Cutting costs is one of the biggest things you can do to make sure your ecommerce business is running smoothly. Especially when your store is at more of an ebb stage in the eventual ebb and flow of shopping seasons, making every penny count is crucial for your profits.
It’s not always easy to know where we can cut costs though, above all when we’re talking about gaining new customers. While new customers are wonderful, and should be a priority, they should never come at the expense of your profits.
So I’m here to tell you how you can reduce your customer acquisition costs by focusing on the customers you already have, and making them loyal through retention and referral programs.
4 Strategies to Reducing CAC
When focusing on reducing your customer acquisition cost, it’s important to remember that everything is relative. You will ultimately decide what you feel comfortable paying for a new customer, and while there is no magic number to aspire to, lower is always better.
There are 4 main strategies you can use:
- Focus on the marketing channels that give you the best ROI
- Perfect your USP
- Invest in your Best Customers
- Focus on Customer Retention Strategies
By using these 4 strategies to focus on customer retention, you’ll be able to reduce your CAC exponentially.
Focus on ROI-Rich Marketing Channels
The very first thing that you’ll want to do when creating a strategy to reduce CAC is to, quite literally, trim the fat.
It’s time to walk away from channels that don’t perform- because they’re just a money suck for your ecommerce store. Think about it- it doesn’t make sense to keep investing in channels that aren’t working.
Let’s take a look at an example:
The first thing that jumps out is that Facebook has the highest CAC at £ 193.81 per new customer. That’s quite high- and while an amazing ROI and revenue generation might mitigate such a high CAC, this is clearly not the case.
Facebook has the lowest revenue acquisition of your channels, the lowest AOV (meaning that customers from this channel aren’t even ready to spend a lot) and the highest CAC. Ultimately, we can see that this this channel isn’t really working for your store.
The highest marketing cost is poured into Google Adwords. Having the highest marketing cost isn’t necessarily a bad thing if you’re getting a high enough ROI, however we can see that Google AdWords could be doing better. Those coming from Google AdWords aren’t converting as well as they could be with only 0.59% as a conversion rate.
This channel is bringing in the most visitors, however it’s perhaps not getting the best ROI. While this isn’t as serious as the situation with Facebook, given that it’s got the highest marketing cost, it’s likely time to shift focus away from Google AdWords and move it to a channel that will pack a bigger punch.
For example, retargeting and affiliate campaigns are working far better for your online store. Criteo is bringing you an 812% ROI, despite having one of the lowest marketing costs. This channel has a £ 15.38 CAC which is rather low for the amount it’s bringing in.
However, Zanox has an astoundingly high ROI, and one of the lowest CACs. It’s bringing in the most orders, and has the highest conversion rate- so obviously this is your best channel in terms of cost to return.
One of the best ways to reduce your CAC is to move budget from channels with a lower ROI to those who are working better for your online store. By reallocating your marketing spend, you make your budget work harder towards your revenue.
Perfect your Unique Selling Point
No matter what you sell and what your business is, there’s one question that you should always try to answer:
“Why should your customer purchase from you over your competitor?”
Perfecting your USP helps reduce CAC by hyper targeting your marketing messages so you’re only attracting your best kind of customer. By doing this, you weed out anyone who might just be window shopping, or aren’t ultimately looking for what you’re offering.
Your USP can be anything:
- Price: can you out-price the competition?
- Quality: do your products last longer?
- Fast/Free shipping: can you offer better logistics options?
- Customer experience: do you have better customer service?
- Brand community: have you created a community and image around your brand?
- Rewards programs: are you making it more advantageous to shop with you?
The sky is the limit, but whatever you choose for your USP, your USP should be found in every marketing message that you present.
As with multichannel customers, you should have an aligned marketing message across all channels so that you can pull in the right customers. The more fined-tuned your message and targeting is, the more narrow your net will be.
This means that you’ll spend less pulling in customers who have no interest in your offer.
Take this USP from Modcloth: “Modcloth provides an exciting and engaging online shopping experience for everyone in search of vintage women’s fashion with fabulous flair.”
They’ve explained exactly who they’re targeting, what they offer, and what you as the customer can expect from this brand. This message translates into their product copy, their product photos, and each and every aspect of their digital marketing. They have nailed their USP.
When you get this part right, you’ll spend less on getting new customers because your message will be fine-tuned for the customers that are most profitable to you. Modcloth isn’t looking to attract women looking for basic, athletic looks, so promoting a pair of sneakers isn’t necessarily going to work for them.
Understand your niche, and speak to them. Don’t bother trying to bring in those who will just window shop or purchase only once from you.
Invest in Your Best Customers
By investing in your best customers, as I mentioned with USP, you hone in on the customers who will be most profitable for your online store.
New customers are important. But they’re expensive.
It costs more to attract a new customer to your online store than it does to retain an existing customer. How much more?
Five times more.
Because with an existing customer, the work is already done.
They know your store, your products, and how you do business. Chances are, if they’ve had a positive experience and are enjoying your products, it shouldn’t take a whole lot to reconvert them.
This model is not just theory. Repeat customers are the bread and butter of online businesses, according to the Adobe Digital Index Report:
We decided to take a look at the average order value of new customers vs repeat customers at Divvit, and as it turns out, new customers that purchase with our merchants spend on average € 108.64.
Repeat customers tend to spend € 60.76 on average- meaning that reconverting a repeat customer just once is worth 20% more than just getting a new customer.
Which means that focusing on the customer who costs five times less means a boatload more money for you.
So how do you figure out which customers are your best customers?
You calculate their Customer Lifetime Value (CLV) to determine their potential.
When you need to calculate CLV, it’s important to know how long your customers typically purchase from you, which is considered their “lifetime” as a customer. If you don’t know how long a customer lifetime is, you can make a few estimates.
From here, you figure out how often they purchase from you in a customer lifetime. For example, if they make 15 orders over 12 months, the frequency in a month is 1.25. If your customer’s lifetime is around 3 years, you can make the estimate that they will purchase 45 times.
You then just multiply that number by their average order value (AOV). Say your average order value is € 100. This would make the value of this customer lifetime € 4500.
This is where we tie it all in: if your customers are worth € 4500 to you over their lifetimes, you know that you need to spend less than that to acquire them in the first place.
However, there is no set CAC- lower is always better. A lower CAC means more of that € 4500 to take home and invest back into your store and your customers.
So we know that repeat customers are the best, but how do you keep customers coming back for more?
Loyalty & Referral Programs
The entire idea behind loyalty and referral programs is to make it more advantageous to shop with you over your competitor.
A great loyalty program incentivizes your customers to come back by offering some kind of carrot to spend often and buy more.
These programs are wildly successful for ecommerce, as those who have some kind of incentive to hit often suffer from FOMO (or fear of missing out) on the incentive.
It can also be more profitable: increasing customer retention by just 5% can boost profits by at least 25% for businesses.
A referral program, which can be roped into a great loyalty program (or vice versa), uses key word-of-mouth marketing.
But on the next level.
When your store, products, and customer experience are great, your customers will talk about you to anyone who will listen. All a referral program does is incentivize your customer to do what they would do naturally, once they’ve fallen in love with your store.
Also, it’s a lot cheaper than traditional marketing channels for CAC.
How well does it work?
Think about this: 77% of consumers are more likely to purchase a new product when hearing about it from family or friends. Word-of-mouth marketing has always been one of the most powerful kinds of marketing because you transform your best customers into your own personal evangelists.
This is the case even when we’re talking about B2B. 84% of B2B decision-makers begin the purchasing process with a referral. This makes sense when thinking logically, especially for business owners who work with a variety of other businesses in their line of work.
The long and short of it is, if you’re looking to reduce CAC through customer retention and referral programs, what you really need are better customers.
But are referred customers better?
Researchers at Goethe University Frankfurt and University of Pennsylvania teamed up to answer the question “are referred customers more valuable than non-referred customers?” in their paper “Referral Programs and Customer Value.”
They worked with a bank to put into place a referral program and study the results. The bank acquired 5000 customers through a referral program with a reward of € 25 over a period of 33 months. This was then compared against 4600 customers that the bank had acquired through other means.
As it turns out, customers were a better fit for the bank, since referrers would likely select friends that he or she thought would be a good match for the bank.
Referred customers would have needs and values similar to their social circles. The bank could use these similarities to better serve the new customer and get 25% higher profit margins.
The research showed that the probability of remaining a customer by the end of the study was 82% for referred customers and 79.2% for their non referred counterparts.
Analyzing this data, researchers found that customers acquired through the referral program were 18% less likely to defect than non-referred customers.
The study wasn’t the only evidence pointing to great results with referral programs. There are a few well-known companies that used referral programs to drive down their CACs.
Dropbox in particular got 4 million users in just 15 months by implementing a great referral program: extra Dropbox storage space for each friend referred, and customers could “earn” up to 16 GB of free data storage.
They managed to go from 100K users to 4 million with this tactic. What’s more, this allowed Dropbox to bypass traditional ad spend, which would have been $233- $388 per new customer for a $99 product.
Dropbox wasn’t the only company to growth hack in this way. PayPal managed to achieve 7-10% of daily growth in the early 2000s with referral programs.
How did they pull that off? They basically gave away free money.
PayPal ended up spending $ 60 million on their referral incentives, catapulting their user base to over 100 million members.
To sum up, adding a loyalty or referral program doesn’t just have CAC reducing benefits, but it also creates a better customer experience for your ecommerce store. When you focus on giving back to your customers and rewarding them for their loyalty, they’ll pay you back.
The point from this is to use strategies that are going to make your budget work harder for you. While some of your campaigns may be working phenomenally, there’s no sense in not trying to improve your processes, especially when you’re paying for them.
CAC can be an easy way to pull your strings a bit tighter and get your ecommerce business optimized for maximum profit. When you incentivize your customers, focus on the best marketing channels, and use customer-focused strategies to prioritize your best customers, you can reduce your CAC for your online store.
This article was written based on our webinar “How to Reduce CAC through Customer Retention and Referral Programs,” which aired live April 17th, 2018 with Raúl Galera of ReferralCandy.