How to reduce customer acquisition cost (CAC) has always been a challenge that D2C marketers and ecommerce owners face even today.
Targeted social, paid search and mass multi-channel marketing campaigns will only work to a certain extent. A recent report showed that the average customer acquisition cost has risen to $29, which is a 222% increase compared to the cost in 2013. These are alarming rates and will only continue to grow as competition becomes more cutthroat.
Yet, brands feel they have little to no choice but to continue spending to acquire new customers, affecting their business profitability. What is even more surprising is that they refuse to acknowledge that half of their spending is being wasted, either on wrong acquisition or reacquisition.
So, the burning question arises: How to reduce customer acquisition cost? What are the top strategies to adopt? In this blog, we delve into various strategies on how to reduce CAC and keep it under check.
What is Customer Acquisition Cost (CAC)?
Customer Acquisition Cost (CAC) is the best approximation of the total cost that brands incur in acquiring a new customer—generating the lead and then converting that lead. It measures how expensive or inexpensive it is to acquire a new paying customer.
Marketing spends would include all expenses incurred on paid search, digital advertising, channel-specific campaigns, etc, that attribute to the cost of acquiring new potential customers. D2C ecommerce brands must constantly compare this metric to the Customer Lifetime Value (CLTV) to ensure that CACs don’t outstrip the CLTV.
The simple formula to calculate Customer Acquisition Cost (CAC)=Total Marketing Spends/Total Number of New Customers.
Top Reasons for High Customer Acquisition Cost
As brands continue to invest in acquiring new customers, here are some reasons that lead to high customer acquisition costs.
1. Increased Competition
The ecommerce industry has become significantly crowded, with new competitors entering the market regularly. This influx of new brands has led to more and more spending on marketing channels to acquire new customers.
This often leads to price wars, where brands lower costs to attract new customers. While this improves sales, it also reduces profit margins and increases CAC.
2. Increased demand for advertising digitally
As more brands compete for online ad space, the demand for ad space has increased, driving up prices as a consequence. For example, in the latest updates, Youtube is now testing paused ads, where an ad will pop up when a Youtube video is paused.
Example of paused ad on Youtube
Such changes brought on by top ad firms like Meta and Google can impact ad spend and CAC, leading to changes in key metrics, such as higher cost per impression.
3. Ad-targeting challenges
Effective targeting requires a deep understanding of customers and their psychographics like demographics, interests, and behaviors. Wrong targeting strategies and efforts in reacquiring customers often lead to excessive spending or Adwaste. Research shows that almost 50% of the allocated budget is wasted due to wrong targeting.
Leveraging a robust and modern customer engagement platform that aids in engaging and retaining existing customers is a cost-effective strategy that can otherwise utilize this adwaste budget to give superior customer experience and better business outcomes like revenue.
How to Reduce Customer Acquisition Cost: 6 Strategies for Ecommerce Brands
It’s time to look at 6 ways ecommerce brands can reduce customer acquisition costs –
1. Provide a seamless onboarding experience
Onboarding plays a massive role in deciding whether a user will return to the app or not. About 66% of users do not return to the app after a week of installing the application. The top reasons users never return are poor first-time experience, high time-to-value, lack of guided navigation, and intrusive pop-ups.
As a result, you may pay more for your ad spends, increasing your CAC.
So how can brands leverage seamless onboarding to engage and retain users?
- Encourage customers to create accounts by integrating the quick login feature in your app or website. This will make it easier for customers to sign up with their Google, Facebook, and Apple accounts.
- Speed up user activation by quickly guiding them to the “aha” moment—the value proposition they seek. You can achieve this using walkthroughs and smart nudges to highlight the features and next best action that will add the most value to the customer.
Nykaa Man, for example, has an excellent user onboarding experience. It features an appealing welcome screen, keeps the login process simple, and shows minimal steps to keep the conversion path short. Nykaa Man also leverages contextual nudges and walkthroughs to provide adequate guidance and offers exciting incentives to keep users hooked to complete their first purchase.
2. Reduce cart abandonment to recover lost sales
Customers, on average, abandon their cart 70% of the time. Adopting a cart abandonment strategy is one of the most effective ways to retain customers and decrease your acquisition cost. Cart abandonment emails have more than a 10% conversion rate compared to traditional marketing messaging.
- Send personalized and contextual cart abandonment reminders to customers for items in their cart. With an omnichannel marketing campaign, send reminders across channels like email, WhatsApp, and push notifications to maximize conversions.
- Strategically incentivize customers to complete the transaction in your cart abandonment emails by including discount offers or perks. Let customers know if those items are selling out quickly or if their prices have dropped to encourage them to take action.
- Deliver 1:1 product recommendations across high conversion channels such as email and app push notifications to prevent drop-offs.
- Sending the email a couple of hours after the abandonment. Sending it too soon will feel like an imposition, while too late will reduce the impact of the email.
- Leverage smart automation to optimize the send time and subject lines as per historical performance to maximize the ROI.
- Furthermore, leverage intelligent segmentation and smart automation to target different users with personalized campaigns depending on their journey, cart value, preference, customer loyalty, etc.
FabIndia, for example, has set up an incredible automated omnichannel marketing strategy with enticing cart abandonment messages.
FabIndia’s Omnichannel Cart Abandonment Reminder Messages
The message also offers additional details about free shipping and easy returns, incentivizing the customers to checkout and creating a sense of urgency to purchase while the product is available.
3. Cross-sell to increase average order value (AOV)
Cross-selling is an excellent way to retain your best customers. Cross-selling also helps you establish a strong bond with your customers, which increases customer loyalty and customer lifetime value (CLTV).
A “Buy it with” section to promote cross-sell of other related products
- Identify your most valuable customers by analyzing customer behavior and revenue data and segmenting them using RFM analysis. Add sections like “Frequently bought together” or “You may also like” on your home page, product page, and checkout page to cross-sell relevant products and increase AOV. Cross-selling helps you increase the value of your existing customers and lowers the customer acquisition cost.
- Leverage contextual nudges to highlight other categories of items the customer might be interested in. Use a series of nudges to cross-sell on the cart page itself. Showcase an initial cross-sell nudge that incentivizes the user to add the product to the cart, such as “Add this item to get free shipping!” Keep users engaged on the cart page and display the product details in a successive nudge.
- Capitalize on high-intent moments across the user journey—cross-sell on the cart page displaying nudges with additional items that pair well with cart items.
- Your best customers are the ones who keep coming back to you. Ring-fence them with contextual and personalized omnichannel marketing campaigns to keep them engaged.
Customer retention is 7X cheaper than customer acquisition. Retaining an engaged customer is also easier than acquiring, engaging, and converting a new one.
Crocs, for example, intended to overcome low customer retention, engagement, and lifetime value. What worked? Automated triggered campaigns to engage customers across multiple channels and deployed an AI engine to understand customers in real-time and show them personalized recommendations.
Learn the multichannel marketing strategy that helped Crocs drive impressive 15% revenue growth with Netcore’s customer engagement platform
4. Predict and prevent customer churn
There is no denying that customer churn rate is also one of the top reasons for high customer acquisition costs. A high churn rate means that even though the brand is continuously acquiring new customers, it’s unable to retain them for the long term.
So how do you predict and arrest churn rate proactively—in real-time?
- Arrest churn rate in a preventive manner rather than being reactive. Use AI to predict what your customers are likely to do, even before they think of it. The first step is to define the frequency at which your users launch your app.
- Leverage cohort retention analysis to analyze insights such as app engagements, in-app interactions, time spent on each app screen, live app performance of each user in every session, and the stage in the user journey—in which a user uninstalled your app. And use this data to segment users into most likely to churn, fairly likely to churn, and less likely to churn.
- Based on these predictions, identify segments you want to target and the most relevant channel to re-engage your targeted users. Craft and deliver effective multi-channel re-engagement campaigns to prevent churn in real-time. For example, depending on the user’s search history, send personalized product recommendations with discount offers on emails or push notifications to bring users back to your ecommerce store.
- Lastly, track your churn management performance by analyzing the number of users you prevented from churning and those who weren’t targeted with your campaigns and didn’t use your app.
All of this will help you prevent your most at-risk users from churning and reduce your customer acquisition cost.
5. Keep acting on customer feedback
Your loyal customers are your biggest advocates and can bring in more customers through word-of-mouth, referrals, etc. Acting on customer feedback makes your customers feel heard and deeply understood, increases their loyalty, and eventually turns them into your brand’s advocates and repeat customers. This can significantly reduce your customer acquisition costs.
- Start with rewarding your loyal shoppers with personalized offers or discount codes while encouraging them to refer your platform to others through a referral program campaign.
- Ask your users to rate your app and give feedback when they’re delighted—on completion of the purchase journey.
- Leverage open text feedback nudge at different moments in the user journey to gather qualitative feedback. Or give users a few choices when asking for feedback. For example, when users browse on-sale products, give them multiple options and ask which product they like the most.
- Use NPS surveys to identify friction points and improve on them. For low NPS scores, trigger open text feedback or discount offers.
Act on all the gathered feedback to arrest churn, increase engagement and retention, and bring down your customer acquisition cost.
6. Implement A/B Testing continuously
Similar to how a physical retail store keeps changing the store layout every month, quarter, or half-yearly to keep visitors browsing, your ecommerce store also requires a continuous change to keep users engaged.
Web and mobile A/B testing keeps you focused on creating the ideal landing page to enhance the overall user experience. By split testing elements and UI/UX, you can identify trends and patterns that your customers prefer to create winning designs with high conversions. With high rates of conversions, your website will be featured more frequently, leading to reduced CAC and increased revenue.
Mobile A/B Testing Feature
Analyze the customer journey for each of the variants used and prioritize the one that leads to better conversions. You can then focus on increasing revenue by A/B testing elements like:
- Landing page copy
- CTA buttons
- Landing page design
- Rich elements like videos/GIFs and high-quality images
- Product recommendations tab on the landing page
Conclusion
The best way for ecommerce brands to keep customer acquisition costs as low as possible is to focus on retaining users from Day 0. Marketers need to quickly guide the users to the product’s value, engaging them with contextual and personalized content and messaging, preventing user churn, incentivizing loyal customers to bring in more customers, leveraging smart automation, and making the best use of AI-led insights.
These ways have proven to increase engagement and retention and reduce customer acquisition costs, time and again. Onboarding a robust and modern customer engagement platform has helped several brands in the past to improve personalization strategies that lead to not only better conversions but significant business outcomes.
