What Is the Cost of Acquisition?

The cost of acquisition refers to the total cost incurred when a business takes on a new client, asset, or good. The cost of acquisition is put onto the company's books after any discounts or closing costs, but before any sales tax is added. The term cost of acquisition can be used for accounting purposes or in business sales.

Key Takeaways

  • A cost of acquisition refers to the total cost incurred when a business takes on a new client, asset, or good.
  • In accounting, the cost of acquisition refers to all of the costs incurred when buying a new business asset and is recorded on the company's books inclusive of all discounts and other costs except taxes.
  • In business sales, it includes anything related to marketing and is tied to campaigns.

Understanding Cost of Acquisition

The term cost of acquisition is also referred to as the acquisition cost. As noted above, it reflects the total costs a business spends to take on a new client, purchase a new asset, or add a new item to its inventory.

As an accounting term, the cost of acquisition refers to all of the costs incurred when buying a new business asset such as equipment or inventory. In this case, it includes the following:

  • Purchase price of the item
  • Costs to ship it to its point of use
  • Costs for installing the item
  • Getting it into working (in the case of equipment) or saleable (in the case of inventory) condition

In accounting, the cost of acquiring a new asset is recorded after the company uses any discounts. The business normally adds in other expenses like closing costs, installation, customs and fees, testing, and other expenses when calculating the cost of acquisition. However, this figure doesn't include taxes.

When a company purchases a new asset, the cost of acquisition doesn't include taxes.

As a business sales term, the cost of acquisition includes anything related to marketing like materials and other expenses, visits from salespeople, commissions, and other related expenses. The cost is tied to marketing and sales campaigns because the more streamlined those campaigns become, the lower the customer cost of acquisition will be.

Conversely, in a high-budget marketing and sales campaign, the acquisition cost may be relatively high, depending on how many sales or customers the campaign draws. Since these costs can be quite 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

Costs of acquisition can be helpful for many different reasons. First, they represent more realistic figures when they appear on a company's financial statements compared to figures used from other sources. That's because they factor in all deductions and expenses from the actual costs to the company except taxes.

Secondly, acquisition costs can help companies plan for the future. Firms can use these costs to determine any sales promotions and other incentives for customers—like a buy-one-get-one-free deal. They can also use these figures to set up budgets and to determine where to allocate capital in the future.

Cable and telecommunications companies—including wireless firms—generally spend a lot of money to acquire new customers. This is especially true when these businesses try to woo people away from their competitors. Contract buyouts from competing cable companies and family plans for wireless customers are two popular promotions that many companies advertise to attract new clients. These can be summed up as costs of acquisition.