Shopify Ecosystem

How To Use Loyalty To Offset Rising Customer Acquisition Costs

how-to-use-loyalty-to-offset-rising-customer-acquisition-costs

Ecommerce marketers are finding themselves in an increasingly tricky situation. As demand for new customers from paid acquisition channels continues to increase in ecommerce, so too does the price to acquire each new customer. Essentially, marketers are now paying more to acquire the same number of customers. And this isn’t going to change any time soon. 

Let’s look at why that is. 

Why is paid customer acquisition cost rising?

Digital advertising spend topped $491 billion in 2021. Due to the nature of this type of  advertising, the more companies that want a piece of the pie (the PPC pie, if you will – we’ll get onto this in a sec), the more the cost of advertising increases for everyone

PPC, or pay-per-click, is currently the most dominant form of digital advertising in ecommerce, which means that more brands than ever are bidding on keywords and (hopefully) gaining customers as a result. This has resulted in an increasing demand for a static supply. Or to refer to the mentioned PPC pie chart metaphor; more people want a slice of pie but there is still just one pie available. 

PPC and Customer Acquisition Costs

While it would be great if 100% of clicks converted into purchases, we know that this isn’t realistic. Along the way, we’ll pay for clicks that result in a purchase, and those that don’t. Both those costs must be factored into the cost of acquiring each paying customer, known as the Customer Acquisition Cost (CAC). 

Customer Acquisition Cost = Cost of Sales and Marketing divided by the Number of New Customers Acquired.

Naturally, the increasing cost-per-click we’ve just spoken about will result in an increase in CAC. You’re now spending more on each click, so naturally your marketing spend increases relative to the number of customers acquired. 

Let’s dust off the calculator to dive in a bit deeper here.

Imagine you’re a fashion retailer, and your average order value (AOV) is $60. 

For the ecommerce industry, we know the average CPC (cost per click) for a search ad is $2.69.

So, if 1,000 people click on your ad, you spend $2,690 in total. But let’s assume you’re converting customers at a rate of 5%, 

If only 50 of those people went on to actually buy an item of your clothing (5% rate of conversion), that means you’ve  paid $2,690 total for just 50 customers, and the individual customer acquisition cost is therefore $53.80. The problem is, as we already mentioned, your AOV is just $60. 

This isn’t great news for your profit margins, so what can be done to offset such expensive rates of acquisition? 

Customer acquisition cost funnel
Customer acquisition cost funnel

Increasing Customer Lifetime Value with loyalty 

Customer lifetime value (CLTV) =  Customer Value x Customer Lifespan

One of the best ways to offset the rising costs of acquisition, is to increase the return on investment each customer offers over time – i.e. increase their customer lifetime value. 

Customer lifetime value is the value that is earned from a customer throughout the duration of their lifetime with the company. Therefore, each time a customer returns and purchases another item, the CLTV increases.

CLTV and CAC

A strong CLTV is instrumental in offsetting a high CAC (customer acquisition cost), and one effective way to measure this is to look directly at the ratio of CLTV/CAC. If your CLTV is $150 and your CAC is $53.80, your CLTV/CAC ratio = 2.8:1. Companies should aim for a ration of 3:1, which would mean you make 3x what you spend acquiring each customer. 

The ratio of CLTV/CAC naturally improves over time, and a higher customer lifetime value by year two and beyond, can completely offset high customer acquisition costs! 

So, how do you encourage customers to make repeat purchases and stick around for longer? This is where it pays to reward customers for their loyalty. 

How does loyalty impact CLTV

To increase your CLTV (and thereby counteract those high acquisition costs), you’ve got to build relationships that make your customers want to continue purchasing from you. Research shows that without those relationships, just 32% of customers place a second order in their first year as a customer.

Loyalty is instrumental in keeping these relationships afloat by allowing you to personalize your messaging, reward your most loyal customers for their business, or catch any at-risk customers right before they churn.

With a loyalty program, you have the functionality to keep your customers engaged for longer by delighting them with unexpected surprises in the form of loyalty rewards, membership tiers, free gifts, access to pre-launched products and so much more. 

Loyalty programs also give you access to vast amounts of data on your customers and their behaviours, meaning you’re even better informed to make important decisions around where to invest your budget. 

Another way that loyalty programs help to offset acquisition costs is by incentivizing referrals. For example, if your loyalty program member refers their friend or relative, you can give the existing customer points and the referred person a discount off their first purchase. Not only are you keeping your existing customer happy and engaged, you’ve also just saved yourself the total cost of acquiring a new customer!

It’s time to take action!

While you might not be able to do much about the rising cost of acquisition, you absolutely can and should do something to increase the lifetime value of the customers you already have!

Rewarding your customers for their loyalty is a no-brainer, and if you’re struggling to gain a competitive edge then this could be just what you’re missing. To learn more about the power of customer loyalty and what it can do for you, sign up for our free academy here. 

Special thanks to our friends at LoyaltyLion for their insights on this topic.
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