Did you know that there is a study shows that the costs of acquiring a new customer for eCommerce businesses have increased by 222% since 2013?
Customer Acquisition Cost (CAC) is extremely crucial for the profitability and growth of your eCommerce business. Today, with the obvious rising expenses of acquiring new customers, Customer Acquisition Cost is becoming an increasingly important metric that you should take into consideration.
In this article, we are going to walk you through the meaning of Customer Acquisition Cost and how it can be calculated; and then, we are going to present you with some of the most effective tips, tactics, and strategies to reduce your customer acquisition costs.
Table of content:
Customer Acquisition Cost (CAC) refers to the resources and costs incurred by a business to acquire a new customer. In other words, CAC shows how much a company has to spend to get a new customer. It is a very significant performance metric that helps businesses boost their return on investment (ROI).
CAC is calculated as follows:
However, in order for this metric to be effective for your eCommerce business, you have to pair it with another crucial metric, which is the Customer Lifetime Value (CLV). It is the average amount of money the business makes from each customer during the complete duration of his/her relationship with the business.
Customer Lifetime Value (CLV) is important because it gives a better understanding of what your Customer Acquisition Cost (CAC) means for your business.
CLV is calculated by multiplying three things:
In order to understand the concept of Customer Acquisition Cost and its close relation to the concept of Customer Lifetime Value, let’s see a hypothetical example.
Company X is an eCommerce store that sells food for pets. In December 2022, the company spent $200,000 on marketing, advertising, and sales expenses. The number of new orders placed during that month was 20,000 new orders. Given this data, the CAC can be calculated as follows: 200,000/20,000 = $20 per customer.
Now, can you tell me what the $20 means for company X?
In order to be able to properly understand the meaning of CAC, you need to be able to compare it against something else. The CLV is what helps you do so. In other words, together, the Customer Acquisition Cost and the Customer Lifetime Value metrics will help you answer the question:
“ Will the revenue we get from the customers we’re acquiring be more than the costs we incurred to acquire them?”
Back to our example, if the average order placed by a customer costs $25, it is important to consider how many times in the future this customer will make an order.
Now let’s take a closer look at what goes into customer acquisition costs and what are the areas on which businesses spend while trying to acquire new customers.
This area includes all the costs that you could incur in the different types of marketing and advertising activities. Such as:
This area includes all types of fees, salaries, wages, and commissions that you pay to different types of personnel and agencies involved, such as:
This area includes all the technical costs that your eCommerce business incurs while trying to acquire new customers, such as:
This area includes all the discounts and sales that your eCommerce store provides to encourage people to purchase from you.
After understanding what customer acquisition cost means for an eCommerce business and identifying the areas for these costs, it is time to learn how to reduce them. So here are some effective tips and strategies to help in lowering your customer acquisition cost.
Customer segmentation is usually crucial for eCommerce, and when it comes to decreasing customer acquisition expenses, properly segmenting your target is your way to go. It is something that you need to prioritize because you don’t want your eCommerce business to be spending money on acquiring customers that are not even interested in what you’re selling.
Some tips that will help you in your target segmentation journey and that will definitely reduce the cost of acquiring a new customer include:
The next most important strategy after target segmentation is understanding your customers and their buying motivation. In order for you to reduce cost per customer acquisition, you need to be able to identify their needs, wants, interests, and preferences.
Research shows that 66% of customers expect companies to understand their needs (Hubspot, 2022). Therefore, if you go on marketing your products and services without fully understanding what your customers want and whether they are being motivated to purchase by need, fear, acceptance, impulse, pleasure, aspiration, or other, you risk spending acquisition money on 66% of customers that you’re gonna lose anyway.
Imagine spending a lot of money to acquire a customer, only to lose them at checkout. Cart abandonment is one of the biggest problems that face eCommerce businesses today. Therefore, there is no minimizing the customer acquisition rate without reducing your cart abandonment rate first.
As we mentioned at the beginning of this article, the customer acquisition cost (CAC) metric is best understood when it is paired with the customer lifetime value (CLV) metric. Therefore, improving your CLV is definitely important in lowering customer acquisition costs. Another significant metric that is very relevant here and that also has a role in minimizing your customer acquisition cost is customer retention rate.
Research shows that:
Learn more about How to Improve Customer Retention Rate For eCommerce.
The first strategy that we are advising you here to follow is to create landing pages. You are probably now asking yourself: “Isn’t that obvious?”
Well, apparently, not! There are many eCommerce businesses that take conversions for granted, include links in their ad campaigns that take prospects directly to the website, and assume that everyone will convert once they get there.
That is not the right way to optimize your customer acquisition cost because there is absolutely no way to guarantee that prospects will convert once they get to your eCommerce store; therefore, you want to have an alternative strategy. Landing pages are a great way to gather leads, and what are leads other than hope for future conversions?
In other words, if your website visitors do not convert the first time they visit your eCommerce store, your landing page will provide you with the data you need to pursue them and work on converting them from prospects into actual customers.
After creating your landing pages, you need to work on optimizing them along with optimizing your eCommerce website as a whole. For example, one of the ways that could help in decreasing customer acquisition costs here is making sure your website and landing pages are optimized for mobile commerce, which comprises 73% of total eCommerce (Zippia, 2022).
Customer churn rate is the number of customers that stop buying from your eCommerce store over a specific period of time. It is a no-brainer that when you want to improve your customer lifetime value, you need to reduce your customer churn rate. Focusing on this negative relationship between these two metrics is another way you can optimize your customer acquisition cost.
I believe it is all starting to make sense now, isn’t it?
It is a bit like a puzzle if you think about it. In order to lower customer acquisition costs, you need to:
In eCommerce, it is always good to use an omnichannel marketing approach where you reach your customers across all available channels, platforms, and devices in a connected way that offers them a seamless experience. However, in order to do this in the right way that leads to lowering customer acquisition expenses, you need to carefully and wisely choose the channels and platforms where you pursue your customers.
There is no point in providing an omnichannel experience if you are wasting money on channels that your target audience does not use. So, to successfully reduce the costs of acquiring a new customer, you need to strike a logical balance between diversifying your acquisition channels and choosing the right ones.
Retargeting, which is also sometimes referred to as remarketing, is one of the most effective strategies to pull your customers back into the funnel or back on the buying journey, which eventually leads to decreasing customer acquisition costs.
Tips:
Word-of-mouth marketing is a golden strategy to optimize customer acquisition costs because it is a cost-free way to increase awareness about your eCommerce brand and reach a wider range of audience. One of the best ways you could leverage word-of-mouth marketing is by encouraging user-generated content (UGC).
Think about it! With paid social media ads, for example, costs are always part of the deal. However, with UGC, you get to have hundreds, maybe even thousands, of users talking about your eCommerce brand and sharing pictures and videos of your products or services without you incurring any additional costs.
Other ways you could benefit from word of mouth is by encouraging your customers to write reviews on your products or services and have these reviews available for all your customers to read. This automatically increases social proof, then, before you know it, one thing leads to another, and you end up succeeding in minimizing customer acquisition costs.
Other than user-generated content and customer reviews, you can leverage word-of-mouth marketing through affiliate programs, referral programs, and influencer marketing.
Loyalty programs are a great strategy to retain existing customers by rewarding them for their loyalty to your eCommerce brand. In order to leverage loyalty programs in a way that reduces the cost of acquiring a new customer, we advise you to focus on the non-transactional activities of a loyalty program.
Non-transactional activities for which customers can be rewarded include:
Investing in creating content and optimizing it for search engines has proven to be very successful in achieving organic growth for eCommerce brands, which eventually helps in lowering customer acquisition costs.
Yes, you might incur some costs at the beginning, such as paying fees to content writers or buying a Search Engine Optimization (SEO) tool. However, we called it “invest in your content marketing” because it is really an investment. You pay some minor costs at the beginning, but these costs help generate way more revenue.
Tips:
If it is used right, email marketing can be an effective, low-cost customer acquisition tool. Sending the right emails to the right customers can lead to reducing customer acquisition costs with little effort.
Whether we are talking about welcome emails, review and feedback emails, confirmation emails, promotional emails, abandonment emails, re-engagement emails, or others, it is a cost-saving strategy.
Conversion rate optimization has so many benefits for eCommerce businesses, one of which is the minimizing of customer acquisition costs.
To understand how this works, take a look at this simple example:
If you spend $100 on customer acquisition expenses and acquire 5 new customers, then your CAC will be $20 per customer. However, if you spend the same amount of money and get 10 new customers to convert, your CAC will be $10.
Discover the Top 26 E-commerce Conversion Rate Optimization Strategies.
Our final advice to you today is to use automation because there is no succeeding in today’s eCommerce world without automation. Most of the strategies we discussed in this article require automation tools to be easier and more effective.
Converted.in offers you the best marketing automation tool that can help you dramatically reduce custom acquisition costs by:
Book your Demo now and start working on reducing your customer acquisition cost today.
