Understanding the cost of revenue
- Understanding the cost of revenue is important for analyzing profitability, payback period, and roadmap prioritization.
- The cost of revenue includes two main drivers: cost-to-serve and cost of acquisition.
- Cost-to-serve includes expenses like customer support, server space, analytics software, logistics costs, storage and hosting, tools and programs, and miscellaneous costs.
- By calculating the margin (revenue - cost-to-serve), you can determine the profit generated from each customer.
- Calculating the cost of acquisition involves considering expenses related to performance marketing, cost-to-serve before conversion, referrals, partnerships, people costs, and tools.
- Averages are often used to attribute these costs to a single customer.
- The payback period can be calculated by dividing the acquisition cost by the revenue per period minus the cost-to-serve per period.
- The cost of revenue data can be used to assess different use cases, understand tradeoffs, and evaluate acquisition sources.
- Analyzing the cost of revenue provides valuable insights for product decision-making.