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The True Cost of Customer Acquisition

The True Cost of Customer Acquisition

How much can Customer Acquisition cost you?

How much did it cost you to win your last customer? You don’t know? Then you are like most people in the financial services industry.

While in other industries, especially in tech companies, there are figures and evaluations for everything, financial institutions and freelance investment advisors usually do not keep a record of their customer acquisition costs (CAC). They simply don't know how much money they have spent to acquire a customer or new assets under management. This can be fatal! Because how is one supposed to know whether the customer, won so joyfully, also "paid off"? Or whether you "paid too much for them" and the energy, time and money you spent would have been better invested elsewhere.

The financial industry needs to get out of an intuitively oriented acquisition process. Therefore, we're going to share with you, some know-how and clear rules, in order to increase your assets under management efficiently and purposefully. Be it from the existing clients or with new customers.

Let's take the following task: You want to add 1 million Euro Net New Assets in an asset management, i.e. fresh capital, with a margin of 1% per annum.

In other words, generate an additional 10,000 euros a year.

Then you have three choices:

  • Upselling to existing customers
    This means, that you sell to your existing customers more of the products they already have in the depot you manage, essentially a higher value/cost-intensive version. This form of acquisition is the "simplest". You already know the clients, know their characteristics, have already sold something to them and in the best case have had good experiences with them. In retail, this measure is one of the most important sales strategies. It is even 20 times more successful than Cross-Selling.

  • Cross-selling also to existing customers
    This means that you sell products to your existing clients that are related or a complement of what they already have. For example, you can now sell investment funds to a client who previously only had a fixed-term deposit.
    If you consider that, according to the “Deutsche Bundesbank”, at the end of March 2019 Germans will hoard 2.494 trillion euros in deposits and cash, cross-selling is almost inevitable. These assets offer themselves to be regrouped into more profitable services. To do this, however, you need to know how your clients invest in general. If they have the fixed-term deposit at another bank and you don't know anything about it, you won't address them accordingly in a campaign. Information acquisition, therefore, goes hand in hand with cross-selling.

  • You win a new customer who invests € 1 million with you (or several with smaller investment amounts)
    Compared to the first two this is a more complex strategy. Because here you’re starting from scratch. And in times of data protection and the ban on cold calls, it is even more challenging than before. But with creativity and diligence you can also be successful here.
    For example, with an event, to which you personally invite handpicked targeted customers or a modern marketing campaign. Remember: Even if you win a single new customer at an event for 50 guests, this is success!

Whether this new acquisition was worth the effort becomes apparent only when you compare the costs with the earnings in the aftermath. Which brings us to the second important point, acquisition controlling.

As said, acquisition is unfortunately not really controlled in the financial sector. But there are, numbers, laws and insights from other industries, which are transferable to financial services.

CAC - Customer Acquisition Cost

This figure includes all costs associated with acquisition of customers. So, it’s important to be honest here.

For an event, for example, the costs include not only the catering, but renting the premises, right down the postage for the invitations. In addition, there are the working hours that have gone into researching the location, collecting addresses, the wording of the invitation, etc. that are often not included in the calculation. Not to forget the resources used from other departments.

But how much can a new customer, who invests 1 million Euros in asset management, cost?

10,000 euro. "That's quite a lot!", you might think.

But this figure is quite realistic, as shown in an experiment that we conducted at a recent symposium.

Over 50 participants from the financial service industry were asked, how high they estimate the acquisition costs for the following new client: 1 million euro into the administration of an estate with a gross margin of 1%, giving an annual yield of 10.000 euro.

The span ranged from a few euros up to 50,000 euro. The average value was 9,302 euro, i.e. just under 10,000 euro.

This so-called Jelly Bean Experiment uses the swarm intelligence of a group to find insights. And the truth here is: A new customer like this will cost about 10,000 euro.

Wealthpilot CAC Jelly Bean Experiment

With this figure in mind, we come to the next step in acquisition controlling: the first goal is now to ensure that the Customer Acquisition Cost (CAC) is at least offset by the returns made with this customer over the course of his or her life (Customer Lifetime Value - LTV).

In short: LTV-CAC>=0.

In our example with 1 million assets and 1% margin, the costs have amortized after one year. Not long, if you assume that a client usually stays longer in asset management!

And when was the acquisition a real success?

In the software industry, it is a success if you have earned three times as much as the acquisition cost with that customer, in the course of the customer relationship.

In our example, you should keep the customer with you for three years or earn 30,000 euros from them. This seems quite feasible. That's why our example should make you feel confident!

Let’s briefly summarize those findings:

  • Let's be honest about the costs. Don't forget to list working hours and internal resources used.
  • Check exactly at what point you start earning with a client. To do this, compare the (honest) costs with the revenue. It is good to have earned three times the amount invested.
  • The faster you start making a profit the better. But don't be afraid, to invest higher amounts in acquiring new clients, if they deliver correspondingly high returns.

An example from the Robo Advisor industry illustrates how expensive it is to acquire new customers in the financial sector. As newcomers to the industry, they are completely dependent on new customer acquisition.

A Robo Advisor calculates a marketing budget of 1,000 US$ to win a new customer.

With an average portfolio of $30,000 and a calculated gross margin of 80 basis points, a customer must stay with you for four full years, just to recoup the cost.

And you can only talk about success after twelve years! Very few customers are so loyal to an anonymous service provider.

Nevertheless, the industry leader in Germany was able to collect again 25 million dollars from investors, in 2019. So, they believe in the business model. And that the company will and must be successful in employing up- and cross-selling, referral marketing, and other strategies.

For all who have existing customers, our Robo Advisor example has a message: You are in a better position! Because you already have customers and can grow with them. Unburdened by the high costs of acquiring clients from scratch.

But it also contains the urgent appeal to make more out of what you already have. Because another point of wisdom is: If you earn 5 times as much from a customer as it costs you to acquire them, then you spend too little on acquisition and are missing out on business.

Concentrate on these ideas when doing acquisition on existing customers. Turn at least a part of the 2.5 trillion euros that stagnate as deposits, into profitable assets.

Make sure you also rely on digital offers because these have the advantage of being scalable. In other words, in terms of effort and costs, it makes little difference whether you make a tool available to one, ten or a hundred savers in order to convince them to shift their money around.

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