The total cost recognized in a company's books before the sales taxes and after the adjustments for necessary expenditures, incentives, discounts, and closing costs.
Acquisition Cost Details
In some instances, the acquisition cost may include the amount of money required to buy a business from a company or firm. Acquisition cost can also refer to the efforts put in by a business to acquire a new customer. These efforts are more than time spent at the office, such as meals, business trips, etc.
The acquisition cost is beneficial when it comes to identifying the fixed assets' total cost. The reason for this is because items such as commissions and legal fees are included. Acquisition costs also remove the closings costs and the discounts. It is also useful when comparing the new customers' revenue and determining enticing new customers' expenses.
Another benefit of the acquisition cost compared to other measures is that it gives a realistic cost about its financial statements.
Example of Acquisition Cost
Jumbo is an online company that sells food products. In the last month, Jumbo spent $200,000 on advertising, and during that period, the number of orders that customers placed was 20,000.
To find the customer acquisition cost, you divide the advertising amount spent by the number of orders for the period.
$200,000 / 20,000 orders = $10 customer acquisition cost.
A $10 customer acquisition cost is high, considering an average order is only $25. So after the cost of goods, wages, and acquisition cost, Jumbo is not making very much money. They either need to find a way to increase sales or lower their advertising costs to have a lower customer acquisition cost.
Types of Acquisition Cost
Fixed Asset Acquisition Cost
Whenever other costs get directly linked to the acquisition process, they might also be considered part of the total acquisition cost. Fixed asset acquisition costs might include:
- A questionable asset that requires regulatory and legal fees to finish a transaction.
- Commissions related to the purchase, including those paid to a staffing company for employee placing, a marketing firm for customer acquiring, a real estate agent during property dealings, or even an investment bank for merger brokering.
- Making equipment operational may include calibration, mounting, general installation, and shipping and receiving.
Customer Acquisition Cost
The funds required to introduce a new customer to a business's services to acquire their business or products are known as customer acquisition costs. To calculate the customer acquisition cost, divide the total cost of acquisition by the number of new customers over a specific time or period.
It is necessary to understand customers' acquisition costs because they get used during capital allocations planning for sales discounts or marketing budgets. Customer acquisition has traditionally associated costs, including discounts and incentives, advertising and marketing, contracts with external advertising firms, and other sales staff.
Many express an incentive that might include service upgrades with no additional cost, bill credits, gift cards, deals like buy one and get one free, and free product with purchase. The cellular and wireless industry are mainly known for their high occurrence of promotions. The primary purpose of initiatives like this is to entice new customers and choose the company over the competitors.