Calculating Acquisition Equity

A simple example will illustrate the calculation of Acquisition Equity. Firm A's sales department began the process by obtaining data from its sales tracking system about prospects targeted in 1995. Interactions with these prospects occurred over a one-year period, after which the firm no longer considered them prospects.

	Step 1:	Determine the number of prospects contacted over a fixed time period from a cohort that is no longer likely to purchase for the first time. In this example, there were 10,000 prospects over a one-year period.
	Step 2:	Measure the marketing and servicing costs associated with contacting and selling to the prospects. The firm determined that the sales organization made 20,000 sales calls over the "life" of the prospects, at an average cost of $50.00 per sales call. Additionally, direct-mail materials cost $0.50 per prospect. Incremental administrative expenses associated with prospects were $200,000. The total cost of contacting prospects thus came to $1,205,000 (1,205,000 = 20,000*50 + 10,000*50 + 200,000).
	Step 3:	Determine the number of prospects who became customers. Of the 10,000 prospects, 1,000 became customers. This equates to an acquisition response rate of .1, or 10 percent (10,000/1,000 = 0.1).
	Step 4:	Compute the sales revenue and gross margin for the new customers' first set of purchases. On average a customer purchases $1,750 per period at a gross margin of 35 percent, yielding a net profit of $612.50 per initial purchase per customer. Multiplied by 1,000 customers, this comes to a total net profit of $612,500 on first purchases.
	Step 5:	Compute the acquisition equity of the entire pool of customers. The profit was $612,500 (Step 4) and the acquisition costs (Step 2) were $1,205,000. The acquisition equity equals $612,500 - $1,205,000 = ($592,500).
	Step 6:	Divide the total acquisition equity by the number of customers to determine the acquisition equity per customer. The net loss was ($592,500) for 1,000 customers, which comes to a net loss of $592.50 per customer acquired.