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COCA
The cost of customer acquisition is a key driver of software economics. In theory, the marginal cost of selling a new license is close to zero, but that’s misleading - the expense of developing the customer’s need and persuading them to accept the solution is a significant cost - apparently among even large enterprise software firms, 60-80% of last year’s revenues go into efforts to acquire this year’s new license dollars.
Larry Augustin argues that escalating customer acquisition costs are killing enterprise software business, and the solution is Open Source. (via Jeff Clavier).
Maybe. But in my view the real point is that driving the costs out of customer acquisition is the key to ongoing margins.
Salespeople and their support structure get a lot of bucks, because they are expected to generate top-line for the company. Outside sales generate the biggest dollars - but they are also the most expensive, and it’s worth asking whether they represent a cost structure that is really optimal for the firm.
I don’t mean to “dis” sales organizations as a class. Nor do I mean to dismiss open source as an option to reduce COCA. They both represent options that a firm might utilize later on.
Software firms, when considering their economics, would be well-advised to ask whether they have a sales & marketing organization that matches their positive business model (how they are actually making profits), rather than their normative one (which they wrote up in their business plan).
Of course, positive business model is really hard to figure out at the start of the game, so it’s the companies that even when growing like gangbusters can recognize and compensate for these discrepancies that are really going to break out. Because the way I see it, managing COCA and the constituent expenses for maximum bang for the buck is the key to profitable growth in the short term, and sustainability in the long term.
November 18th, 2005 at 3:13 pm
[…] I alluded to a this idea in a previous post. […]
March 19th, 2007 at 3:57 pm
[…] This is true for more than just web services. Geoffrey Moore says in Dealing with Darwin that particularly in a volume operation, innovating the business model is crucial to success. (He contrasts this with a complex systems environment, where s 10x improvement from the technology is the focus of innovation.) Cost of customer acquisition (COCA) is usually the most crucial lever to pull in the business model, because that is how dollars come in. Especially when the back-end is built on commodities, the ability to generate top-line either at lower cost or at a higher effectiveness is going to be critical. […]
August 14th, 2007 at 7:26 am
I couldn’t understand some parts of this article COCA, but I guess I just need to check some more resources regarding this, because it sounds interesting.