by Carlos Eduardo Espinal
@cee
A big thank you to Christoph Janz of Point Nine Capital and Juan Cartagena of Traity for feedback and editorial review.
Just as driving with your eyes closed is dangerous to your health, so is acquiring customers without knowing what it costs you to acquire them. Both can lead to disastrous outcomes.
Whilst acquiring new customers is always something to be happy about, it doesn’t mean, however, that you should throw out common sense in how you account for your time and human resource efforts in acquiring them, typically referred to as your CAC (customer acquisition cost). Most startups understand that if they pay Google for advertising, that should be included in my CAC costs, but many other items add up as part of the CAC that are less obvious.
In tldr format: Companies typically under-account for time costs in acquiring a customer; don’t forget to include your staff’s time in your CAC.
Before going any further, I should caveat that this does not mean you need to go nuts on excel getting this perfect to the nth degree. In a pre-product market fit company, you will likely be experimenting on how to sell quite a bit. The point here is to approach things with a rational sense for what can scale and what cannot and doing a back-of-the-envelope calculation on how this might affect your CAC down the road.
Ideally, everything you did in order to get that shiny new customer would be accounted for if you want to get a true snapshot of what that new customer cost you, how much need to charge to cover your costs, and what it might cost to get, say 100 more or 1000+ more similar customers. One tool that we can borrow from the accounting world to help you visualise this, is what is called Activity Based Costing. In the words of Wikipedia: Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing methods. For more reading on ABC click here.
You might feel you have ‘acquired’ your new customer for ‘free’ but when you account the time that it took and some of the additional efforts, you might find that your new user is costing you more to acquire than you are charging them and thus, you are accidentally creating an imbalance in your company’s cashflow and experimenting with a non-scaleable method for customer acquisition.
To help illustrate, let’s walk through a few examples:
A customer that wants to buy your product says they only will pay if you help to integrate your product into their current systems and help them migrate their data from their old systems onto your new one. Because you are a hot-shot coder, you oblige and bang out the necessary code changes quite quickly and import their data into your system’s formatting. Within 6 weeks, you have finalised onboarding this new customer and you are happy as your first pay check comes in… was this truly a ‘free’ customer acquisition process if this is something you plan on implementing as an ongoing way of acquiring customers? How should you account for that time you spent integrating systems and migrating data?
You have a team of 5 people who are in charge of communicating with the outside world via social media and provide them with lots of ideas and communications about your company and its products, because of this, your product gets lots of mentions on the inter webs for a great customer experience. Is this truly a ‘free’ customer acquisition process or do these people act like a quasi-PR / sales team?
If we take an activity based costing mindset when assigning costs to your customer acquisition model, what you will find is that it takes more than just a website and some Google Ads to convert customers into paying customers. It requires the time of people, initially you, but later perhaps sales people or sales engineers to get the deal over the line.
The time you spent helping someone use your software or installing it or deploying it within their network or employees is part of that cost because you will not be the one doing this for the rest of your company’s life. You will likely have to hire someone to do this later.
As a starting point to kickstart your thinking, the following list includes time and/or other items that you may be ignoring as part of your acquisition costs:
- The time you spend on getting people onto your sales pipeline – typically may become the job of a sales person down the road
- The time you spend on Social Media outreach
- The time you spend Networking at Events
- The time you spend converting a customer from warm to paying – typically may become the job of a sales person down the road
- The time you spend on support or install calls to help a customer roll out the product within their network – might become the job of a sales engineer down the road
- Integration work to include your product into their system or data flow – might become the job of a consultant, or sales engineer down the road
- Supplier calls or deals (with minimums to help provide you with the necessary inventory to sell onto your new customers.
- Sales Channel calls or deals – do you need to spend time setting these up or actually even splitting revenues?
As I mentioned before, these time based costs need to be considered for inclusion onto the more ‘traditional ones’ such as paid Ads & PR which startups usually associate with CAC calculations. Once you have determined what your rough aggregate CAC is, then you can figure out if it works for you vis-a-vis how you plan on monetizing your proposition.
In conclusion, the concept of accounting for your actual customer acquisition costs isn’t a difficult one to grasp, however, avoid getting caught not thinking through the impact of your time and other efforts in getting that customer! Driving while not looking is dangerous!
If you want a good starting point to start getting a better feel for how to model and visualise a SAAS KPI funnel and its related costs, refer to Christoph Janz SAAS KPI Dashboard on Google Docs (http://christophjanz.blogspot.co.uk/2013/04/a-kpi-dashboard-for-early-stage-saas.html ) Keep in mind, however, that his model is meant to be just that, a starting point; you will likely need to adapt it for the particular circumstances of your business.
Also, for more on customer acquisition costs vis-a-vis the lifetime value of your customers, David Skok’s blog post on the subject: http://www.forentrepreneurs.com/startup-killer/
Article originally published here: http://netocratic.com/real-customer-acquisition-cost-1546