successful viral uptake like facebook the cost is in the cents (i.e. [total marketing and some R&D costs]/number of unique visitors). On the other hand I’ve heard that customer acquisition costs for companies like Vonage are in the hundreds of dollars. Anyone who has seen their mailers and expensive TV commercials can see why that number is so high. Last I heard I think it takes them at least 2 years to break-even on each customer they get.

I even had the MBA student who helped me create the financial model search his resources and no such luck. I would be happy to get information on even what the amount that a magazine like O Magazine or Pregnancy Magazine spends getting one customer to sign up. You’d think that as much has been written about facebook, that their cost per visitor would be somewhere on the Internet, but for some strange reason that information is not readily available. Go figure!

In my quest, I happened upon the following links that might be useful for any other entrepreneurs looking for the same information.

Calculating Customer Acquisition Costs (an online calculator)

Customer Retention and Acquisition
(definition and 1999 info on Amazon.com)

On Measuring The Cost of Customer Acquisition (a 1999 Entrepreneur.com article)

There may not be a satisfactory answer (or more likely I don’t have access to the money or resources to help me find it) but at least being aware that there could be an answer is probably not a bad thing. I ended up backing into some numbers using the information in our financial model which to me, the ever optimistic entrepreneur, seemed reasonable enough.

For more of Aruni’s posts, including the original texts for all her Found|READ contributions, see her founder’s blog, entrepreMusings.

  1. Um, just sign up for a CPA network like commission junction and linkshare.

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  2. this would be good little calculator tool to have and i’m surprised there is not better info on the subject. I recently was searching for the same data and didn’t find much.

    BTW: I didn’t find much value in the online calculator link above – but its better than nothing.

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  3. If you need people to sign up and pay for something, an reasonable average to plan for is 10 to 20 US$ per customer – I’ve heard that from websites in different industries.

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  4. Backing into the number is a perfectly reasonable approach for start-up and the one I have used for the last two companies I helped start. In backing into the number take into account things like customer lifetime (and thus lifetime value), amortization of development and operations infrastructure, direct and indirect marketing and sales (with reasonable conversion rates applied), etc. and, assuming your customer estiamtes are not wildly optimistic you should end up with a number that (gut check) makes sense….BTW – this exercise is also really useful for testing your customer number projections – CCA too high then you need to examine the numbers, too low and you may be being too optimistic!

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  5. @Hasan – I agree with you on the calculator and it is amazing that there isn’t more out there.

    @Peter – thanks for the info. I’m curious how the mix would be between a visitor ad-based driven site as well as a conversion site like Amazon.

    @Warrick – great advice! The problem is finding comparable CCA numbers to check your gut on the reasonableness of the estimates.

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  7. Peter – or anybody -

    Is there any more info or reference about what would be an expected cost per new paying customer? All I’ve found were 1998-2001 examples.. Amazon, Priceline. Things are so different now.

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  8. Did anyone find anything? It seems like there is a lot of speculation but very few hard figures. I’m moving into the marketing arena, and would love to have some actual FACTS that I could present to potential customers.

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