Cost of customer acquisition (COCA), component of unit economics, is a number that a lot of people may be more familiar with than customer lifetime value, which is a more difficult calculation. How to determine cost of customer acquisition is not complex. It is funny that that people have different ideas about COCA and what it means. COCA is defined as all expenses for sales and marketing, divided by the total number of new customers.
It’s not near as complex number is customer lifetime value; all expenses for sales and marketing, divided by the total number of new customers. Let’s break that down a little bit further, there’s a wrong way to calculate COCA and there’s a right way to calculate coca or an easier way.
Wrong Way to Calculate COCA
Bottom up approach
The wrong way, the difficult way would be from a bottom up approach:
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Factoring in all the costs (and receipts) to make a sale
To factor in all costs to make a sale by using receipts and numbers. If you are traveling out to visit with somebody, you take your mileage. If you have a lunch, you bring the receipt back and you use every single receipt all day long, every day of the week, all year long. You total those up.
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Salary plus benefits
You use all salary plus benefits. A lot of people don’t add in the loaded rates of salary and with benefits. We have to add in all of that salary that deals with sales, and marketing.
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All the itemized costs
All the itemized costs that go along with that, not just the receipts, but the phones used by the salespeople, the supplies used by the salespeople, all of your internet sales related costs. This is not your internet website but if you’re doing Google AdWords or Facebook boost ads, all these things you’re paying for sale.
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Associated expenses
Factoring in all the costs to deal with all the labor involved. All secretaries that may be helping the sales people and all of these associated expenses.
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Very laborious, tedious, detailed and painfully difficult
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End up with a fraction of what the actual cost is for all your sales and marketing.
Right Way to Calculate COCA
A better way to calculate coca would be to do it from a top down approach, and do it on an annual basis.
Top down approach
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Aggregate all expenses over a period of time then divide by total number of new customers over that time period.
Your accountant has categories in your budget; they put all of these expenses together and track them over a period of time. Every year you have all of this material that’s aggregated by your account. Work with your accountant and pull out the categories dealing with sales and marketing; the staff that’s loaded rates for your sales and marketing staff; the percent of your office over the period of a whole year that goes to sales and marketing; your phone bills and travel expenses.
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Do over 3 time periods depending on the life cycle of your product.
It’s a lot easier to aggregate it on an annual basis and you may want to break that down into a few timeframes. Year one, as you’re starting up, year two and three as you get really up and running; years four and five as you hit some kind of a stable medium.
The right way to calculate COCA is to do it on an annual basis versus trying to capture all the receipts for every day’s worth of activities.
How to decrease the cost of customer acquisition
How to determine cost of customer acquisition involves understanding how to decrease cost of customer acquisition. How do we decrease the cost of customer acquisition, sometimes also known as customer acquisition cost CAC, which is what you want to do. You want to get new customers as cost effectively as possible.
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Sales staff effectiveness
One of the ways is to use sales staff very effectively. Remember, your most expensive budget in your sales and marketing is your staff unless you’re doing TV ads that can cost you a million dollars. Your sales people are your most expensive expense when it comes to sales and marketing costs. Use them very carefully and wisely.
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Word of mouth
Increase every way you can word of mouth. Word of mouth is the least expensive form of sales and marketing and the most effective form simultaneously. How can you increase word of mouth?
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Internet inbound marketing
Increase internet inbound marketing. In outbound marketing techniques you have sales staff pushing materials out, and you’re trying to tell people what to buy and where. You want inbound marketing because it is cheaper than sales staff.
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Improve conversion rates
Improving the conversion rates in your sales funnel is a great way to keep decreasing cost of customer acquisition because if you close more customers, the cost per customer goes down. You want to improve the conversion rates.
- Automating increasing touchless conversion is very helpful.
For example, having a Frequently Asked Questions section on your website, where people are going to object or have issues and concerns put up questions that already answer those. You’re actually continuing to move people through the sales funnel, without having to have human touch because sales people human touch is very expensive.
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Hot leads, shorter sales cycles
Having hot leads is very valuable because they close faster than cold leads. Hot leads have a shorter sales cycle. Finding a great source of hot leads is very valuable.
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Channels and Distributors
Then lastly channels and distributors can help reduce the cost of customer acquisition but remember, at the same time, your profit margins lower and you may not be able to touch the customer.
How to increase the cost of customer acquisition
How to determine cost of customer acquisition involves understanding how cost of customer acquisition increases. How do we increase the cost of customer acquisition? What kind of things impact us that would make those costs go up?
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Lots of staff, field sales
A lot of sales staff, or to do a lot of Field Sales is the most expensive form of marketing. You will have higher cost, because not only are do they have travel costs but it takes time to travel and time equals money.
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Outbound marketing
Outbound marketing is more expensive than inbound marketing. It takes sales staff to do outbound marketing,
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Lots of cold leads
Cold leads to take longer to close increasing your cost of customer acquisition.
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Longer sales cycle
The longer the sales cycle is, the more expensive it is to get a customer.
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Customized solutions
Creating a customized solution involves market segmentation, and identifying a very specific targeted market beachhead so that we can create a very customized solution. If we start serving multiple beachheads and many different kinds of end users, we have to create a customized solution for every customer, that’s expensive. It takes more time and resources; your cost of customer acquisition goes up.
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Decision Making Unit Changes
Changes in the decision making unit when dealing with b2b, it’s more complex. Even with business to consumer it can be. But if the decision makers change and in many companies that may happen in every of two to three years you may have to start over building the relationship and getting that customer and so that lengthens the sale and increases the COCA.
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Ignore bad word of mouth
If you have bad word of mouth now customers move slower and again time equal money.
Common COCA Mistakes
Here are some final thoughts on cost of customer acquisition and common mistakes.
- Not including All costs that go into sales and marketing
- Underestimating cost of personnel
Including the idea of loaded salary; it’s not just the salary, it’s all the benefits that go with it and under estimating that cost of the fully burdened personnel.
- Long sales cycles that cost time and money
You may not see the long sales cycle time as an impact cost to COCA, but the faster you can close a customer the more time you have to spend with other customers and actually the number of customers you close goes up, which drops the cost of customer acquisition overall.
- Focusing on cold leads or customers who won’t buy
Focusing on cold leads or customers who aren’t going to buy is going to increase your cost of customer acquisition. Think strongly, how can you get hot leads, even warm leads, but cold leads will take the longest to close. There are those anti persona people that just want to suck up your time and they never plan on buying and if you can identify those, steer clear of them.
- Corporate shakeups that can impact the decision making unit and that will impact how fast you can close the deal.
- Overestimate sales productivity
Lastly, and this is a common one, overestimating sales productivity, you project that you can do a lot of sales and it’s a lot harder and takes a lot longer than you think. So those are some things dealing with the cost of customer acquisition.
Conclusion
How to determine cost of customer acquisition involves calculating it using the top down approach where you aggregate all expenses over a period of time then divide by total number of new customers over that time period. This is better than the bottom up approach which is very laborious, tedious and painfully difficult.