Everyone thinks that they just need to boost sales and that's it - you’ll achieve growth eventually.
In other words, sales at all costs.
But as you go down that road, reality sinks in - you have less money to invest in and sustain your eCommerce business.
This is why customer acquisition costs take precedence over just sales. The goal should be to grow your business but as efficiently as possible.
Moreover, small and medium businesses don’t have much of an option but to be thrifty with their marketing spend.
And that’s what this article is all about - customer acquisition costs , what is it? And how can you get it to an optimum level?
What is eCommerce customer acquisition cost (CAC)?
To put it very simply, it's the cost of acquiring every new customer. It paints a picture of how effective your marketing efforts are and what kind of traction it can bring.
More importantly, it gives an idea of the probable profitability and investment requirement you would need to grow your business. So the lower the customer acquisition cost, the better the profit, the longer your last and the more your growth.
How to calculate CAC?
To calculate the CAC for your eCommerce business, follow this formula:
To calculate the total sales & marketing costs, here are some of the items to consider:
- Advertising costs
- Cost of your marketing team
- Cost of your sales team
- Creative costs
- Technical costs
- Publishing costs
- Production costs
- Inventory upkeep
12 fresh strategies to reduce your customer acquisition costs
1) Focus on the 20% (Adopt the Pareto principle)
You must’ve heard the phrase “Work smart, not hard”. The Pareto principle puts that into practice.
In every effort you take, keep this approach in mind - focus on the top 20% that gets 80% of your sales.
This means doubling down on the following:
- Top locations (On Google Analytics, Go to Audience > Geo > Location)
- Top products/ product categories (On Google Analytics, Go to Conversions > eCommerce > Product Performance)
- Top traffic sources (On Google Analytics, Go to Acquisition > All traffic > Source/Medium)
By identifying your top locations, you can target your ads, pitch and product offerings accordingly making it easier to convert. It also helps relieve you of expenses going towards marketing in other locations.
Also, having fewer products isn’t always a bad thing - it results in lower inventory cost, storage cost etc.
But phasing out or discontinuing products isn’t easy, you don’t want to be stuck with unsold inventory.
To offset this, announce a massive clearance sale to sell the stock quickly. Make sure you subtly state that these products won’t be available after this.
Check out how ASOS does this.
Not keen on it? - You can also bundle your low performing products with your high performing ones at a single discounted price, attaining higher revenue for these products.
When it comes to your traffic sources, it’s pretty straightforward - understand what avenue works best for you and double down on it.
2) Adopt the decoy pricing strategy
Pricing can heavily influence the decision to buy. And once again, more sales , higher return and lower CAC in the long term.
To combat this, try implementing the decoy pricing strategy.
If the image above gives a familiar memory then you’ve been a victim of the decoy pricing effect.
As evident in the image, there are two options and one decoy option to sway the customer to purchase the product of higher price / value.
Here is another example of this strategy.
3) Bundling smartly has more benefits than you think
This in turn helps to reduce the average customer acquisition cost as you grow because the shipping cost, marketing costs etc. are spread across multiple products.
Also, it helps improve stock rotation which will bring down the storage costs as well.
To make it work, bundle slow selling products with your top selling products to clear stock and recoup the cost. Tag this bundle as a bestseller to push it out faster.
Follow the “buy more to save more” model - club 2 high value products, club a high value and low value product or multiple products at a single price. Whichever option you pick, make sure you have at least one high value/top selling product as part of the pack. Customers will perceive a higher value and you maintain stock rotation.
4) Identify & optimize gaps in your funnel
In order to reduce your customer acquisition costs, you need run a thorough analysis of your conversion funnel. At the end of the day, CAC is influenced by increased sales as well.
If you don’t already know, a conversion funnel is basically a representation of the customer's journey on your website. Most eCommerce websites experience a lot of leaks from the funnel - forcing them to spend heavily on email marketing, retargeting and other avenues to bring them back.
To optimize your conversion funnel:
- Start by looking at the ‘Behavior flow’ report on Google Analytics. It'll show you the number of drops at each page of your website.
- After identifying the pages with maximum drop offs, get a bit granular and look at the click and navigation data on each page by using a Heatmap tool.
- Basis the data, find out friction points and fix them accordingly.
However, here are a couple of common quick fixes:
- Run a technical audit of your website using tools like ScreamingFrog to find out broken links and fix them.
- Use Google Page Insights to identify issues that reduce the load time of your site. Accordingly, fix them based on these suggestions. Common reasons are heavy images and gifs and multiple plugins running that tamper with the website’s code.
- Use heatmaps to identify which fold of the page has the most engagement. Try pitching the most valuable information in that fold.
- Update your internal search to display alternatives for zero results and also identify spelling errors.
- Through heatmaps, identify which form fields cause the most frictions when a customer signs ups. This is very effective when you have micro-conversions or longer forms. Get rid of the fields that drive your visitors away.
- Analyze whether your popups and exit intents convert visitors or get closed. Accordingly, test the copy, display trigger time and the CTA to figure out the best approach.
5) Focus MORE on CLV
According to a study, you can increase your profits by at least 25% with just a 5% increase in customer lifetime value (CLV).
There are plenty of benefits of an improved CLV - better referral, easy branding through word of mouth, more sign ups for your loyalty programs.
However, many eCommerce founders focus more on new customer acquisition than retaining them - in the long run , this heavily bumps up your acquisition cost.
There are numerous ways to improve your CLV, here are two that can impact your CAC.
- Offer related products at discount prices during checkout. Keeps customers happy and engaged with your brand. You can also throw in a free gift. Easy way to introduce them to a product and keep them coming back for more units.
- Loyalty programs aren't just about the prizes and the offers, create one that engages with the customer. Try building a point system based on how they interact with the brand (following on social media, offering a referral etc.). These points can be used to gain a discount during a purchase from your store. This helps market your brand at a relatively lower cost.
6) Define (or narrow down) your target audience
While everyone would love to sell everywhere and to everyone, having a really broad target audience shoots up your CAC in the long run. Your conversion rate also seems very low, when actually your market is just too large.
The reason why your acquisition cost goes up is because you aren’t spending money to attract the right audience - losing more money in experiments that don’t lead to any sales.
We know that many of you might already have a target audience in mind but the challenge is focusing all your experiments and campaigns towards attracting those people to your site. Because it’s very tempting to try and attract more traffic but going wide - it looks good on paper and even seems encouraging.
Moreover, as you keep running campaigns, you learn more about your target market - how they’ve evolved and how their interests have changed. So, keep revisiting your persona document and make changes & additions to ensure that razor sharp focus.
If you don’t already have one, start building it. Yes, this isn’t a very common practice in eCommerce but it honestly should be. It helps to easily identify how to actually reach your ideal target audience.
When it comes to creating a persona, here are a few things you should include:
- The target regions (specific to cities)
- The ideal demographic
- The occupation (helps understand the day-to-day life of the customer)
- Magazines, online media and social platforms they consumes
- Their biggest challenges in finding the right product
- Their favorite infomercial channels
- Their favorite brands/products that relate to your product (helps identify potential partnerships and sales pitches)
Once you’re done with all the research, here’s what the final output will look like.
According to this persona document, you can identify the right avenues and the right pitch to market your brand, the right communities to participate in etc.
Another quick way to identify the right channels and the nature of your audience is to open up your GA and look at your top sources and mediums (Acquisition > All Traffic > Source / Medium)
You will find the top conversion driving sources - you can do some research on what's working , why and who are these people who buy from your brand.
7) Content marketing works, but if you do it differently
It's the hottest topic ever since the pandemic hit. Content marketing has become incredibly popular in driving sustainable organic growth and in reducing the long term cost of acquiring a new customer.
In fact, the average conversion rate for stores that run content marketing is nearly 3% which is 6 times higher than those that don't.
But the catch is - it's a crowded avenue now, with competition coming from every industry for different topics. =
The key is to tap into platforms that have recently gained popularity and create extremely unique content.
Our advice would be to hop on the YouTube Shorts trend.
YouTube Shorts became the TikTok or Instagram reels equivalent in 2021 and many creators and brands have begun leveraging it to drive traffic to their site or main channel.
With Shorts, you can try creating “How to” style videos but not “how to use this product” - no one cares about that. Instead, create videos to solve general problems faced by your customers.
Shorts is like tv or radio ads, it's more about smart product placement. Based on your market research, find out the queries your customer base would have and create content around solving those problems.
Another idea is to get your customers to do an unboxing/ unpacking video - quickly stating what's great and what can be improved. These are really popular among the YouTube viewers.
Finally, you can also try 5 minute crafts or DIY style videos , featuring your products - something like this.
An alternative way to save on creating such content yourself is to partner with creators in your space.
For instance, if you sell kitchen knives , you can partner with content creators like acooknamedMatt who creates cooking videos. This provides for opportunities to do smart product placement - reducing the cost in making the video yourself.
Another quick hack - post user generated content (that you can source from social media or amazon reviews) on your YouTube channel as Shorts videos. As review based content is quite popular, this could help generate interest without spending a penny.
Social proof + content marketing in one go.
8) Choose influencers from your pool of customers
Influencer marketing isn’t cheap any more. It costs a bomb to get top or even mid tier influencers to shout you out. And it doesn't guarantee a major bump in sales.
For most eCommerce businesses, influencer marketing accounts for a huge chunk of their overall expenses. In fact, about 17% of businesses spend half their budget on influencers.
To reduce the cost of influencer marketing, we suggest scouting for smaller influencers - from your customer base or those that have under or around 10k followers. Yes this means that you need to reach out to multiple people but it’ll be worth it.
When structuring your payment model, it’s better to promise a free product or discount coupon instead of straight cash or expensive commissions. Just check out the image below, it gives a good idea of how much is spent on hiring influencers.
This freebie or discount model won’t fly with bigger influencers and that's why it’s better to work with people with less reach but who post content that makes sense to your brand.
With your customers, you can do this to engage with them and keep them coming back for more purchases. It helps build a great relationship with them - and they would be happy to shout you out for a freebie or a coupon because they already like your products.
9) Weed out the low performing Ads
Ads are very expensive and possibly the reason why you have a high customer acquisition cost.
The iPhone update has made generating paid traffic more difficult. Personalizing ads and retargeting have become more complicated.
Google Ads have similar problems - too much competition making PPC costs too much to maintain in the long run.
There are two steps to combat this challenge.
The first - identify your top performing Ads, the gaps in your other Ads and optimize the channel for maximum ROAS. This sounds easy but actually takes a lot of time and effort in data analysis.
An alternative is to use a simple tool that runs an audit on your ads and provides you with the fixes. We have a FREE tool called PPCgear that scans your Ads and analytics to identify the best and worst performing Ads and suggests changes to boost the return on your money.
The second - Improve the customer experience on your site to ensure that most of your visitors turn into loyal customers.
Here are a few tips to create a better experience on your website:
- Popups can be seen as intrusive and annoying. Instead of displaying a popup immediately when they land on a page, be patient and allow them 10-15 secs to have a look at your products. Write a funny and witty copy to grab their attention.
- Have a more comprehensive categorization of products - based on product line , usage, gender, age, style, sale etc.
- Think mobile first when it comes to filtering and sorting - majority of customers will be on mobile and touch patterns, screen size and layout will be very different.
- Tweak your internal search to identify spelling errors, related terms and display alternatives for ‘no result’ terms.
- Focus more on product benefits and solving customer problems when writing product descriptions. Draft copies that tickle the funny bone and have a bit of personality.
These are just a few tips to provide a better customer experience on your site. However, it depends on your site. To get specific suggestions, take a full site audit.
10) Coalition programs need persistence
We know that coalition programs are seen as a very futile task but in reality, all it needs is a bit of patience and consistency and it can drastically reduce the cost of marketing for your business.
Getting into the right coalition programs help split the funds required to market, reach the right audience and execute the operations. Essentially, wider reach at lower cost.
What do you need to think about? - Whom to partner with and how to make the most out of it.
Finding the right partner isn’t as easy as connecting with a brand , building a model and voila! - you're selling more. It takes multiple attempts.
Even a brand like Spotify had partnered with multiple brands - Sony, WNYC studios, Waze, Microsoft before they partnered with Hulu.
Once you’ve found the right partner, you have access to their customer’s data, which you can analyze to understand their behavior. This can help tailor a specific pitch for similar audiences.
Besides the existing customer, you also can gain new insights by running surveys and post purchase feedback questionnaires.
Another key tactic is to bundle low performing products with either a popular product from your brand or a fast selling product from the partner’s brand. This helps get more eyeballs for your products that aren’t selling as much.
A note to keep in mind is to find a partnership that lasts for more than 6 months or a year. Without longevity, coalition programs won’t have much of an effect on your costs. Also, the partnership/loyalty programs must be dependent on each other.
Otherwise, nothing stops the partner from ditching you to start their own program. Such was the case with Plenti.
Similarly, find a partner that sees value in working your brand and building a loyalty program around what you have to offer.
11) Use email marketing - smartly
Email marketing is every store’s go to to drive traffic to their site. But the reality is that many stores spend a ton of money and effort without the right strategy - increasing the CAC for your store.
Address this problem by putting your email marketing on autopilot. Set up a drip campaign that’s automated and well spread out. How does this help reduce CAC? The pay for employees of an average business can go up to 75% of the total expenses. The time and number of campaigns required to convert a potential customer - if automated , can save days of email marketing expenses.
Oh and ditch email marketing to lists, try behavior based segmentation - this when combined with email automation, can significantly improve your conversion rates because it brings more personalization to your communications. This reduces the number of emails you need to send to convert one customer , bringing down the CAC.
12) Ran those A/B tests last year? Time to run them again
A/B tests aren't one and done efforts. It requires constant revisits.
During the acquisition phase of any sales journey, the first couple of touchpoints are crucial in getting the visitor interested hooked to your brand. This in turn will make the later sales stages much easier and require less investment.
Hence the process is simple -> test, analyze, monitor and test again.
The more you test, you start identifying what works and what doesn’t and what’s worth investing in.
Another link between your CAC and split testing is the time & effort of your development and design team. The more testing you perform, you realize where and how to better use the team's time. As you keep perfecting each element, the changes become minimal and hence reducing cost of design and development.