Cost of Customer Acquisition (CoCA)

The LTV and CoCA analysis checks the economic viability of your new venture. It highlights the importance of keeping an eye on these key factors. It also provides a quantitative way to manage the business to be successful. It is important to understand that unit economics analysis does not fully account for the expenses of Research and Development as well as General and Administration not to mention some room for profit back to the shareholder but is a proven and generally accepted strong indicator. Don’t let your optimism blind you in doing the calculations. Make the numbers real and not what you want them to be.

NOTE: There is important information in the Glossary about this definition of CoCA and how it is similar and dissimilar to other terms often used to convey analogous concepts, most specifically but not exclusively CAC.  I encourage you to read as well so you are not confused when you hear or see the terms and can in fact be well prepared to ask questions to understand the information and then use it effectively.

Content will be published as it becomes available.

To estimate the CoCA, you will take the plan from Step 18, Design a Scalable Revenue Engine, and build a forecast of how many customers you expect to gain during the short-term, medium-term, and long-term time periods, as well as the total marketing and sales expenses for each time period that would result in gaining the number of customers you forecast.

To forecast the number of customers you expect during each time period, you need to do a sales forecast that you and your team really believe is not only possible but also likely. Have your forecast reviewed and tested by a sales professional. Often entrepreneurs’ forecasts are incredibly naïve and wildly overoptimistic.

Your sales forecast for your first 90 days, and possibly even for your first year, should have specific names of the customers whose sales you are going to record. If the potential customers don’t already know you and you know them, it is highly unlikely that they will be buying during this initial time period. Take the number of people you think will be buying and only record a percentage of that on your forecast so that it is more realistic (maybe 80%, but that will vary by situation).

In the longer term, your sales forecast can make more abstract estimates based on growth rate, sales productivity, and market share, but understand that the more abstract the assumptions are in the calculation of the forecast, the less credible and the more risky they are. For every story of an entrepreneur exceeding their projections, there are dozens of entrepreneurs who underachieved. Follow the maxim “underpromise and overdeliver” when it comes to your forecasts. Don’t delude yourself into believing you have a great business when the facts indicate otherwise. Enthusiasm is good, but naïveté is bad. Again, get a professional salesperson to review your forecast with you so they can point out the flaws. Listen to them carefully!

To forecast your sales and marketing expenses, you will need to first estimate, based on your Scalable Revenue Engine from Step 18, what all of your sales and marketing activities will be, and how much they will cost. Marketing expenses will generally be the set of expenses that build brand awareness and generate leads, and sales expenses relate to converting those leads into paying customers.

Sales expenses may include:

• Salaries of salespeople
• The time you and other non salespeople spend on sales activities
• Commissions
• Bonuses
• Travel and entertainment expenses
• Benefits (health insurance, etc.) and employer taxes (social security, Medicare, etc.)

Marketing expenses may include:

• Salaries of marketing employees (and bonuses, benefits, employer taxes, etc.)
• The time you and other nonmarketing employees spend on marketing activities
• Digital marketing investments
• Content development
• Websites
• Social media
• Advertising
• Trade shows
• Public relations
• Consultants

If some people aren’t collecting a salary or their salary is below the market rate, you should take the market rate for that person when calculating the expense. It is not sustainable to not pay salaries, so using anything less than the market rate in your calculations will significantly understate your expenses.

If you have not done an exercise like this before, understand it will take some time to go through the level of detail and thought required to produce a relatively accurate list of expenses. I strongly recommend you work with someone who has experience building a marketing and sales budget to help you because otherwise, you will miss a lot of expenses.

I have provided a relatively blank worksheet for you to list your expected expenses because each company will have a very different list depending on what their industry and sales channels are.

Some of your marketing and sales expenses may be related to customer retention and support often called “Customer Success” now, instead of new customer acquisition. Do not include those expenses in the calculation of CoCA. Customer retention expenses, within reason, are generally money very well spent, because your most profitable customers are almost always your existing customers—you have already spent the money to acquire them, and the costs to retain them are not nearly as high as the costs to find new customers. They are also your best salespeople in your target customer community. You want your existing customers very happy!

Then, take the grand sum of all the marketing and sales expenses, less customer retention and support for each time period, and divide by the number of new customers in that same time period. That will be your CoCA for that time period.

In the remaining worksheets, you will look at ways you can reduce your CoCA, graph your LTV against your CoCA for each time period to see if your CoCA is currently low enough compared to your LTV, and then look at risk factors related to your CoCA calculation and how you can mitigate them.

If you stay focused on your target customer and do all the steps well, you should generate positive word of mouth in the advocacy stage of the sales funnel (see Step 18), and that will be the biggest driver to reducing your CoCA in the long term.

Content will be published as it becomes available.

Content will be published as it becomes available.