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Jan 17, 2023

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Reducing Customer Acquisition Costs for eCommerce

In this article, you will find out how the improvement of your CAC can lead to lower expenses and improved customer experience, which results in higher profits and increased value per customer.

Reducing Customer Acquisition Costs for eCommerce

Bringing clients to your Shopify store can be tough and expensive. Let’s check if your customer acquisition strategy is on-point and brings customers that don’t cost you a fortune!

Attracting customers to your store is all the rage nowadays, but how can you do that efficiently? How can you maximize your store’s potential without overextending your budget? Where is that golden thread that separates underfunding from unnecessary expenses? Let’s dive in and find out how the improvement of your CAC can lead to lower expenses and improved customer experience, which results in higher profits and increased value per customer.

💰Here’s what we are going to cover:

  • Definition of Customer Acquisition Cost and how to calculate it
  • How to calculate CAC
  • Exploring marketing costs by industry
  • What channels should your business focus on?
  • Drive growth with CAC

What Is Customer Acquisition Cost?

First of all, let’s define what Customer Acquisition Cost or CAC stands for. CAC is the price of attracting a single customer to your business. That term covers all of the related expenses, and anything that stands between the production of your goods or services and getting them to your customer's hands.

By calculating their CAC costs, businesses can set a hard limit to the expenses they can handle, when attracting new customers. If they go beyond that figure for any reason, it means they spend more than they profit from operating.

How Do You Calculate CAC?

For those, who are just starting out to track their acquisition expenses, they can use the simplified formula, that helps to track only marketing expenses. Let’s say our budget is 1000$ and during a campaign, we attracted 20 customers. Your customer acquisition cost would be 40$.

Total Marketing Spend ($1000) / New Customers (25) = CAC ($40 per customer)

However, this is not a true acquisition cost, as it does not cover your other expenses. If you are struggling with marketing in particular, this formula will help you understand if your marketing budget is faring well or if it needs an optimization

COGS or Cost of Goods Sold covers all of your expenses related to the production of your goods. An updated formula should look like this:

(Total Marketing Spend + COGS) / New Customers = True CAC

Customers vary in their buying power. Some of them buy in single units, whereas others may buy in large quantities. It is important to determine what is your AOV or Average Order Value. You can track this number by dividing your company’s total revenue by the order numbers.

We’re almost there, however, the key piece of the formula is missing. How much do you earn at the end of the day? That’s where the Gross Profit chimes in. Gross profit represents the company’s total revenue minus direct production costs. The formula is: 

Net Revenue - COGS = Gross Margin

With its help, here’s how the final formula would look like

(Average Order Value x Gross Margin) - Customer Acquisition Cost = Profit

With these formulas, business owners would be capable of understanding how profitable their ventures are.

Exploring Marketing Costs

“As a rule of thumb, you shouldn’t spend more than 5% to 8% of your total budget on marketing.”, states Shopify

Marketing expenses vary greatly depending on the industry business is operating in. According to Shopify research here’s what businesses spend on their marketing annually by their industry

Annual marketing budget for eCommerce brands by industry (source: Shopify)

Before we start analyzing numbers a careful reader should keep in mind that what we see here is a statistical average, what a normal thing for business should be. Real-life cases should be reviewed on a case-by-case basis. These numbers demonstrate to us that product type, production cost, actual and perceived value, entry barriers for other competitors, and potential volume of goods a manufacturer can output directly influence their marketing budgets. Electronic producers such as Samsung compete on a global scale and sell their products for hundreds of dollars per piece, while local health and beauty salons compete for a small portion of the audience (they couldn’t serve more people unless they scale up their operations significantly. Therefore they can afford to keep their expenses relatively low.

Now let’s see what’s the average CAC for the same industries. As mentioned above, industry type, business modus operandi, and the number of employees may significantly influence acquisition costs for two businesses even from the same industry.

Customer acquisition cost by industry (source: Shopify)

What Channels Should Your Business Focus On?

One of the greatest eCommerce benefits is that you can track every dollar you spend on your internet marketing. You can create highly targeted campaigns, reach out to potential customers, sneak up on your competitor’s audience, recover abandoned carts (possible Gr link insertion) and upsell to people who already bought a product from your business.

CAC helps to determine which channel is the best for your investments. Small to medium businesses run on a limited budget and it always helps to determine how much they should diversify their marketing channels.

For instance (let’s leave out the product’s cost, A/B testing, ads style and format, regional prices, etc. for the moment) if an eCommerce store runs Google Ads and gets a client for every 20$ spent but also runs Facebook Ads and gets clients for every 15$ spent, they’re better off spending their Google Ads budget on Facebook Ads. However, if they keep pouring money into Facebook and after 100 clients they spend 25$ per client, it’s also rational to limit their Facebook Ads budget to $1500/month and pour the remaining money onto Google Ads to get the best bang out of their buck.

Another interesting evaluation that business owners can do to better comprehend their return on investment is to compare their Acquisition Costs against overall Customer Lifetime Value (CLV)

Let’s see how CAC is broken down by popular marketing channels.

Search Engine Optimization (SEO)

With proper SEO, your business has an untapped potential to bring a steady supply of high-quality traffic to your store. Optimization also does not go anywhere, compared to ads that stop showing up in your potential customer search results and news feeds when payments go dry. It is a foundation that builds upon itself and improves over time when your website attains ranking and credibility. It’s always a good idea to invest in SEO, it’s an investment that will keep improving as time goes by.

Instead of targeting a huge audience, make your store stand out to the people who actually want to find it! Setting up a search engine optimization in the US would cost you anywhere from $4’000 to $10’000 and $500-$1000 in concurring costs each month.

To calculate customer acquisition cost for SEO, you’ll need to sum up all of the SEO-related expenses and divide that number by the total number of SEO conversions, which are perfectly trackable by analytics software.

To sum it up, SEO is affordable and it works with people who already search for your business unknowingly, they just need a little push towards you!

PPC - Pay-Per-Click Advertising

PPC allows marketers to select what keywords and phrases they want as triggers for their advertisements to show up for their potential customers. If you paid enough then your ads will display the above organic search results for these targeted keywords. Compared with SEO, you don’t have to wait for the results, you’ll start seeing them immediately, as soon as you launch your campaign, your store will be getting traffic and your revenue will go up in the short term.

PPC is considerably cost-effective after initial setup, which may cost anywhere around $4000-$10000 by a marketing agency you’ll pay very little for the actual clicks. Setup costs can also be reduced by hiring a private contractor or a freelancer, at the risk of not optimizing it properly. Price measurements between 2021/22 of Google Ads by Viden show the following prices which are quite affordable.

Google Ads Cost by Campagin Type (source: Viden)

Do keep in mind that sales funnel implies that a number of people should click on your ad in order for some of them to turn into actual purchases and website design plays a crucial part here. The less amount of steps customers need to complete in order to complete a purchase, the better it is. Long, tedious, unwieldy, and annoying mandatory barriers may ruin leads that you received from your ads.

To sum it up, pay-per-click advertising is relatively cheap, it’s perfectly trackable, easy to analyze and it works with people who are already looking for your goods and services, they just don’t know it yet.

Email Marketing

Setup expenses of email marketing are fairly similar to SEO and PPC campaigns. Expect to pay somewhere from $4000-$10000 initially, if you decide to go with a marketing agency, $500 monthly payments, and from a few cents to $3 for each visitor that would come to your website from promotional emails. In the US, 72% of adults prefer business communication via email and unlike other more intrusive means, email marketing does not intervene in customers' daily routines.

Email marketing has a great potential to be incredibly cost-effective and yield high-quality leads because people that signed up for your newsletter are already interested in your product. With Growave email automation and customization, you can follow up on your Shopify store website visitors and provide well-tailored targeted email notifications to turn visitors into buyers. Not only this, but it also allows you to drop in a few discount codes in your targeted emails to win back your inactive members. 

Conclusion

If you are still thinking about the proper way of tracking your customer acquisition costs, we hope this information was useful for you. It’s never too late to start tracking your marketing data. The absence of historical data is a little setback nowadays, that’s what industry benchmark numbers are for. Don’t be afraid to experiment with your marketing campaigns and keep in mind that lots of customers do not always mean your business is on the rise. Knowing exactly how much each customer costs is crucial for the long-term profitability of your venture.

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