hello this is dr. adam jae bok in this short audio presentation we're going to talk through the cost of customer acquisition calculation so cost of customer acquisition often referred to just as coca is an important number for any business but especially so in the digital goods world and for start-up companies it's quite simple really it's just the total spent on acquiring customers divided by the number of customers who complete the purchase in other words we're trying to figure out what our average cost is to acquire one more customer sometimes the easiest way to think about this is just to do it so let's do a quick example let's imagine for a moment that you are hosting some kind of major event at the uw-madison and one way or another you're able to get your hands on the emails of all 40,000 students at UW Madison I'm not sure quite how you'd do that legally but let's just pretend for the moment that you did and it cut and so you've spent $100 to to send out 40,000 emails and 1% of the people who receive the email end up buying a ticket for the event so what is our cost of customer acquisition remember it's our total cost divided by the number of customers acquired so I strongly urge you to pause the presentation here and see if you can come up with the answer yourself here's the answer our total cost is $100 that's how much we spent to get the email list and to send out all the emails the number of customers that we're going to acquire is 40,000 times our one percent success rate that turns out to be 400 so our cost of customer acquisition is our total cost divided by the number of customers acquired $100 divided by 400 or approximately or 2.25 dollars which is 25 cents so our cost of customer acquisition that is our for each customer is 25 cents so what what do we need cost of customer acquisition well it's as I said it's the cost of acquiring each additional customer which is a key indicator of the long-term financial model for the business you might think about what is coca imply about the profit you have to generate for each customer in the long haul and I'll give you a little bit of a hint when you combine coca with lifetime value you'll discover something very very important but we'll talk about that in a lifetime value presentation for the moment let's do a little more work with kokis that you're really comfortable with what needs to be done the real issue with cocoa of course is that it's not usually described in a single step the example that we just went through is highly simplified most cases recognized require recognizing that getting to a customer doesn't happen on the first connection the first contact the first click and so on now this can be applied to almost any kind of business we're going to do two more examples one will be an online example and then we're going to do a second example as for a car dealership which you're going to do yourself and then answer in canvas so let's talk about home energy service audits and we're going to do this via Facebook impressions with so this is an online campaign at least as a start and so here's the information about this particular campaign to get a thousand Facebook impressions is going to cost about 50 dollars so this is not a real-world number by the way but let's assume that this were the case to get a thousand people to see this particular Facebook Ads which cost 50 bucks there's a 6% click-through rate that means that 6 percent of the people who see the ad click on it to see what it means that takes them to the website 10 percent of people who visit the website request a proposal that is a proposal for how much it would cost to do the energy audit for their home so they probably have to enter a little bit of information like how big the house is and where it's located and so on sending a proposal is not free the company spends every time the company receives a request for Proposal it's takes it costs $25 to put the proposal together it's not a fully automated system someone has to sit down look at the size of the house look at the location and figure out some additional information about it and that cost money because we pay people to work for our company and so this might incorporate maybe an hour to of work or something like that and then once these potential customers receive the proposals two-thirds of them actually then buy the audit so how what is our cost of customer acquisition now this is much more complicated than the other one but I really strongly encourage you before we go to the next slide to see what the answer is this is a great opportunity to test it out for yourself you're gonna learn this best by doing it and running through the calculations here's one way of providing the analysis now you might have been able to go through it just in your head step by step but another way to do it is to create a table like this in which we address the conversion rate the number of customers still active in the funnel the cost of the specific step and then the total cost of the entire process so there are we get it so let's start at the top with a thousand impressions that means we're saying there are a thousand customers who see the ad and it cost us $50 to place the app so there's our total cost so far $50 and we have a thousand potential customers to work with of them only 6% will actually click through so that brings our customer number our number of customers in the funnel down to 60 this doesn't cost us anything this step just happens on its own so our total cost is still $50 of those 60 10% of them request a proposal so now we're down to six this however cost us money the six people who requested a proposal each proposal costs us $25 to produce so the cost of this step is 6 times 25 which is a hundred and fifty dollars and that brings our total cost up to $200 and then of those individuals still in the funnel at this point the ones who receive and proposal two-thirds of them actually order this the audit so of the six individuals who requested a proposal four of them actually ordered the audit again this doesn't cost us anything and so our total cost is $200 our coca is our total cost divided by customers acquired our total cost as shown in the chart is $200 and the number of customers we acquired is 4 so our coca is $50 per customer so I encourage you to take a moment walk through this make sure you're comfortable with it because the this is the expectation that you can complete a calculation like this so here's the one to do yourself I'm going to explain out the details here and then you'll have the chart and then you'll need to go to canvas to complete the actus quiz activity which includes both the coca and an LTV calculation so you probably want to watch the LTV audio presentation as well before you launch the quiz you can start and stop the quiz but it's probably a good idea to get it all done at once so here's the example and we're now talking about a car dealership with some kind of advertising campaign we're going to send physical invitations by the mail to 10,000 people in Madison and it's going to cost us a thousand dollars to do that we're inviting them to come to a car sale at the dealership 5% will come to the dealership and of those who come to the dealership 10% of them will go on a test drive now again here's a situation where this is this step is not free a test drive takes an hour or two and we have to pay our employee to do that and there's probably other costs like marginal insurance and the gas and things like that so we've determined that the effective cost of any given test drive to us is $50 then of the people who go on a test drive 20 percent of them will actually buy the car so here's the same kind of chart which I've provided to you but you've got to fill the rest in yourself to figure out what the answer is all the steps are on here and you just need to enter in the additional data and do the calculations so this gives you a sense of how to do coca please take a shot at this this is the exact question that's in the canvas activity quiz so take a look see how you do and then you also should move on to the lifetime value calculation because that we'll also talk about how it's connected to coca