Running an ecommerce business is expensive, and the more successful you are, the pricier it seems to get.
If you aren’t actively trying to keep the costs of running your online store low, things can get out of hand pretty quickly.
Business 101: Reduce your costs while maintaining your revenue to earn more profits. While that sounds simple, it can get tricky if you’re not sure where to cut costs.
One of the best areas to reduce spending is how much you spend to obtain just one new customer. Customer acquisition cost is a make or break metric for your ecommerce store, as it has a significant direct impact on your revenue.
I’m going to go through a few ways to calculate your CAC and how to reduce it with a few tips. There is a plethora of ways to lower your CAC, may of which are centered around targeting the right customer with the right message at the right time.
5 Steps to Lowering your Customer Acquisition Cost (CAC)
Reducing your CAC isn’t as difficult as it might seem- and even a tiny reduction, as we just saw, has a big impact. There are many aspects that you can fine tune over your business to improve your customer acquisition costs:
1. Perfect your Unique Selling Proposition (USP)
Differentiation is the key to your success.
Your Unique Selling Proposition (or Point) is what sets you apart from everyone and everything else. If you don’t know what your USP is, you won’t know why your customers should buy from you instead of the other guy.
It’s really that simple.
Why do your customers purchase from you? What makes your store more attractive than the hundreds of thousands of your direct competitors?
- Your USP can be literally anything:
- You might have the lowest prices on the market
- Maybe your products are of particular quality
- Your customer experience blows everyone else out of the water
- Maybe there’s a real community around your store and products
- You have a rewards program that makes it more advantageous
- You offer free socks in every purchase
Whatever your USP is, it’s important that it adds value to the customer in a significant way. Ask yourself what your ideal customer is looking for and wants. How can your store directly respond to that?
The strength of your USP is how well it responds to customer needs. When that simple question is answered, you know how to gear each aspect of your marketing message.
2. Marketing Analytics: Focus on the Channels that give you the best ROI
Every ecommerce business is different. While there are some universal truths, what ultimately works for your online store is unique to you.
There’s no harm in experimentation and trying what others are doing, but you’ll have to find your sweet spot. One of the best ways to do that is to take a good, hard look at your marketing channel ROI.
With any marketing channel, and especially paid channels, there’s going to be a bit of a learning curve when it comes to the time and money that you invest in them. With that said, there are always a few channels that are going to do most of the work for you.
Then there are others that will bomb completely, and taking a look at your marketing analytics is the best way to see where, how, and why.
Take the following example from the Divvit Analytics Explorer:
Here, we see the subtle difference between beating a dead horse and nuking it from space.
Customer acquisition cost comes out to € 544.72 per new customer. That’s a little over € 12,000. However, there are plenty of other channels that are doing a lot better. Even organic Facebook does better than the paid Facebook ads, bringing in 8.7 times more revenue.
Even so, focusing on Google organic would probably be the best bet: already bringing in nearly € 30,000, it’s far more profitable than any other channel.
While this is an extreme example, it’s a clear case of needing to stop all Facebook ads now- because they’re simply not working for this store. With a conversion rate of 0.24% and a CAC of € 544.72, they’re just not worth the two-thousand euro or so that they’re bringing in.
This example is more in-your-face obvious, though it won’t always be so. Calculating your CAC through your marketing analytics will show you exactly where you can cut costs and improve your overall cash flow.
Knowing is half the battle- and when you know where you can cut unnecessary costs, you can focus that budget on the channels that work, or other cost-friendly tactics.
3. Zero in on your Best Customers
Much like useless Facebook ads, bringing in the wrong customers to your site will only cost you more.
The best way to reduce customer acquisition costs is to bring only the right people to your site.
Easier said than done, right?
Not if you do it right. There are ways to hone your marketing funnel so that you’re only casting the net for the customers that are most likely to buy.
The other half of CAC is CLV or Customer Lifetime Value. Customer lifetime value is the amount of revenue a customer will generate for you over their lifetime.
This is the kind of customer you want to attract.
Your CAC needs context, and that’s what the CLV provides. Take the example above, let’s say Le Petit Vapoteur spent € 500 to obtain this customer. This customer, from December 31st 2016 to December 31st 2017 spent € 838.40.
To determine a customer’s lifetime value, simply add all of the revenue they have generated over their lifetime. However, sometimes you don’t have a customer that has ended their lifetime ordering from you.
It’s possible to estimate the CLV of a customer by taking the average monthly or yearly purchases and multiplying it by the average order value (AOV). You would then estimate the number of months or years that the customer would purchase from you in their lifetime and multiply that against the previous number.
AOV = Total Revenue in a time period / # of Orders
The AOV for this customer is € 55.89. Over a 12-month period, the customer ordered 15 times, counting an order-per-month rate of 1.25. Let’s say that the customer will be with this shop for another 5 years, which makes for a nice clean 75 more orders.
Multiplying that by the AOV gives us € 4191.75. Subtracting the € 500 they spent to obtain this customer? Total value is € 3,692- a cost that this store probably deems ultimately worth the spending.
If your customer acquisition cost is providing you customers like this, then it might be worth the cash. However, there is always room for improvement and optimization. The ROI provides much more value when you can cut the costs.
How to Identify your Best Customers
Start by creating a detailed marketing persona for your customer. A marketing persona allows you to put a face and a name to your customer and adapt your marketing message directly to that customer.
See Greg the Professional and more about marketing personas from our post on Perfecting the Customer Journey.
Why is this useful? You humanize your customer. Instead of just being a nameless number, you create a persona around who your ideal customer would be. It’s so much easier to relate your marketing messages and operations to a real person.
Once you have a proper marketing persona, you can start investing in your actual customer.
4. Invest in your Best Customers
Once you’ve identified the best customer for your ecommerce business, it’s crucial that you invest in adapting everything around that customer.
I’m not even just talking about your marketing messages and operations, I’m talking about customer service, onboarding, and retention.
The fact is, if you treat your customers right, they’ll pay you back to the tune of 40% of your overall revenue.
Statistic from the Adobe Digital Index Report.
According to the same report, the revenue from one repeat customer is roughly equal to 5-7 new customers. Repeat customers already know and trust you. If you give them a good reason, they’ll be happy to come back.
So how do you transform a new customer into a repeat customer?
Focus on providing an amazing experience...the first time:
When your customer comes to your site, your complete user experience needs to be picture perfect. It should be easy for them to find what they’re looking for and purchase from you. UX hangups can be the catalyst that makes them bounce before even becoming a new customer.
Create an onboarding process that makes the customer feel wanted:
Show a little appreciation: thank your customer for signing up or buying. Give them the next steps they should take and let them know what they can expect from you. If you feel inclined, offer a discount off of their first (or next) purchase. Give your customers an incentive to come back.
Invest in customer support that puts your competition to shame:
Many think about site optimization when they hear customer experience. However, it’s so very much more: it’s the first email they get from you, the unboxing experience when they receive their product, and the support when things go awry. Providing outstanding customer service makes the experience with your brand stand out in your customer’s mind.
Create or improve your customer loyalty program:
The idea behind a customer loyalty program is that it makes it more advantageous and often less expensive to shop with you over the competitor.
Using a points system is a great way to not only encourage your customers to come back often, but to spend more while they’re at it. We’ve already seen that customers who are in a loyalty rewards program spend 13.71% more than those who aren't.
Use retargeting marketing to give the ads you pay for an extra boost:
Using retargeting marketing and emails allows you to take your marketing budget the extra mile. For more bang for your buck, target customers who have already purchased from you or who are thinking of purchasing.
In fact, users who are retargeted are 70% more likely to convert according to Hubspot. If you want your ads to be that much more effective, concentrate them on retargeting rather than spray and pray.
5. Invest in Cost-Efficient Long Term Strategies
A big part of reducing CAC can be done by investing in strategies that don’t rely on your budget alone. As a general rule, when you’re not investing money into something, you have to invest time.
Paid campaigns can work well, but to get the most out of your budget, pair them with long term strategies that improve the overall marketing health of your ecommerce site.
Content Marketing & SEM:
Using everything you’ve learned about your USP and your ideal customer, it’s time to adapt your content marketing and SEO around that customer.
Let’s go back to the problem your USP solves. What is your customer searching for? Are you ranking for the keywords they use?
A great way to start ranking for those keywords is through content marketing. Writing 16 or more blog posts per month can boost your traffic 3.5 times, and honing those blog posts so that they’re full of the keywords your customers are looking for will amplify your attraction of the right customers.
On top of that, now that you have put a name to your ideal customer, you can write your posts speaking directly to that customer.
However, your content will go nowhere if you don’t have a good promotion strategy in place.
Social Media & Community Management:
It’s not enough to just publish your content and hope it gets seen. It’s important to do a bit of promotion for your content and your brand.
Social media can be the answer here. Putting real time and effort into your community management strategy not only promotes your content and business, but helps to create a real community identity around your brand.
With that said, these strategies only work if your ideal customers are present on those networks. Go back to your data and look at where your customers really come from in order to choose the right social networks for your ecommerce store.
User Generated Content:
Creating content, when done right, can hold immense value for your brand. However, it can be time consuming to create quality content all the time.
What if you could curate content about your brand?
That’s where UGC comes in. UGC can be social media posts about your products, customer reviews, and comments about your brand made in a public sphere.
Curating UGC is not only great for your SEM strategy (because Google loves fresh content updated regularly), but it’s also great for business. A customer is 97% more likely to purchase after having interacted with UGC.
Boom. A new customer, with practically no CAC.
Another great way to drive down your CAC is by using influencer marketing.
As with every other strategy I’ve covered, it’s crucial to attack audiences where your customers will be present. It makes no sense to go for an influencer that has nothing to do with your site, products, or brand.
The idea is to get a trustworthy shout-out to a large audience by someone they trust. When that audience is your target customer, it provides more value to your campaign.
While some influencers are paid, and expect payment for promoting your online store, it’s possible to negotiate a review of your products in exchange for the products themselves.
When you approach an influencer and ask for a review, you need to be prepared for honesty. However, if you’re confident about the quality of your products, there shouldn’t be much to worry about.
In the event you do pay an influencer for promotion, it’s important to think about this as a partnership. This leads me to my next point:
Creating partnerships with influencers or other companies is a great way to tap into new audiences. If you have a non-competitor with the same target audience as you have, creating a win-win situation where you collaborate and leverage each other’s audiences can boost your customer acquisition.
What’s great about partnerships is that you can construct them basically however you want, the sky's the limit. It can be as simple as collaborating on some content to as complex as being the official representative for your niche to your partner’s audience.
Investing in your core business and, above all, your customer, is the best way to reduce your CAC. By perfecting what sets your store apart from the competition, focusing on the ideal customer and which marketing channel that customer comes from, you can attract the right customer to your store and lower their acquisition costs.
By focusing on your core business and in cost-friendly long term strategies, you will improve the overall health of your ecommerce store, while boosting your marketing efforts. By optimizing each aspect of your business and customer relationships, you can center your strategy around a solid customer base.
What are your best strategies for reducing CAC?