How To Calculate Your Ecommerce Cost of Customer Acquisition

    by Ted Ammon

    Date

    October 23, 2013 at 10:00 AM

    calculating_cost_of_customer_acquisitionThe Cost of Customer Acquisition (or CoCA) is a critical metric you'll need to be able to determine how to grow and maintain the profitability of your ecommerce business. Have no fear; I'm here to lead you through this installment of “Should Have Paid Attention in Algebra Class.” If I can do this math, you can too. Previously, we learned how to calculate the lifetime value of a customer for both subscription and traditional ecommerce sites. Fortunately, the math for determining CoCA is a bit easier, but important and controllable variables still exist.

    Break Out the Calculators

    Simply put, the CoCA is the average amount of sales and marketing expenses you invest to acquire a single customer. Like any good, actionable metric, it's comprised of smaller metrics that you can work on optimizing to improve your business. The metrics are the cost you spend per visit (CoVA - Cost of Visitor Acquisition), the percentage of those that turn into leads (or pre-transactional contacts as ecommerce marketers may call them) gives you the Cost of Lead Acquisition (or CoLA), and the percentage of those who become paying customers gives you the final Cost of Customer Acquisition (or CoCA).

    The factors of CoCA work together like this:

    ecommerce-acquisition-cost-funnel-1

    If you want a real example, let’s plug in some numbers. Let’s say your marketing team spent $1,000 on a Pay-Per-Click (PPC) campaign and 500 people visited your site. At this point, your Cost of Visitor Acquisition is $2 ($1,000 divided by 500). In PPC campaigns, this is usually called the CPC or average Cost-Per-Click, but if you wanted to look at this from, say, blogging, you could use the same math (money invested in blogging divided by the number of visits the blog drove).

     

    If 5% of those website visitors convert into a lead (or pre-transactional contact, again depending on your jargony delights), then your Cost of Lead Acquisition is $40 ($2 divided by 5%). Essentially, if you decide that you need to fill your funnel with more pre-transactional contacts, you can be confident that if you give your marketing team $40 they can bring you one lead.

    If 10% of those leads actually buy something from you, your final Cost of Customer Acquisition is $400 ($40 divided by 10%). So your marketing team can confidently say to you that investing in this campaign will yield one new customer for every $400 you invest.

    ecommerce-acquisition-cost-funnel2-1

    You probably had one of two reactions to that math: Either you said "$400 per customer? Wouldn't that be nice!" or "I'd be out of business in a week if I spent that much per customer." Either reaction is perfectly fine. The key is that you know how to calculate this for yourself.

    Again, as with any good metric, CoCA helps you identify leverage points that a real human being can work on and improve. Simple sales and revenue are too high level for anyone to do anything about. If you wanted to decrease your CoCA (which may not always be the case if you're trying to grow - but that's a topic for another day), you know that you either need to lower your CoVA, raise your visit-to-lead conversion rate, or raise your lead-to-customer conversion rate. Associated with each of these goals is a set of marketing activities your team can work on (e.g. visit-to-lead conversion rate optimization might include adding additional calls-to-action or testing your landing pages).

    Calculating CoCA By Buyer Persona and Source

    Of course, we know intuitively that different kinds of customers cost more or less to acquire. We also know that different traffic sources and marketing activities will also have a different CoCA. However, if we don't track and measure it, we can't know which contributing variable can be improved.

    For example, $1,000 might buy a lot of blog articles depending on your industry. If you were paying $50/article through a freelance service -- or your cousin Vinny (who's a perfect example of your best customer and therefore creates awesome content that other best-customers will love) -- you'd end up with 20 blog articles. If each of those got just 25 views, you'd break even with your PPC campaign in the hypothetical example from earlier -- assuming the other variables stayed the same (which they may not). Just like with PPC, blog article costs are going to be highly variable depending on your intended audience, but the math still applies.

    Even if all of those numbers work out though, traffic from your blog might convert at a lower rate into a contact. Perhaps only 2% of blog site visitors turn into leads, your CoLA suddenly goes from $40 to $100 -- the effect of which trickles down into the rest of the business. Although leads from organic search tend to cost less on average, all of these numbers may fluctuate and be variable, which is why it's important that you track and optimize it for your unique company and customer audience.

    You'll also want to segment your customers and analyze your CoCA by buyer persona. Although some customers may be "big spenders" and seem attractive, we all know that there are some customers who just aren't worth it to the business. The determining factor will be their CoCA:LTV ratio, but you have to start by acknowledging that not all customers cost the same amount to acquire.

    Factoring Sales Costs

    Sales costs should also be factored in to your CoCA analysis. Unlike the B2B sales world, where CoCA will factor things like the cost of sales rep salaries, commissions, and support services; most ecommerce companies will primarily factor in the cost of their shopping cart and marketing platforms. If you're spending $2k/month on shopping cart and marketing software, and you acquire 10,000 customers, you need to add $0.20 to the CoCA totals for your customers. Depending on what your other numbers are, this may add a small or significant amount to your overall CoCA calculations and can't be ignored.

    Is It Worth It?

    Many other factors come into play when determining if the CoCA you’ve calculated is worth your investment. Determining the LTV of those customers goes a long way toward showing you the true value of the marketing dollars you spend. You can examine the ratio of CoCA to LTV, which will give you a better idea of where your money is best spent. 

    InboundCommerce

    The majority of marketing activities in modern ecommerce center around reducing CoCA. The Inbound Commerce methodology shows what parts of the customer lifecycle contribute to your CoCA. Optimizing for the progression of your contacts through this process can also help you reduce your CoCA.

     

    photo credit: rbbaird via photopin cc

     
                                         

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