Calculating Your Client Acquisition Costs: How to optimize 8 key components

Acquiring new clients needs to be the lifeblood of every growth-focused advisory business. Sure, M&A deals tend to garner the lion’s share of media attention, but most of the best-run firms place far more emphasis and effort on driving growth organically. Given this decade-long bull market, however, firm growth via market appreciation has been so steady that many firms have slacked off on their client acquisition efforts.

Take a few minutes to calculate your firm’s actual organic growth:

OG= total growth – (capital market growth + growth derived from acquisition)

So many firms in our industry are surprised how little genuine organic growth they’ve experienced over the past few years when they actually run the numbers. This is one of the key reasons why competition for wealthy clients has begun to steadily intensify.

There are many good reasons for you and your leadership team to focus on organic growth, but here are just a few to consider.

Enhances Enterprise Value:
Organic growth directly contributes to increasing your firm’s enterprise value by reflecting its ability to expand revenue and profits through internal operations. This growth is often seen as a sign of a robust and sustainable business, making your firm more valuable and attractive to potential buyers or investors. After all, at some point, as an entrepreneur, you will want a buyer for your firm's shares, and at the right price.

Attracts Next-Generation Owners and Investors:
Companies that demonstrate consistent organic growth are more appealing to next-generation owners and investors. This is because organic growth indicates a stable and scalable business model, reducing the risks associated with external growth strategies like acquisitions. It also shows that the company is well-positioned for future success, making it an attractive investment. High performers and top talent are always attracted to firms that are in growth mode.

Enables Reinvestment for Competitiveness:
Organic growth generates the capital needed for owners to reinvest in the business. This reinvestment allows firms to remain competitive by upgrading technology, investing in top talent, and delivering the very best advice to clients. By continually investing in these areas, your firm will be better equipped to meet client needs and sustain a leading position in the market.

So, as you reflect on your firm’s organic growth, it’s never been more critical to ensure that your firm’s marketing and new client acquisition efforts are cost-effective and able to generate a sustainable growth trajectory for the business.

What is client acquisition cost (CAC)?

One effective approach to achieving this is actively managing your client acquisition cost (CAC). But unlike your firm’s compound annual growth rate (CAGR), which has a universally accepted formula and some general target benchmarks (which I tend to take exception to for being overly simplistic—but that’s a topic for another time), there are no hard and fast rules around what your acquisition costs should be.

CAC is the total cost of acquiring new clients for a specific period (including all marketing and sales expenses) divided by the total number of new clients acquired during the same period. The formula for calculating your firm’s CAC is simple and straight-forward:

CAC = total client acquisition costs ÷ total # of new clients acquired

What’s especially challenging is that CACs can vary widely based on the size of your firm, the types and wealth levels of the clients you’re seeking to attract, the geographic location of your business, and a host of other factors. So an appropriate CAC for one advisory firm may be vastly different than the CAC for another firm.

So, where do you begin? Start by adding up your total acquisition costs. By way of example, let’s say you’re running a mid- to large-sized $700 million AUM advisory firm with ~400 clients. Given those parameters, you might reasonably expect to incur the following annual expenditures:

• Marketing and advertising: $100,000
• Sales and business development: $150,000
• Referral program: $25,000
• Events and seminars: $50,000
• Technical and software: $30,000
• Content creation: $20,000
• Overhead: $25,000
• Branding and PR: $10,000

This would result in $410,000 in total client acquisition costs. Assuming your firm was able to successfully acquire 100 new clients over the course of the year, your CAC would therefore be $4,140 per client ($410,000 ÷ 100).

 Understanding the components that make up your CAC

To get a truly accurate estimate of your CAC, you’ll need to factor several components into each of these eight core expense categories.

1. Under “Marketing and Advertising Expenses” include:
   1. Digital advertising (including costs for online ads on platforms like Google, Facebook, and LinkedIn)
   2. Traditional advertising in print media, radio, TV, and/or billboards
   3. Content marketing (e.g., blogs, videos, podcast creation, and distribution)
   4. SEO and website maintenance to help ensure your website ranks well on search engines

2. Under “Sales and Business Development Expenses” capture:
   1. Sales staff compensation, including salaries, commissions, bonuses, and incentives
   2. Travel and entertainment expenses for client meetings, events, and associated networking costs
   3. Acquisition of any tools designed to streamline and assist the sales process, such as CRM software

3. Add all “Referral Program Costs” such as:
   1. Any referral incentives/rewards for existing clients who refer new clients
   2. Incentives for referrals from professional partnerships (i.e., accountants, attorneys, and other professionals)

4. For “Event and Seminar Costs” include:
   1. Hosting educational seminars and webinars to attract potential clients
   2. Participation and/or sponsorship of relevant industry conferences and events

5. Under “Technical and Software Costs,” factor in:
   1. Financial planning software that allows you to design and implement comprehensive financial plans for your clients
   2. Other technologies/platforms that broaden your solutions or streamline your operations

6. For “Content Creation and Distribution Costs” include expenses related to:
   1. Creating whitepapers, e-books, or other downloadable content to help generate leads
   2. Email marketing campaigns

7. Factor in relevant “Overhead Costs” including:
   1. A percentage of rent and utilities allocated to marketing and sales activities
   2. Administrative staffing to support marketing and sales efforts

8. Include “Branding and Public Relations Costs” such as:
   1. Media relations and PR campaigns
   2. Other efforts to build and maintain a strong brand presence

Here are a few tips to help optimize your CAC

Obviously, your goal should be to actively invest in client acquisition – but always with an eye on getting the most bang for your buck. A few ways you can help optimize these expenditures are by:

• Leveraging data analytics – using data to track the performance of specific marketing channels and campaigns and subsequently focusing on those channels that provide the highest ROI.
• Enhancing your digital presence – by investing in SEO to improve organic search rankings and utilizing social media platforms for targeted advertising and client engagement.
• Developing high-quality content – that addresses the key pain points of your target audience(s) and uses targeted content to nurture leads through the sales funnel.
• Strengthening the firm’s referral programs – by offering more attractive incentives for clients who refer new clients and by partnering with other elite professionals for mutual referrals.
• Institutionalizing your sales processes – by training the business development team to be more effective in converting leads and leveraging CRM tools to streamline the process and improve follow-up.

Sustainably growing your business starts with understanding and optimizing client acquisition costs (CAC). Carefully tracking and analyzing your CAC and leveraging insights from industry experts like Mark Hurley, Michael Kitces, and John Furey will help you develop targeted strategies to attract and retain clients more efficiently, ultimately driving long-term growth and enhancing your firm’s overall value.

The key is to strike the right balance of marketing investments, client experience enhancements, and continuous refining of acquisition strategies to stay competitive as our industry evolves. Rest assured, the opportunity for new clients over the next decade and the rise in competition for high-value clients will only grow. Make certain your firm is well-positioned to grow organically. When you know your numbers, specifically your CAC, you will likely find how important it is to grow and how much you’ll want to invest in your growing enterprise. After all, growing organically and increasing the number of new clients your firm can serve expands your impact and truly makes a difference in the lives of many.

Coaching Questions

1. How will your firm improve how it measures and calculates your client acquisition costs (CAC)?
2. What strategies will your firm implement to optimize client acquisition costs while attracting high-value clients in the coming years?
3. In what ways can you and your leadership team refine your client acquisition approach to ensure sustainable growth and increased enterprise value over the next decade?
4. How does your firm measure your organic growth rate?

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