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Ecommerce marketers are finding themselves in an increasingly tricky situation. As demand for new customers from paid acquisition channels continues to increase, so too does the price to acquire each new customer.
According to data from Statista, customer acquisition costs have risen by 60% in the past five years. Back in 2013 you would have waved goodbye to just $9 per customer you acquired, but today you could be losing as much as $29 each time.
Essentially, you’re paying more to acquire the same number of customers. And this isn’t going to change any time soon.
Let’s look at why that is.
Digital advertising spend is forecast to grow to $836 billion by 2026. Due to the nature of this type of advertising, the more companies that want a piece of the pie (the PPC pie, if you will – we’ll get onto this in a sec), the more the cost of advertising increases for everyone.
Paid search and social are currently the most dominant forms of digital advertising in ecommerce, which means that more brands than ever are fighting for visibility on the same platforms and (hopefully) gaining customers as a result. This has resulted in an increasing demand for a static supply. Or to refer to the mentioned PPC pie chart metaphor; more people want a slice of pie but there is still just one pie available.
While it would be great if 100% of clicks converted into purchases, we know that this isn’t realistic. Along the way, we’ll pay for clicks that result in a purchase, and those that don’t. Both those costs must be factored into the cost of acquiring each paying customer, known as the Customer Acquisition Cost (CAC).
Customer Acquisition Cost = Cost of Sales and Marketing divided by the Number of New Customers Acquired.
Naturally, the increasing cost-per-click we’ve just spoken about will increase CAC. You’re now spending more on each click, so naturally your marketing spend increases relative to the number of customers acquired.
Let’s dust off the calculator to dive in a bit deeper here.
Imagine you’re a fashion retailer, and your average order value (AOV) is $60.
For the ecommerce industry, we know the average CPC (cost per click) for a search ad is $2.69.
So, if 1,000 people click on your ad, you spend $2,690 in total. But let’s assume you’re converting customers at a rate of 5%,
If only 50 of those people went on to actually buy an item of your clothing (5% rate of conversion), that means you’ve paid $2,690 total for just 50 customers, and the individual customer acquisition cost is therefore $53.80. The problem is, as we already mentioned, your AOV is just $60.
This isn’t great news for your profit margins, so what can be done to offset such expensive rates of acquisition?
Customer lifetime value (CLV) = Customer Value x Customer Lifespan
One of the best ways to offset the rising costs of acquisition is to increase the return on investment each customer offers over time – i.e. increase their customer lifetime value.
Customer lifetime value is the value that is earned from a customer throughout the duration of their lifetime with the company. Therefore, each time a customer returns and purchases another item, the CLV increases.
A strong CLV is instrumental in offsetting a high CAC (customer acquisition cost), and one effective way to measure this is to look directly at the ratio of CLV/CAC. If your CLV is $150 and your CAC is $53.80, your CLV/CAC ratio = 2.8:1. Companies should aim for a ratio of 3:1, which would mean you make 3x what you spend acquiring each customer.
The ratio of CLV/CAC naturally improves over time, and a higher customer lifetime value by year two and beyond, can completely offset high customer acquisition costs!
So, how do you encourage shoppers to become returning customers and stick around for longer? This is where it pays to reward customers for their loyalty.
To increase your CLV (and thereby counteract those high acquisition costs), you’ve got to build relationships that make your customers want to repeat purchase. Research shows that without those relationships, just 32% of customers place a second order in their first year as a customer.
Loyalty is instrumental in keeping these relationships going by allowing you to personalize your messaging, reward your most loyal customers for their business, or catch any at-risk customers right before they churn.
With a loyalty program, you have the functionality to keep your customers engaged for longer by delighting them with surprises in the form of loyalty rewards, membership tiers, free gifts, access to pre-launched products and so much more.
Loyalty programs also give you access to vast amounts of data on your customers and their behaviors, meaning you’re even better informed to make important decisions about where to invest your budget.
Loyalty programs also help to offset acquisition costs by incentivizing referrals. For example, if your loyalty program member refers their friend or relative, you can give the existing customer points and the referred person enough points to unlock a reward that makes their first or next purchase far more appealing. Not only are you keeping your existing customers happy and engaged, but you’ve also just saved yourself the total cost of acquiring a new customer!
It’s time to take action!
While you might not be able to do much about the rising cost of acquisition, you absolutely can and should do something to increase the lifetime value of the customers you already have, and drive your returning customer rates skywards!
Rewarding your customers for their loyalty is a no-brainer, and if you’re struggling to gain a competitive edge then this could be just what you’re missing. To learn more about the power of customer loyalty and what it can do for you, sign up for our free academy here.