How to reduce customer acquisition cost in E-commerce
The cost of converting a new customer is among the major challenges for an entrepreneur as it directly impacts the operating expenses. At the same time, reducing the customer acquisition cost enables a company to significantly boost its revenue and, subsequently, enable it to run profitably.
Certainly, it is necessary to keep this cost to a minimum. But in reality, the task is quite challenging. However, some proven ways and tips have helped businesses keep their customer acquisition costs (CAC) to a minimum. Surely, these tested ways can help your business as well.
Want to learn more about how to lower customer acquisition costs in e-commerce?
In this article, we’ll discuss important subjects and answer vital questions, such as:
What is Customer Acquisition Cost In E-commerce?
Customer acquisition cost is the money spent to convince a prospect to make their first purchase and become a customer. In other words, it is the estimated total cost required to reach out, persuade, and convert a prospect into a buyer.
This metric is of uttermost importance because growing your customer base depends on minimizing the cost of acquiring new customers.
How Do You Calculate Customer Acquisition Cost?
Customer acquisition cost is computed by dividing the “total marketing expenditure” by the “number of new customers,” i.e.
CAC = (Total Marketing Expenditure / Number of New Customers)
When adding up the total marketing spend, ensure to include salary (salaries of your sales team), overheads (any rent, utilities, or equipment spent on marketing and sales), expenses for paid marketing (Google AdWords, e.t.c), and tools (any tools such as software or analytics used in marketing and sales).
Practical Steps for Calculating Customer Acquisition Costs (CAC)
Below is a practical step for calculating a CAC:
- Suppose an e-commerce firm, ABC Limited, spends $2,200 on sales and $800 on marketing to attract 1,000 new customers. The company’s CAC is computed as:
CAC = ($4,400 + $1,600)/1,000 = $3,000/1,000 = $30
This means the e-commerce company spent $30 to acquire each new customer.
- Wamco Limited spends $20,000 on a marketing campaign. After the campaign, the company realized that 2000 new customers had subscribed to its monthly rental plans. The company is estimated to spend an extra $40,000 on production and technical costs for these new customers every year.
CAC = ($20,000 + $40,000)/2,000 = $60,000/2,000 = $30
This shows that $30 is spent to acquire each new customer.
What Is a Good Customer Acquisition Cost?
Usually, business owners benchmark their customer acquisition costs against customer Lifetime Value (LTV). Before we proceed further, it is best to understand what a customer’s Lifetime Value (LTV) is all about.
Customer lifetime value (LTV, or CLV) is a metric that determines the actual revenue a business will earn from a single customer throughout their business engagement on the platform.
Ideally, it should take at most one year to recover the cost of customer acquisition. Your LTV to CAC ratio should be 3:1, i.e., the value of your customers should be three times the cost of getting them. If the value is closer to 1:1, you are spending a lot of money on acquiring customers as they are spending on your services or products.
It is vital to know that repeat buyers have greater lifetime values.
How to Reduce Customer Acquisition Costs for Your E-commerce Business
Most businesses capitalize on different paid marketing channels to acquire customers. In the competitive e-commerce space, gaining new customers is more expensive than keeping the ones you already have. To reduce customer acquisition costs, the goal is simple; spend the least amount of money to get a paying client or customer.
Here is how to minimize your cost of acquiring new customers:
1- Focus on your existing customers
Statistics show that it costs five times more to get a new customer than to retain existing ones. And from a marketing standpoint, maintaining a customer is more cost-effective than getting a new one.
You must leverage your relationship with existing customers. Give them a small incentive for referring new customers. Word-of-mouth referrals are more appealing to people than your ad campaigns. When your customers talk about your business, prospective customers are listening, and the cost of converting them will be minimal.
2- Leverage content marketing
Content marketing offers a cost-effective way to educate customers on the benefits of your products, build relationships, and drive demand. Creating and publishing content via a company’s own channels is an untapped goldmine to reduce the acquisition costs of new customers. Content marketing should also be utilized with efficient search engine optimization techniques.
3- Deploy a strong loyalty program
If you want loyal and repeat customers for your business, you should be ready to give away cost-effective incentives. It’s not enough to offer a customer a good price for a service or product; another competitor may be ready to undercut your price to gain their loyalty.
Offering a robust loyalty program can help you benefit from user-generated campaigns. These include guest blog posts, social media posts, and user testimonials.
This is very helpful since social media users consume up to six hours of user-generated content daily. Statistics show that user-generated campaigns are 30% more efficient than regular ads.
4- Leverage On Affiliate Programs
Engaging in affiliate partner programs is also an effective way to lower customer acquisition costs in e-commerce businesses. Affiliate partners leverage their influence to engage with prospective clients.
This marketing trick lowers CAC for companies because they only pay percentage-based commissions to affiliates after customers make a purchase. This way, an e-commerce owner can reduce customer acquisition costs due to zero upfront costs.
Tips for lowering customer acquisition costs
A recent study shows that a business can boost its profits by at least 24% with just a 6% increase in customer lifetime value (CLTV). However, most e-commerce owners rely more on new customer acquisitions than on retaining them in the long run, which ultimately skyrockets their customer acquisition cost.
Here are effective strategies to increase your Customer Lifetime Value (CLV):
- Display related products at discounted prices on the checkout page. This makes customers intrigued and loyal to your brand.
- Create a point system and reward your customers based on how they interact with your brand.
One Real-World Example Of How To Lower Customer Acquisition Costs
Compared to social media content that usually goes viral, expensive marketing campaigns don’t yield the expected results.
If your content reaches only a few thousand people, your brand will gain thousands of social media customers within minutes.
The Blendtec Story:
In 2006, the company’s founder, Tom Dickson, spearheaded a YouTube series tagged “Can it blend?” and created different videos by blending myriads of rare items like banana peels and fish bones to prove the power of Blendtec blenders. Guess what? Thousands of people loved it, and their sales skyrocketed.
From the Blendtec story, it was obvious that customer acquisition costs for their e-commerce firm were significantly reduced. This is a good example of a cost-effective social media campaign.
Why Is Customer Acquisition Cost Important?
It is an important metric used by business owners to compare the amount of money they spend on gaining new customers against the number of customers they eventually acquire. It enables them to note their loss and profit margin.
You can only make informed business decisions when you know the cost of converting a prospect to a loyal customer. By reducing customer acquisition costs in your e-commerce business, you will save a significant amount of time and money.
Try out the proven tips discussed in this article to gain more insight into the inner workings of your business and how to better allocate your resources for maximum profit.