You can't manage what you don't measure.
http://www.forentrepreneurs.com/startup-killer/
- Cost to Acquire Customers (CAC)
- The ability to monetize those customers, or LTV (which stands for Lifetime Value of a Customer)
Successful web businesses have long understood these metrics as they have such an easy way to measure them. However there is a lot of value in looking at these same metrics for all other businesses.
To compute the cost to acquire a customer, CAC, you would take your entire cost of sales and marketing over a given period, including salaries and other headcount related expenses, and divide it by the number of customers that you acquired in that period. (In pure web businesses where the headcount doesn’t need to grow as customer acquisition scales, it is also very useful to look customer acquisition costs without the headcount costs.)
To compute the Lifetime Value of a Customer, LTV, you would look at the Gross Margin that you would expect to make from that customer over the lifetime of your relationship. Gross Margin should take into consideration any support, installation, and servicing costs.
CAC calculations
For example, if you are using Google Ad Words to drive traffic to your site, take a look at the following interactive spreadsheet. This example shows a cost per click of 50 cents, and the resulting website visitors converting to a trial at the rate of 5%. Those trials are then shown converting to paid customers at the rate of 10%. What the sheet shows is that each customer is costing you $100 in just lead generation expense. For many consumer facing web sites, it can be hard to get the consumer to pay more than $100 for the service. And this cost does not factor in the marketing staff, web site costs, etc.
Simple Cost of Customer Acquisition Calculation
Input Variables
Total Web Visitors 10,000
SEM cost per click $0.50
Conversion to trial % 5%
Trial conversion % 10%
No of Sales & Marketing Staff 5
Cost per employee per month $16,500
Flow Qty. Conversion %
Total Paid Web Vistors 10,000
Trials 500 5%
Customers 50 10%
SEM Marketing Spend $5,000
Total Headcount Costs $82,500
Cost of Customer Acquisition
Without headcount costs $100.00
With headcount costs $1,750.00
Direct Field Sales Force Cost
(All numbers are annual)
Sales Sales Eng Inside Sales
Team composition 1 1 0.5
On target earnings $230,000 $140,000 $90,000
Salary Cost $230,000 $140,000 $45,000
Salary + Overhead $310,500 $189,000 $60,750
Total Team Cost $560,250
Avg. team Failure Rate 25%
Adjusted Team Cost $747,000
No. of Marketing people 0.5
Average cost per person $200,000
Marketing Programs Spend $150,000
Total Marketing Costs $350,000
Total Sales & Marketing spend $1,097,000
No of deals per team per year 10
Cost of Customer Acquisition $109,700
Once you have completed the product, you will want to familiarize yourself with all the latest techniques involved in the low cost sales model, or Sales 2.0.
From a funding standpoint, it is useful to know that your ability to raise capital will dramatically improve as soon as you have proven that you have a viable business model. Think of that as two equations:
- CAC < LTV (3x appears to be a rough minimum for SaaS businesses)
- CAC should be recovered in < 12 months (for subscription businesses)
Tool to calcualte your CAC thru your website. http://www.panalysis.com/customer_acquisition_cost/
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