Cost of Acquisition

What Is the Cost of Acquisition?

The cost of acquisition is the total expense incurred by a business in acquiring a new client or purchasing an asset. An accountant will list a company's cost of acquisition as the total after any discounts are added and any closing costs are deducted. However, any sales tax paid is not included in this line item.

The term cost of acquisition is used for accounting purposes and in business sales.

Key Takeaways

  • Cost of acquisition is the total of expenses incurred when a business acquires a new client or a new asset.
  • In accounting, the cost of acquisition is a line item that includes all expenses related to buying and deploying an asset except for any sales taxes.
  • In sales and marketing, the cost of acquisition includes all the costs of acquiring new customers.

Understanding the Cost of Acquisition

As an accounting term, the cost of acquisition includes all upfront costs incurred when purchasing a business asset such as equipment or inventory. The figure includes the following:

  • Purchase price of the item
  • Costs to ship it to its point of use
  • Costs to install the item
  • Costs to get it up and running (in the case of equipment) or ready for sale (in the case of inventory) condition

The business normally adds in other expenses like closing costs, customs and fees, testing, and other miscellaneous expenses when calculating the cost of acquisition. Any discounts are reflected in this line item. However, taxes are not included.

Cost of Acquisition in Sales

As a business sales term, the cost of acquisition includes expenses related to marketing such as promotional materials, travel by salespeople, and sales commissions. The cost is tied to marketing and sales because the more streamlined those campaigns become, the lower the cost of acquisition will be for each customer.

In sales, the average cost of acquisition per sale may be relatively high. It is a standard rule of thumb in business that it costs more to sign a new client than to retain a current one.

Special Considerations

Knowing the costs of acquisition is crucial for a company in measuring the success of an initiative or a new product. That's why the figure is comprehensive in including all related expenses (except sales taxes).

Certain industries such as cable and telecommunications commonly have high costs of acquisition.

The figure is also used to help companies plan for the future. The costs are considered in determining whether to launch a sales promotion or other incentives for new customers. They are also used to plan budgets and determine how to allocate money.

How Investors Use Cost of Acquisition

Investors who read financial statements may take a great interest in a company's cost of acquisition, particularly if that number is unusually high or low.

Cable and telecommunications companies, for example, generally have high costs of acquisition. They have to spend a lot of money on marketing and promotions in order to acquire new customers. This is especially true in competitive markets where consumers have a choice.

Contract buyouts from competing cable companies and offers of family plans for wireless customers are among the promotions that companies in this industry use to attract new customers. These are expensive examples of costs of acquisition.

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