If your business performance depended upon a single number, wouldn’t you want to know it?
It’s your organization’s cost of acquisition, or COA, and it can influence every business decision you make.
But if you don’t know what I’m talking about, then you’ve come to the right place.
In this article, I’ll teach you exactly what cost of acquisition means, why it’s important, and how to calculate it for your IT/MSP organization.
Cost of Acquisition – The Definition
You may have seen different versions of this term:
Client acquisition cost. Customer acquisition cost. Cost of customer acquisition. Cost per acquisition.
But regardless of which one you use, they all describe the same thing:
The cost of attracting and converting a new client.
OK, That’s Fine. But Why Does It Matter Actually?
Now that you know the definition, what does it mean to you as an IT solution provider? Here’s why you should care.
Fact: To be successful, your business needs to generate revenue. That bit is obvious.
And to do that, you need to bring in customers to use your services.
But attracting and converting those customers costs money. As does delivering a service.
And if the attracting, converting, and providing service cost more than what revenue the customer will bring in, your business won’t last long.
Let me explain this further.
Take a look at the diagrams below. You’ll notice that f the cost of customer acquisition (CAC) outweighs the lifetime value (LTV) of a client, the organization will consume itself in trying to keep up.
However, if you can increase the LTV of a customer and decrease the CAC (as in the second image), you will have a much healthier business.
See what I mean?
But its simplicity doesn’t make it any less important. Knowing your organization’s cost per acquisition, and understanding what it actually means, is imperative. It could impact almost every business decision.
“Customers are costly—not managing CAC is like descending from the face of Yosemite without a harness.”
Here’s an example of what I mean.
Let’s say you’re considering an email campaign to re-engage lost leads. You’re trying to decide between Strategy A and Strategy B, but they both seem like solid options. If you don’t know your organization’s cost of acquisition, you’ll be deciding blindly.
Why, because the cost of the emails might not be worth the lead values.
However, if you do know the COA, you’ll be able to see that one of those strategies, although appealing, could cost you more to regain a lost lead than the lead is worth.
How to Calculate Cost of Acquisition
Calculating the cost of acquisition for your own IT organization might sound like a job for the accountants.
But trust me: it’s not as complicated as it looks.
Let’s break this formula down.
On one side of the equation, add all the salaries, tools, and spend that are involved in the acquiring process. This includes both marketing and sales, and anything else that you include in that process.
Be honest and thorough when deciding which costs to include—that’s the quickest route to profitability.
On the other side of the equation, calculate your total number of newly acquired customers. You can think of this number as the fruit of your labors. What did your salaries, tools, and spend produce?
With those figures at hand, divide the cost by the number of acquired customers. (If you’re unsure how to go about this, just follow along with the sample equation in the image above.
If you spent $36,000 on your sales and marketing and acquired 1,000 new customers as a result, then you cost per acquisition would be $36.
After you’ve determined your organization’s COA, you need to figure out the average value of each client.
If your COA is $36,000 total for the year, as in the example above, that could be great or terrible. It all depends on how much value all of your new clients bring in. Many MSP experts agree that a low cost of customer acquisition is an amount that your organization can recoup in less than a year.
“In this [example], the COC [cost per customer] recovery time is nine months. If your average MRR is $2,000 per customer, and your gross margin is 50% (we are using round numbers here for simplicity), then each month you will generate $1,000 in margin dollars to recoup the cost of customer acquisition. So a nine month COC implies a $9,000 cost to acquire each customer.
Where did that $9,000 go, anyway?
…If we ballpark your cost per sales rep at $100k per year (including salary, commissions, overhead, T&E), then each month a sales rep accounts for more than $8,000 in selling expenses.
So the next question is how many deals at $2,000 MRR does a sales rep close in a month? If the answer is only one deal per month, then most of your $9,000 COC has been spent on selling expenses alone.”
How to Improve Your Cost Per Acquisition
You know, improving your COA may seem a bit like cleaning your house. There are always windows to wash, dishes to put away, floors to sweep, counters to wipe…the list never ends.
And by the time you think you’ve conquered it all, there’s another pile of dishes in the sink.
What I mean is that there is always something more to do when it comes to optimizing your MSP marketing efforts.
Invespo reported the top acquisition channels for many businesses in the infographic below:
As you can see, there is no shortage of channels, tools, and strategies out there. Be creative and explore what works for your IT/MSP organization, whether that’s direct mailers or social media platforms. Anything that optimizes your marketing spend, increases your number of new customers, or increases the value that each customer adds is a win.
Here are some ideas:
- Hire effective IT sales reps
- Use automated marketing tools to streamline your sales funnel
- Encourage client references
- Set up A/B tests to improve clients’ online experience
- Raise your prices
- Create demo videos to reduce the need for expensive human touch points
- Address common sales objections on you website
- Reduce marketing spend
- Improve how you follow up with new leads
Even though the cost of acquisition is so important, many IT service providers overlook it when making important business choices. Now you won’t be one of them. With a little bit of number crunching, you can understand your organization’s COA.
When you understand it, you can start taking steps to improve it. And that, in turn, will improve your entire business.