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Attracting new customers is not free. Want to know how "not free" it is? Here's a simple way to calculate your cost of acquiring new customers (use the numbers for your last month or the same month the previous year):

(Total amount of advertising spent + payroll dedicated to pure sales staff) / # of new customers

Let's take a real-world example (once again using the micro-gym business I am most familiar with):

If my gym spent $1,500 on advertising last month.

My staff (which fulfills many roles other than sales), spent 38 hours giving membership tours last month at an average payroll rate of $9.50/hour, so my sales payroll was $361.

That would make my total Acquisition cost $1,861 for the month.

We signed up 27 new members.

So, our cost of acquisition is $68.93/new member.

In a service-based industry like ours, you also have to be aware of how many customers you're losing. In the example above, we lost 15 members last month. As a result our net gain was only 12 new members. That changes our cost of acquisition to $155.08/new member.

Basically, for every member you lose, you have to pay to replace them with another member. 

That is what I want each of my employees to think about during customer interactions. "Should I give the a month free ($34.95) to keep this member happy?" Well, considering it would cost us $155.08 to replace this member, a $34.95 credit is probably not a bad idea.

The takeaway is how important it is for you to know your cost of acquisition. If it only costs you $15 to acquire a new member, then a $34.95 credit is probably excessive, but, if you don't know your cost of acquisition, it's difficult to make accurate decisions about the value of maintaining your current customer base.

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