How to Calculate the ROI of Online Communities

By Richard Millington

ROI People

Measuring Customer Acquisition Cost

Customer acquisition cost (CAC) is very simply the amount of money the organization spends to acquire a new customer. An organization would usually calculate this by dividing the total marketing (or promotional) spend by the number of customers acquired during this time. If you spent $30,000 on promotion and acquired 1000 customers, your CAC is $3000.

Previously, we explained how to measure customer acquisition through lead generation or conversion. This essentially was a process to measure the value of the average customer and multiply this by the number of new customers the community attracted. This assumed that there were additional customers (i.e. not people who would have become customers anyway). This distinction is important. It enables us to include the entire lifetime value of that customer.

In practice, it’s rarely this simple. In many cases, it’s hard to determine if you would have reached a customer by either method. However, for the purposes of this calculation, we’re going to take the absolutist view that every potential customer would be reached eventually, but a community might be a more cost-effective way to acquire these customers. This means we’re not measuring additional revenue generated, but costs saved compared with other methods.

You can measure this through a number of data points. This includes:

  1. Cost of the community (technology costs, staff costs, process costs, overhead costs).
  2. Number of leads acquired through the community (manually-tagged, automatically-tagged, self-generated).
  3. Percentage of overlap of these leads above.
  4. Average conversion rate per lead generated by community.
  5. Average deal size per lead generated by the community.
  6. Investment in current promotional methods (adwords, sponsorship, advertising, PR, direct response).
  7. Leads acquired through each of the above methods.
  8. Average conversion rate through each of the above methods.
  9. Average deal size through each of the above methods.

Resolving a problem at the first attempt reduces the overall number of calls the customer service team receives. This is the comparative metric we aim to measure here.

You need six pieces of information to calculate this rate. These are:

  1. Number of calls received by agents ‘not exposed’ to the community per month.
  2. Number of customers helped by agents ‘not exposed’ to the community per month.
  3. Number of calls receives by agents ‘exposed’ to the community per month.
  4. Number of customers helped by agents ‘not exposed’ to the community per month.
  5. Number of customers who call for support per year.
  6. Cost per call.

This sounds more complicated than it is.

Community ROI Template

You can simplify and adjust the spreadsheet package here to suit you or follow the process below.

Step One: Measure Cost Of Acquiring A Customer Via The Community

The first step is to find out how much it costs to acquire a customer via the community.

Here, you need to divide the total cost of the community by the customer acquisition metric we need to identify. This might be leads identified, leads collected, search engine traffic, etc.

Let’s imagine we are using the community as a lead generation tool. We first need to know the cost of generating a lead by the community. First, we identify the costs of the community per year. This, as above, includes the technology, staff, processes, and overheads.

Next, we calculate the number of leads generated via the community that year. This includes those manually-tagged, automatically-tagged, and self-generated leads. We also remove the % overlap from these leads.

If, for example, we spent $424,716 per year in the community and generated 10,784 unique leads in that year (as per below), our cost per lead in the community is $39.38.

screenshot-2016-09-02-09-26-18

This means it costs us $40 to acquire a customer via the community per year.

Step Two: Compare With Cost Per Lead Via Other Methods

We can now compare this cost with leads generated via other methods. For this, we can use either specific outcomes (e.g. email addresses collected by sponsoring an event) or calculate an average of all direct lead generation efforts (PR, marketing, advertising, etc.).

This helps us get the cost of acquiring leads via the community compared with traditional methods. If a specific budget was compared (e.g. event sponsorship), we would simply compare costs against the costs of acquiring leads via this budget.

screenshot-2016-09-02-09-28-23

This tells us the organization spends on average $85 to acquire a lead via current promotional methods. This is for a single year. You can repeat this for each year.

It’s tempting here to calculate the difference between the two (cost per lead via community vs. cost per lead via traditional methods) to see how much money you are saving per lead. The problem with this is it doesn’t account for the quality of the lead. What if leads via the community are not as good as leads via traditional methods? We need to balance for that.

Step Three: Adjust for lead quality

To determine the quality of the lead, we need to also calculate the conversion rate and average deal size of leads via both methods. We’re assuming purchase rates and retention levels are consistent, but you can also include this in your calculations. From the community, we can use a sampling technique if we cannot track them individually. For traditional methods, we need to calculate the average conversion rate per method and then the number of converted leads. This will let us calculate an average conversion rate across all methods, as shown below.

screenshot-2016-09-02-09-52-22

Next, we need to calculate the average deal size from each method and multiply this by the number of leads generated via each method (don’t use converted leads). This will give us the total revenue generated from these leads and let us calculate the average deal size of leads generated via these methods (don’t be tempted to average the conversion rate/deal size from the table above. This doesn’t balance for the number of leads generated through each method).

From these two figures, we can calculate the percentage difference in conversion rate and average deal size. This means the conversion rate via community-traditional methods/community conversion rate. Likewise, with the average deal size (and converted into a percentage).

screenshot-2016-09-02-09-54-48

This might require a little explaining. In the example above, the conversion rate via the community is 16.3% higher and the average deal size is 57.09% lower. When we multiply these, we find that leads via the community are about half (49.9%) as good as leads via traditional methods.

Step Four: Calculate Difference in Lead Costs and Multiply By Lead Quality

Now we can calculate the difference in costs in leads generated by the community between the two methods and then multiply this by the quality of the lead. This will give us the cost saving per lead generated via the community.

Once we have done this, we can multiply this by the total number of unique leads generated via the community to give us the figure below:

screenshot-2016-09-02-09-56-32

While this sounds like the most difficult process we have covered so far, it’s actually relatively simple as the data is usually much easier to gather.

Notes

There are a near-infinite number of ways to track a reduction in customer acquisition costs. Variations of this could just as easily track lead generation, lead identification, lead validation, or even traffic generation via the community. In practice, these tend to be used rarely.

Summary

  1. Customer acquisition cost (CAC) is the cost of acquiring a customer (total marketing spend/customers acquired).
  2. A community can reduce CAC by attracting and converting the same customers more efficiently.
  3. To measure this reduction of CAC, you need to determine the cost of acquiring a customer via the community and the cost of acquiring a customer via traditional methods.
  4. You then need to use the conversion rate and average deal size to determine and adjust for the quality of the lead.
  5. Once you have this, you can simply multiply by the number of leads generated.
  6. Very minor adaptations of this process can be used for lead validation, identification, traffic generation, etc.

Chapters

Share

 LinkedIn LinkedIn

 Google Plus Google+