What’s Your Real Customer Acquisition Cost?

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


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On Growth, Virality Loops, and Customer Acquisition

Evernote Camera Roll 20130411 111108_SnapseedEveryone loves a personality test. Whether for fun, or to better asses our skills as part of choosing a career, we all love hearing about how others perceive us, how we function, and how we are likely to react in situations. We are all naturally narcissistic (up to a point) and it is at this point that Traity, a Seedcamp company that specialises in helping its users figure out how they rank in a variety of psychometric test (think of them as a more thoroughly complete Myers-Briggs test), helps users identify their core attributes as ranked by people in their social graph.

For the purpose of simplicity when speaking of Traity’s technology, I’ll use the term ‘personality test’ loosely, however, what was confusing for the founders was that while ‘personality tests’ are generally well received and actually fun for many (as in magazines or online for example), Traity struggled quite a bit, in their early days, in converting people to use their service because their personality test, while far more accurate and useful than those you take online where you assess yourself, requires you to have had your friend assess you as part of their process.

Traity was having a classical conversion/acquisition problem. Traity’s CEO, Juan Cartagena, could funnel people to his website, but couldn’t get them to go through the sign up process and then get others to sign up (which he needs as part of his product). So he went on a mission to find out how to optimise this. Here the video of Juan sharing his story of discovery (it is embedded at the bottom of this post for your convenience).

After this video came out, I recently had the chance to catch up with Juan and ask him if he could help me summarise how he worked his way through to where he is now. Firstly, he told me it all started with a chat with social games guru Blake Commagere (http://www.crunchbase.com/person/blake-commagere), who pointed him in the right direction…

Next, he identified the key metric he wanted to optimise around. In his words: “There is generally one key metric for every business that matters- optimise around that metric.”

He then decided to experiment with design as a key growth driver vs. the traditional MBA-type solutions which, until then, had not been working for him. For the record, Juan has an MBA from the Chicago Booth School of Management. One of the top MBA programs in the world, so for him to make a jump like this, really does mean a lot in terms of not adhering to ‘traditional-type’ thinking.

He then further committed to this path of experimentation by reading two books which greatly influenced his thinking on how to further evolve his customer acquisition process:

After having read both books, he went through each one of the key influence factors outlined in the book and scoured through his product to see how we could apply the concepts. Once identified, he then went about applying the appropriate design principles to yield the ultimate effect on the influence factors.

For your reference, the key influence factors highlighted in Caldini’s book on Influence include:

  • Reciprocation
  • Social Proof
  • Commitment & Consistency
  • Liking
  • Authority
  • Scarcity

Before proceeding any further, I should state that in order to better apply these concepts, that you understand what your Minimum Viable Segment (MVS) is. Without understanding your MVS, any optimization of design or messaging will likely not be targeted enough to yield directionally measurable results. For a primer on an MVS, go to Northbridge Partner, Michael Skok‘s site here: http://www.mjskok.com/resource/gtm-segmentation

The design process Juan subsequently followed, included not just the obvious making of buttons, bigger, correctly placed, or prettier or red (one of the points he mentioned about colors and engagement) or choosing a different logo, but more importantly in coming up with the correct messaging to convey the influence factors he was trying to exploit. This is crucial. The messaging is just as important, if not more, than the more traditionally-experimented visual elements of design. Although not from the books that Juan mentioned, two good books to get you thinking about how messaging matters for positioning and differentiation are:

As far as Juan’s design focus, think about it this way, he moved away from just building a more explosive gunpowder to thinking more about how to package and propel it forward (otherwise all you have is explosive gunpowder that will explode in your face).

Evernote Camera Roll 20130411 111052_Snapseed

Although it seems obvious when you read this, Juan discovered that a key aspect of using both influence and design as part of evolving his process, was understanding that his costs of user acquisition would go down the more his viral acquisition would go up, and in order to scale this virality he would need to leverage the emotions of users to have a stronger reaction. However, I’d venture to say that many don’t consider this as part of their design process, Juan admits he didn’t at first.

Specifically, Juan saw how, via design, narcissism and voyeurism was used by sites like Facebook & LinkedIn to yield frequent use, fear of missing out by sites like Instagram, Twitter, and Groupon, and Inspiration by brands like Coca-Cola. He set out to understand how he could leverage these feelings as part of creating better copy on his site’s messaging to both yield better conversion but also more virality.

He then took things one step further by truly delving deeply into what virality is… and then nesting virality loops within his product that amplified his ‘K’ value  (For a primer on Viral Marketing, check this Slideshare presentation from David Skok: http://www.slideshare.net/DavidSkok/the-science-behind-viral-marketing ) oh, and yes.. he’s Michael J Skok’s brother. Also from David Skok, an excel model you can use that might help you plan and predict this to investors: http://www.forentrepreneurs.com/lessons-learnt-viral-marketing/

Lastly, because without metrics you are just flying blind, Juan used Kissmetrics to analyse his efforts and truly understand whether his changes across the board were yielding his desired results. Build, Measure, Learn… Build, Measure, Learn.

In summary, if you have identified a real need within a market and built something awesome (gunpowder) but you just can’t seem to reach your customers, perhaps go through the journey Juan went through and assess whether perhaps the issue isn’t what your product does, but rather how you are presenting it to your users.

Additional Resources:

For a curated list of talks on what will get you on the right track in Customer Development – http://www.hackertalks.io/index/2
For a curated list of talks on UX – http://www.hackertalks.io/index/3
Growth Hackers Conference Lessons Learned – 
Growth Engineering – https://www.blossom.io/growth-engineering
For a list of Growth Hackers – http://www.aginnt.com/the-growth-hacker-mafia#.UWvHXSv70qv

Juan’s original video –

Juan Cartagena: Getting What you Want from Interaction Design Association on Vimeo.

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