Cost of Acquisition: What it Means, How to Use in Investing

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 or transaction costs are deducted.

Cost of acquisition, which is also referred to as acquisition cost, is used for accounting purposes and in business sales.

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. It 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, and other miscellaneous expenses when calculating the cost of acquisition. Any discounts are also reflected in this line item.

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.

What Cost of Acquisition Can Tell You

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.

Managers also use the figure 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.

For example, cable companies, telecommunications companies, and subscription streaming services 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.

The Bottom Line

In accounting, the cost of acquisition reflects all the costs related to buying an asset, such as equipment or a competitor. In the context of sales and marketing, cost of acquisition is used to determine all of the costs related to acquiring new customers. In either scenario, knowing the cost of acquisition helps companies plan for the future and allocate money.