Customer acquisition cost is the amount of money spent to acquire new merchant services clients. It can provide a lot of insight into the best way for ISOs and agents to spend their time and dollars on attracting new customers.
So, what is a reasonable customer acquisition cost when it comes to merchant services?
Well, like just about everything else in this world, it depends. But fortunately, with a little math, we can get closer to an answer for your specific situation.
First, you have to know your customer lifetime value. This is the amount you’ve earned for a single client over the course of your entire relationship with them. You can use averages here over a payments portfolio of business, but we’d highly recommend breaking these out based on similar merchant types since the margins can vary so widely.
You won’t earn the same amount on a restaurant client as you do on a B2B client, nor will you earn the same amount from a cash discount portfolio as you will an interchange plus one. The more specific you can get in your grouping, the more accurate you can be.
Now, subtract any direct costs of acquiring a single merchant account. If you always provide free equipment, use the typical amount you’d spend on a merchant in this type of portfolio. Again, more specific grouping leads to better results. A restaurant would need an expensive POS while a B2B client needs no equipment at all. If you provide an upfront signing bonus to agents, factor this in, too.
Next, we have to estimate what it costs us to support this business. I would recommend you come up with an operating expense % to apply. Take your operating expenses from your P&L and divide that total by your total residual income. Use amounts over an entire year to account for the cyclical nature of our business. Apply this percentage to the customer lifetime value.
For the sake of example:
Customer lifetime value: $2000 (100 months @ $20/month)
Upfront cost: $500 ($300 in equipment & $200 agent signing bonus)
Overhead applied: 10% ~ $200
We could spend up to $1300 in customer acquisition costs and break-even, but let’s be real, NO ONE WANTS TO WORK FOR FREE.
And we should also plan for a little wiggle room for the unknown and unexpected.
So, a good starting point is 25-50% of this amount. Then you can adjust according to the trends and your comfort level.
Sometimes it can be hard to see money fly out the door on sales and marketing, but as long as you do the math and see positive ROI, you can increase your spend to drive more sales, and ultimately, more margin.