Sign in or start a free trial to avail of this feature.
5. Sales and Marketing Expense Projections
In this lesson, we project sales and marketing expenses for both new & existing customers, and for both TrackerTime’s products.
To explore more Kubicle data literacy subjects, please refer to our full library.

Lesson Goal (00:04)
The goal of this lesson is to create projections for TrackerTime’s sales and marketing expenses.

Understanding the Sales and Marketing Expense (00:16)
Acquiring and retaining customers is the biggest challenge for a startup. Generally, the cost of acquiring a new customer is higher than the cost of retaining an existing one. As a result, we split our sales and marketing expense between new customers and existing ones. We aim to project the cost of acquiring a new customer and the cost of retaining an existing customer for each year of our model. We also want to perform these calculations separately for the B2B product and the B2C product.
Historic figures for these four metrics are supplied by the company. The cost of acquiring a B2C customer is much lower than the cost of a B2B customer. This is because an individual consumer can sign up themselves online, while a business needs to engage with a sales rep before a transaction is complete.
The company also supplies future projections for the four metrics. In formulating these projections, we should consider the average annual revenue generated by a customer. Typically, the gap between an average customer’s annual revenue, and the acquisition cost of a new customer is no more than 10 or 20% in the long run. If the average annual revenue is greater than the acquisition cost, then we recoup the costs of acquiring the customer within a year. In subsequent years, the customer becomes profitable, given the lower cost of retaining an existing customer.

Calculating New and Existing Customers (03:26)
In order to project the sales and marketing expense, we need to calculate the number of new and existing customers each year. The number of new customers for a particular year is simply that year’s customers minus the previous year’s customers. The number of existing customers is simply the previous year’s customers. We calculate new and existing customers each year for the B2B product and the B2C product.

Projecting the Sales and Marketing Expense (04:31)
The sales and marketing expense for each year will be the number of new customers multiplied by the cost of acquiring a new customer, plus the number of existing customers multiplied by the cost of retaining an existing customer. We calculate this figure for each year in our model, calculating the B2B and B2C expense separately.
In the previous lesson, we calculated our cost projections for cost of goods sold, research and development and general and administrative. The remaining cost to be calculated is sales and marketing. For startups, the cost of acquiring and keeping customers is the biggest challenge bar none. As a result, we're going to spend a full lesson just examining our sales and marketing expense projections and we're going to do this in a very specific way. For each product we're going to split our sales and marketing expenses between new customers and existing customers. New customers are customers acquired that year and typically the cost of acquiring a customer is much higher than the cost of keeping one.
This can be seen in the numbers given to us by TrackerTime for the last four years.
What can also be seen is that the cost of acquiring a consumer is much lower than the cost of acquiring a B2B customer.
When a B2C customer signs up, they typically sign up online to TrackerTime and pay with a credit card, so the cost of acquiring these customers is simply the cost of getting them to your website. However, with B2B customers, most of the time a TrackerTime sales rep will need to speak to someone within the business before a sale is made. This substantially increases the cost of acquiring customers and explains the difference between these two numbers. To calculate our sales and marketing projections, we need to project out these four numbers for the next five years and we also need to calculate the number of new and existing customers for each of the next five years as well. TrackerTime has already provided projections for the next five years regarding the cost of acquiring and keeping new customers. I'll add these in now off camera. As you can see, for both maintaining and acquiring new B2B customers, the projections represent a significant jump as does the cost of acquiring B2C customers. When we ask TrackerTime's CEO about this, she explains that SeedCo are very uncomfortable with projecting numbers lower than this, even though historically the company has been able to attract customers at a lower acquisition price. In SeedCo's experience they haven't seen too many examples of companies able to maintain a huge gap between the annual revenue per customer and the sales and marketing expense of a new customer. This gap is currently over 50% in 2016 for B2B.
SeedCo are much more comfortable keeping this assumption to be closer to 10 or 20%. When examining the cost of acquiring customers it's always worth comparing against the annual revenue per customer as SeedCo has done here. If the sales and marketing expense is less than the annual revenue per customer, it means that the sales and marketing expense of acquiring a customer is recouped within one year which is a really good result for a B2B software product. This also means that if the customer stays for subsequent years they become very profitable because the cost of keeping that customer is much lower. SeedCo's assumptions here are quite conservative but probably more in line with typical market values. Let's now scroll up and calculate the number of existing and the number of new customers for both B2C and B2B. The number of new customers is quite easy to calculate. It's simply this year's customers minus last year's customers and I can copy across for the remaining cells.
The number of existing customers is simply the number of last year's customers.
For the first year of course, the number of new customers is simply 12 in this case with no existing customers. I'll repeat this for B2B.
And new customers is F7 minus E6 Existing customers is the number of customers from the previous year and then of course in the first year this is 461 and zero.
I can now calculate my sales and marketing expenses.
To do this, I'll start with B2B which will be equal to the number of new customers multiplied by cost of acquiring a new customer plus the number of existing customers multiplied by the cost of maintaining and this will all be divided by one million as millions are my units and I'll copy across for the remaining cells.
Next I have my B2C marketing expense and this is the same formula.
So, again I'll jump up to the top, take the number of new customers, and take the cost of acquiring a new customer and I'll add this to the number of existing customers and multiply it by the cost of keeping an existing customer and I'll divide by a million again.
And then I'll copy across for the remaining cells.
In the next lesson, we're going to calculate depreciation and amortization for TrackerTime and complete our income statement.
Sign in or start a free trial to avail of this feature.