Take a look at your company’s margin: are you smiling or frowning?
Does it seem like you’re heading in a good direction, or is it more likely that your business model is no longer working?
Here’s the paradox. Even if you’re attracting a steady stream of new customers each month, you might find yourself in trouble at the end of the quarter if you are not careful.
Everything in this Universe is perfectly balanced.
It applies to eCommerce as well. So, there must be a cost for every new customer earned, right?
In this case, each new client you acquire will cost you real dollars. And many eCommerce businesses come to a dreadful conclusion: they can’t afford to acquire new customers anymore.
You want to avoid finding yourself in this scenario and steer clear of cash flow pressures.
So, you need to know the answer to a simple but essential question:
How much can I afford to pay to acquire a customer?
Enter the eCommerce Customer Acquisition Cost (CAC) – one of the most misunderstood metrics in the eCommerce universe and today’s subject.
Today you’ll read more about this metric.
Moreover, we’ll discuss how to correctly calculate your customer acquisition cost, why you should monitor it constantly, and you’ll find practical ideas for reducing the cost.
So, do you want to improve your CAC? Let’s begin.
What is eCommerce Customer Acquisition Cost (CAC)?
Customer Acquisition Cost (CAC) represents the total cost of getting a new client. This means you need to add:
- marketing costs,
- the wages you pay your employees (freelancers and 3rd party experts included),
- the tools you use,
- and any rent & utilities you spend for your marketing & sales departments.
CAC is the cost you have to pay for each new customer acquired.
While it might seem pretty straightforward, this metric is one of the most misunderstood terms in the entire eCommerce universe.
The confusion comes from a simple error: most marketers don’t look at all the data and make incomplete calculations.
They look at their marketing costs. Maybe some go further and add production costs, etc. However, the picture is still incomplete since they don’t think of the wages they pay their employees. Or maybe they look at the salaries, but they leave out the subscriptions to various tools.
You get the idea.
The key takeaway from this chapter: do not confuse CAC with your Cost per Order (CPO – Facebook Ads, SEO, Google Ads, TV commercials, etc.).
How to calculate customer acquisition cost
To accurately calculate your customer acquisition cost, you must look at the overall costs involved in marketing & sales.
If you didn’t look at CAC from this holistic point of view, it’s high time you changed your ways of defining & monitoring the success of your company.
Unless you do it, you will miss out on having a realistic range for the customer acquisition cost. Consequently, you won’t be able to evaluate the health of your business correctly.
This means you’ll be biased, invest more than you can afford, or bleed money over an unproductive marketing strategy.
Here’s the formula for accurately understanding your CAC.
First, add up all the costs associated with:
- Wages (the salaries you pay your staff, including freelancers or agencies you employ to acquire new customers)
- Overheads (rent, utilities, equipment – everything you spend on marketing to acquire new customers)
- Paid marketing (money you invest in marketing – usually it involves expenses on paid advertising and agency fees)
- Tools (any tools/ software your Sales & Marketing teams use for analytics).
These costs are divided by the number of new customers you acquired, and voila!
You have your CAC.
How to optimize your customer acquisition cost
Now that you have adequately assessed your CAC, you might find yourself in an unhappy situation. At this rate, you can’t afford to acquire new customers.
You realize your old ways don’t have the impact they used to. Your current business model doesn’t work anymore, so you need new ways to get things done.
And you need them yesterday, if possible.
So, here are a couple of strategies you could try if you want to reduce customer acquisition costs.
- Leverage the value of your repeat customers and treat them as an acquisition tool.
While this might sound unethical, it’s simply rewarding your loyal customers with special offers and creating affiliate programs for your promoters.
You might find out that it’s cheaper to reward an old customer for bringing you a new customer than to spend that $ on paid marketing.
It’s a win-win situation. You get a new customer, your loyal customer feels valued, and the new customer solves his problem with your help.
Bonus points – your customer retention rate will surely increase once you show your customers they have a real reason to return.
One of the most straightforward strategies to reduce customer acquisition costs is to improve the customer retention rate and leverage your promoters.
Speaking of promoters…
If you are ready to dive into the strategies for keeping your customers happy, you might want to read The Ultimate Net Promoter Score Guide. You can find it here for free.
Read it and learn how to use NPS to grow your business and become more customer-centric.
2. Create and use dedicated Landing Pages with your Ads.
Your Ads get clicks. But you don’t see sales. So you assume the Ad didn’t work, right?
Well, the situation is more nuanced than that. Usually, if an ad gets clicks, it’s done its job: it brought people onto your Website. But the journey doesn’t stop there.
It’s what happens after the click that matters.
Many eCommerce marketers link the Ad to their homepage. We wouldn’t recommend this, as prospects can go around wandering on your Website…and forget why they came there in the first place.
Don’t overestimate the memory of your prospect. If you throw information at prospects and give them many places to click on your Website, they might forget to buy.
They take a look at your blog, read your reviews, maybe scroll through your Team page…and that’s it. You’ve lost them.
You’ve lost them, so you wasted your budget on those Ads.
To ensure you’re getting back each penny you invested while improving the conversion rate, you should link Ads with dedicated landing pages.
Keep it simple and send traffic to high-converting pages: product pages, pricing. Gently guide the prospect towards the checkout page, as you would show a toddler through a maze.
This approach will surely improve your conversion and lower your CAC.
(since you are not investing in Ads that don’t work).
3. Automate wherever you can.
(You should find an automated solution for repetitive tasks anyway. Maybe now it’s the right time to do it).
But wait – automation doesn’t mean investing more in tools and raising my CAC?
It depends. You will need to test it and see how it works inside your ecosystem.
Automating as many processes as possible means hiring fewer people and paying fewer wages. A simple task doesn’t require as much brainpower as before, so fewer people are needed to do it.
Ten years ago, you might have needed 15 people to gather and analyze your customer data. But today, you can use a SaaS like Reveal to create highly targeted marketing and sales campaigns on all channels.
You might find that the subscription to such a SaaS is cheaper than paying 15 data analysts to monitor and use your data in the long term.
This example applies to any other areas inside your business. But again – you have to crunch the numbers and see if it’s feasible for you.
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4. Continuously track, monitor, and optimize your customer acquisition strategy.
Don’t take anything at face value. Even if a specific strategy brought you money a couple of months ago, it doesn’t mean it won’t lose you money today.
The eCommerce landscape exploded over the years, and things are changing faster than ever. You can’t afford to base your marketing strategies on your gut feeling anymore.
It’s better to play it safe and calculate your customer acquisition regularly. Check the cost of customer acquisition each time you change your strategies or try something new.
It may seem exhausting to be on the constant lookout, but in the long term, you’ll gain much more if you are going to be data-driven and prioritize the things that matter.
Now that we touched on the subject of data and prioritizing…
5. Use your data to roll out better-performing ads – on every channel.
We’ve already seen the costs of paid advertising go through the roof. The costs alone will weigh your CAC more than you could maybe afford.
So, here’s where you could save a part of your budget and weed out the Ads that will never perform for you.
Take a look at your creatives and make sure you’re rising above the noise. What makes you unique? What’s the specific value your product brings?
Don’t be afraid to lean into peoples’ emotions and talk about their pains & desires. Don’t be basic – invest in better creatives and talk about those things your competitors won’t.
Besides the creatives, you can also tweak the audiences you’re using. Target your audience and use lookalike audiences in Facebook Ads and Google Ads to acquire new clients similar to your best customers.
6. Two key points to consider to increase your conversion rate.
Conversion Rate Optimization might be a different feat, but it still affects your CAC.
If you are not converting, you might want to consider the following:
- The landing page;
Invest more in customer research and then in the creatives. Use specific landing pages for particular products and change the creatives accordingly.
- The messaging;
Same as with the landing page. Emphasize the value you bring and what you can do for your prospect.
Don’t brag about how awesome your products are. Instead, show your prospects you understand them and that you genuinely care about solving their problems.
7. Pay close attention to your products.
The better your products are, the easier it will be to sell them, right?
So, don’t take product optimization out of the mix. Always survey your existing customers about their purchases: did they like the products? Would they recommend the products to their peers?
Then, look at your data: are there products that sell better in a specific demographic? Or products that decrease your customer retention rate? Could you do anything to sell better products and eliminate toxic products?
Reveal is the SaaS that will help you get a bird’s eye view of your product assortment and help you determine which products are toxic and which bring you the most value.
It’s easier to retain customers (and cheaper to acquire them) when you sell high-quality products that people love. So, don’t fall in love with what you sell unless the data proves you have a reason to.
Benefits of optimizing your customer acquisition cost
- You won’t spend as much as your competitors.
We hate to be the bearer of bad news, but we have to say it: it’s getting costly to acquire new customers. And things will only go downhill from here.
The media landscape is ultra-saturated, and new players join the eCommerce game every day.
Some are experienced marketers; some are still dipping their toes into the water.
The faster you move, the wiser you move, the quicker you can rise above the noise and save money where your competitors are losing.
And when competition is fierce, optimizing your customer acquisition brings you an undeniable advantage.
- You can focus on long-term growth.
When the CAC isn’t worrying you anymore, you can focus on the more exciting stuff.
While your competitors are fighting over Ad space, you can increase your margin by optimizing the customer lifetime value and earning more from existing customers.
Deliver a better customer experience and increase customer retention. Don’t waste your time on pity battles, such as getting X number of new customers each month, but keep an eye on the real prize: achieve sustainable growth and scale your business.
- You can use your optimized CAC as a benchmark.
Once you’re done with the improvements and have reached the golden ratio, you can use this metric as a benchmark.
Meaning – when you reach a reasonable, affordable CAC and your acquired customers are good customers, you can compare it to your KPIs.
And you always have something to come back to if you’re unsure of your numbers.
Compare and contrast your numbers to your ideal CAC, and you will always have a clear view of where you’re standing.
You will be done with the guessing and the wandering into the darkness of an unmonitored eCommerce business.
Instead, you get clarity, long-term growth, and the certainty that you’re going on the right path.
Frequently asked questions about audience targeting.
You can create affiliate programs for your best customers. Also, you can leverage emotions to improve your messaging, use lookalike audiences and advertise to people similar to your existing customers, and even reduce money spent on wages by automating routine, repetitive tasks.
The average CAC varies and depends on the products, the seasonality, and even demographics. According to Shopify data, the average CAC for a small eCommerce business (less than four employees) is around $58.64. The bigger the company, the bigger your CAC will be.
Add up all the costs associated with Sales & Marketing (meaning: wages + overheads + paid marketing + tools) and divide them by the number of new customers acquired. The result is your CAC.
To determine whether your CAC is good or you’re overpaying, you need to compare it to your Customer Lifetime Value. Divide your CLV to your CAC, and the results will give you an idea of where you’re at. Ideally, CLV:CAC should be 3:1 or 2:1. If it’s 1:1, it means you’re not making a profit, and if it’s lower, it means you’re bleeding money, and you need to change something asap.
