SaaS Economics Blog

    SaaS Unit Economics - Calculating COCA by Segment (and why its hard)

    by Brad Coffey

    LTV COCA

    At a high level calculating the cost of customer acquisition (COCA) is relatively straightforward to calculate for a SaaS company.  It's simply the total Sales and Marketing expense for the period divided by the number of customers acquired in the period.  Easy.

    Unlike other SaaS unit economic metrics, unfortunately, this simplicity breaks down rapidly when calculating COCA for a specific segment.  How do you break down the marketing spend aimed at the software industry vs marketing spend targeting manufacturing?  How do you break down the sales spend for SMB segment vs enterprise segment?  Its often very difficult to calculate reliable numbers within these narrow bands.

    At HubSpot we've looked at several different calculations over the years and have come up with one simplifying approach - that although imperfect - can drive COCA when applied consistently.  

    Measuring COCA by Segment:

     

    At HubSpot we calculate COCA by segment as:

    Marketing COCA =  Total Marketing Spend * % of Total Leads in the Segment

    Sales COCA = Total Sales Spend * % of Sales Reps selling into Segment

    Total COCA = Marketing COCA + Sales COCA

    A few notes on this.  First, the total marketing and sales spend includes everything (managers salary, overhead, etc.) - not just direct program spend or commissions.   Some people do this when calculating COCA and I think its wrong and ignores some of the real costs there.  Second, this assumes all leads are the same price.  It's a simplifying assumption in the wake of more information around specific channel spend, we find works well for most companies.  Finally, this also assumes all sales reps have the same costs associated with them.  While this isn't always accurate depending on the mix of inside and outside sales reps - much like the marketing spend we find works well for most companies and is relatively robust.

    With these assumptions and this approach we find that we can segment our SMarketing (Sales + Marketing) funnel down to very refined levels and measure the health of our business in specific markets.  

    When we conduct this analysis we do not only look for segments with the lowest cost however - but instead try to identify segments that have the highest return on our sales and marketing spend.  So although COCA is valuable, the real insights come when compared to other unit economic measures such as the lifetime total value of the customers in that segment.  (lifetime total value, LTV is measured as avg. Monthly recurring revenue * gross margin / monthly churn rate)   

    By most VC standards, SaaS companies should target a LTV to COCA ratio of 3, and a COCA payback of <12 months.  Many public companies are well within those ranges or much beyond them.  However - these numbers heavily dependent on growth rates - its much more difficult to maintain high unit profitably and solid economics while growing 100% year-over-year than it otherwise could be.  Said another way - in most companies if they fired 1/2 their sales team these numbers would improve, but the growth would stall.

    For many of these reasons its essential for companies to understand the economics and COCA of the markets they target and the segments their business sells into.

     

    So what do you think?  Are there better alternatives for calculating COCA by segment?  For some additional information also check out David Skok's piece on the Startup Killer: Cost of Customer Acquisition.

    Brad Coffey

    Written by Brad Coffey