Ecommerce customer acquisition cost: Definition, calculation and effective solutions
Online merchants are well aware that there are numerous e-commerce metrics they must know to expand their operations. But one metric, and one expense in particular, gets priority over all others. In e-commerce, this is the ecommerce customer acquisition cost. Online stores can identify how their different forms of marketing are working out for them by understanding the ecommerce customer acquisition cost. Besides that, they also can evaluate their spending compared to their revenues and identify potential issues. Therefore, in this blog, ArrowTheme will talk about what the ecommerce customer acquisition cost is, how to calculate it, and the effective solutions. Don’t miss this opportunity.
What is the ecommerce customer acquisition cost?
The expense incurred by a corporation or store in attracting and obtaining a new customer is known as customer acquisition cost (CAC). Moreover, Corporate Finance Institute defined CAC as “the resources and costs incurred to acquire a new client.” Along with client lifetime value, CAC is among customer acquisition measures (CLV or LTV).
CLV is a metric that evaluates the value of a customer’s relationship with a company or brand.
A company’s or store’s rate of growth is measured by customer acquisition. It displays the number of new clients you’ve acquired. While it’s excellent to expand, it’s also crucial to understand the expense of doing so.
For example, you offer a $30 product. And then you calculate your average client acquisition cost. But you find that you’ve spent $40 on each customer. So you’ve got a problem. Your firm is on its way to financial disaster with a $30 product and a $40 CAC!
Similarly, in case you’re testing several adverts for your product, you’ll want to determine which one has the best CAC. That is, which has the best return on ad spend (ROAS) and the lowest cost per customer acquisition.
Calculating your client acquisition cost helps you understand where your money is going. Moreover, it also offers you an idea of how much profit margin you’ll need to be successful.
Why is ecommerce customer acquisition cost important?
In e-commerce and any other industry, knowing the ecommerce customer acquisition cost is critical. Because these prices can make or break your firm. Furthermore, after you have a customer, you must work to keep them. Otherwise, you would have wasted your money.
According to statistics, it costs 5 to 25 times more to gain a new customer than keeping an existing one. However, customer acquisition is a must for a startup company. As a result, you can avoid becoming bankrupt. Furthermore, customer acquisition is a continuous effort. No company ever stops looking for new customers.
According to an Econsultancy survey, businesses generally put a higher priority on customer acquisition than on customer retention. Furthermore, 44% of the 1,000 digital marketing and e-commerce professionals surveyed said they prioritized attracting new clients.
How to calculate the ecommerce customer acquisition cost?
It’s now time to figure out how much it will cost you to acquire a new customer.
Divide your sales and marketing expenses by the number of new customers to get at the customer acquisition cost formula.
Your ad spend are all included in your sales and marketing costs
Besides that, you can improve your return on investment (ROI) from your marketing and acquisition activities by understanding how CAC works and how to calculate it. Thus, this will result in more revenues and, eventually, a larger profit margin for your company or store.
Average ecommerce customer acquisition cost
If you’re just getting started with your e-commerce store, you definitely have to pay for customer acquisition. However, when you try to retain clients, you should lower the average customer acquisition cost for your e-commerce website in the long run. In e-commerce, acquiring customers often necessitates the use of multiple digital marketing methods or channels. Search engine optimization (SEO), paid advertisements or search engine marketing (SEM), social media marketing, content marketing, and email marketing are just a few examples.
According to ChatterBuzz research, the average customer acquisition cost in e-commerce is $45.27 when using Google Paid Search advertising. Obviously, this number will differ depending on the specific product you offer on your online store. If you sell high-end goods, your average CAC is likely to be $45.27 or more. However, in case you’re selling lower products, this figure may be lower.
Industry-specific customer acquisition costs
Because different products have varying average CACs, it’s only fair that this measure varies by industry. According to Propeller’s research, the average customer acquisition cost by industry is as follows:
- Travel: $7
- Retail: $10
- Consumer Goods: $22
- Manufacturing: $83
- Transportation: $98
- Marketing Agency: $141
- Financial: $175
- Technology (Hardware): $182
- Real Estate: $213
- Banking/Insurance: $303
- Telecom: $315
- Technology (Software): $395
CAC vs Gross Margin
Examining your gross margin is another technique to assess your CAC. Otherwise, your organization will lose money on each sale if your gross margin is lower than your customer acquisition cost.
However, in case you’re selling a product with a high repeat purchase rate. So it might be acceptable to lose money on the first sale (CAC larger than gross margin). Because you’ll make money on later repeat purchases. On the other hand, most organizations will need to ensure that their CAC is lower than their Gross Margin. To do that, they can increase their gross margin or lower the cost of acquiring each client.
Thus, let’s take a look at the following example:
Timo runs a windmill-related e-commerce site. Each windmill is offered for $50 and also has a 40% gross margin. Therefore, Timo will get $20 left. Timo’s average price is $50 because people rarely buy more than one windmill. His customer acquisition cost is at $15. As a result, each windmill generates a profit of $5 for him.
He can make a lot of money if he sells a lot of windmills. Timo could raise his price to $60 if he thinks this will be difficult. If he succeeds, his gross margin will increase to $24 (assuming it is still 40% ). After deducting the $15 acquisition cost, he’d be taking in $9 per order rather than only $5.
CAC vs Average Order Value
Focusing on your average order value in case you want your e-commerce business to succeed. Besides that, y ou have a bigger gross margin per order if your average order value is higher. As a result, you may afford to pay a greater customer acquisition cost. Because it will not harm your business.
Furthermore, in case your average order value is $500 and you have a 30% gross margin. So your gross margin will be $150. A $50 customer acquisition cost is not out of the question. Timo’s average order value was $50, with a 40% gross margin in the windmill example. Therefore, Timo couldn’t afford a $50 acquisition cost. Because this works out to a $20 gross margin.
CAC vs Lifetime Value
You’re going to spend money on getting a client. Besides that, you want them to come back. For example, you’re selling a one-time item like a swimming pool. So you can also offer pool cleaners and replacement parts to those customers.
Consider the lifetime worth of your customers when determining the optimal acquisition cost for your company. The entire gross margin you will receive from your typical client over the length of their association with you is the lifetime value of your clients. After all of your expenses are covered. Therefore, you need to know how much money you’ll make from each client. Thus your gross margin is crucial.
More importantly. you’re losing money with every client if your acquisition cost per customer is more than their lifetime value.
However, if you underspend on acquisition costs, you may lose potential clients who could boost your overall profitability. In case your lifetime value is ten times greater than your acquisition cost. So your profit per customer flourishes. However, your client could be lower. In most circumstances, your lifetime value to acquisition cost ratio should be approximately 4 times what you paid for the acquisition.
Let’s go back to Timo and his windmills for a second. The average order value will remain at $50. We’ll now assume that his consumers purchase two $50 windmills rather than just one. Because the gross margin is 40%, the lifetime value is $40. After these fees are deducted, the acquisition cost per customer is still $15, leaving $25. His client acquisition cost to lifetime value ratio is 40:15. We can conclude that his acquisition costs are excessively high. Because this comes out to only 2.67. He may wish to reduce his acquisition cost to between $10 and $13. Besides that, he also can improve his client lifetime value to $60 to achieve an LTV:CAC ratio of 4.
How to Control the Cost of Customer Acquisition
Now that you understand how important customer acquisition costs are to your e-commerce business, the next step is to figure out how to reduce them.
Pricing should be adjusted.
Increasing your rates is one of the simplest methods to do this. You get a bigger margin when you charge a higher price. As a result, you might have a greater customer acquisition cost and yet be profitable.
Raising pricing may encourage potential customers to purchase cheaper products from your competitors. Therefore, instead of raising your rates, you can consider lowering your costs.
Reduce the price of the products you sell.
Reduce your costs by lowering your cost of goods sold (COGS). This will raise your gross margin automatically.For example,, you can achieve this by reducing your shipping costs by shipping by sea rather than air. E-commerce businesses can sometimes save money by renegotiating volume discounts with their suppliers. Moreover, another alternative is to bargain for a lower price based on shorter payment terms. Furthermore, you can potentially save money on warehousing by choosing a less expensive warehouse for the majority of your storage and using more expensive fulfillment facilities exclusively for lower inventory volumes.
Improve the selection of niches
Finally, you can concentrate on niches that are less competitive. Consider pursuing a different e-commerce niche if acquiring clients in your current one is too expensive. This may not be a possibility for every company. But it is something you should think about.
How to lower ecommerce customer acquisition cost?
A high ecommerce customer acquisition cost is bad to your firm because it reduces revenues and profits. Is it possible to lower your average client acquisition cost? Yes, there are. So here are six suggestions for lowering your CAC:
Make changes to your customer acquisition strategy on a regular basis.
You’ll need a customer acquisition strategy if you want to acquire clients efficiently. But, more significantly, you’ll want to keep it updated and modified on a regular basis.
Examine the many chances and channels you’re using to attract new clients, as well as the costs associated with each.
Is there a channel that isn’t attracting as many clients as others? Perhaps a channel is consuming too much of your budget. Therefore, it may lead to a higher average CAC. Adding new channels can help you lower your average CAC while also keeping you informed about current marketing and e-commerce trends.
Pay special attention to the accessibility of your website in order to increase conversions.
A user-friendly and accessible website converts better and encourages customers to return. Therefore, this means you’ll need eye-catching graphics and engaging writing.
Besides that, you should also optimize your landing pages for conversion. Your copy and designs can be changed and A/B tested to evaluate which works best with your newly attracted customers.
Remember to add your call-to-action wherever you see fit. Additionally, make certain that your website is mobile-friendly. After all, more consumers than ever before are purchasing online using their mobile phones.
According to Statista, mobile commerce will account for 53.9 percent of all retail e-commerce in 2021.
Cutting costs is very important. However, knowing when and where to minimize expenditures is critical.
You should reduce your cost of goods sold (COGS). Therefore, you can increase your profit margin. It allows you to increase your customer acquisition budget.
Moreover, your COGS can be reduced by lowering your shipping costs. For example,renegotiating your courier contracts, delivering globally by sea rather than air freight, or even obtaining volume discounts from suppliers. As a result, finding cheaper warehouses for your products might also help you save money.
Look for low-cost Niche opportunities
This may not be suited for many e-commerce enterprises. However, those who are just getting started may seek areas that are less competitive and thus less expensive.
Reduce the length of your sales cycle
The total sales cycle is one of the factors that contribute to greater costs per new acquisition. The higher the expense of acquiring a new customer, the longer the cycle.
As a result, shortening your sales cycle is one way to cut costs. This can assist you cut down on the time it takes to gain a new customer. As a result, the costs involved.
Examine your sales funnel to see where buyers drop out or abandon the process.
Keep Your Customers Satisfied
After attracting new clients, your ultimate goal is to keep them and have them return to your store on a regular basis.
As a result, customer retention should be a part of your total customer acquisition strategy. This is particularly crucial when dealing with customers who have a high CLV.
These are the consumers who will add the most value to your business during their time with you.
Creating a loyalty program, providing excellent customer service, and improving your user experience are just a few examples of how to keep consumers.
How can ArrowTheme help?
Customer acquisition costs are crucial when you want to run an eCommerce business. Your company’s profitability will be determined by how carefully you measure and manage them. Because there is no such thing as a “correct” or “incorrect” amount, you must analyze your entire business.
Our goal at ArrowHiTech is to make it easier for businesses and e-commerce businesses to flourish. Therefore, you can schedule a free consultation with us to learn how we can help you reduce the ecommerce customer acquisition cost. Our Ecommerce Solutions will help you solve all of your business problem