The Ultimate Guide to Use Loyalty & Offset Rising Customer Acquisition Costs
- Posted on November 16, 2022 by Robert
- Reading time about 6 minutes
Many eCommerce brands are struggling to attract new customers and retain existing ones in long run due to the highly competitive business world. The marketing team of eCommerce businesses is finding themselves in a very difficult situation as they witnessed an increase in demand for new customers from paid acquisition channels in the eCommerce sector.
With skyrocketing customer acquisition costs to acquire every new customer, marketers are paying more to acquire the same number of customers. This is not going to change soon and is likely to continue. In this blog, we will learn how the right Customer Loyalty Software Solution can help eCommerce brands to offset increasing customer acquisition costs.
The reason behind the Increase in Paid Customer Acquisition Costs
Digital advertising services are one of the highest spending for many firms and records say marketing spending topped $491 billion in the year 2021. PPC, also known as pay-per-click, is currently the most dominant form of digital advertising used by the eCommerce sector, which shows that more brands are bidding on keywords and gaining customers eventually.
PPC and Customer Acquisition Costs
If you are wondering how the two factors PPC and Customer Acquisition Costs are related to one another, we will find out now. Converting 100% of clicks into purchases would be great but this is not possible. With PPC, we will pay for clicks that result in a purchase and those that don’t. Both of these costs must be factored into the cost of acquiring every paying customer, which is known as Customer Acquisition Cost (CAC).
The formula for calculating CAC is as follows-
Customer Acquisition Cost = Cost of Sales and Marketing divided by the Total Number of New Customers Acquired.
This means increasing cost-per-click will result in a higher CAC. You are now spending more on every click, which will increase marketing spend relative to the number of customers acquired.
For instance, let’s take an example to give you a better understanding-
Suppose you’re a fashion retailer in the eCommerce industry with an average order value (AOV) of $60. As we know the average CPC (cost per click) for a single search ad is $2.69, we are spending $2,690 in total if1000 customers click on ads. Assume that you’re converting customers at a rate of 5%, i.e. 50 of these total people buy an item from your store, which means you paid $2690 in total for 50 customers making the individual CAC equal to $53.80.
The problem is that your AOV is just $60, which is not good for your profit margin.
What should you do to offset these expensive rates of acquisition?
USE LOYALTY TO INCREASE CUSTOMER LIFETIME VALUE
Yes, the answer is the Customer lifetime value (CLTV)! Undoubtedly, one of the best ways to offset the rising costs of acquisition is to increase the return on investment from each customer- i.e. to increase their customer lifetime value.
CLTV, Customer lifetime value can be defined as the value that is earned from a single customer throughout the whole duration of their lifetime with the company. This means every time a customer returns and makes a purchase, the CLTV increases.
CLTV can be calculated by = Customer Value x Customer Lifespan
Customer lifetime value (CLTV) and CAC
As we are now aware that a high CLTV helps balance a high CAC (customer acquisition cost), one of the most effective ways is to look directly at the ratio of CLTV/CAC.
For example, if your CLTV is $150 and your CAC is $53.80, your CLTV/CAC ratio = 2.8:1.
This means companies should aim for a ratio of 3:1, which signifies the company can make 3 times what you spend in acquiring a new customer. As the ratio of CLTV/CAC tends to improve naturally over time, a higher CLTV by year two and beyond can offset high customer acquisition costs perfectly!
The answer lies in encouraging customers to make repeat purchases & make them stay together for a longer time. What can you do? Reward them simply for being your loyal customers.
How Loyalty Can Impact Customer Lifetime Value?
As the key is to increase your CLTV and keep a balance on high acquisition costs, the brands must focus on building stronger relationships with your customers to make them continue purchasing from you. Research says only 32% of customers place a second order in their first year as a customer.
Making use of the effective Rewards Program Platform is the right way to keep customers loyal with the help of personalized communication & rewards that are relevant and valuable to them. With a loyalty program, your brand can keep your customers engaged for longer by delighting them with unexpected gifts in the form of different loyalty rewards, membership tiers, gifts, exclusive access to pre-launched products, and many more. These programs also enable brands to get access to exclusive data with insights into customers & their behaviors helping them make informed decisions for better investment & higher returns.
Another best and most important thing is that a loyalty program can help your brand balance the high customer acquisition costs through referral rewards. With proper rewards to existing customers for bringing in new leads to your business. For instance, you can reward both the existing customer and the new one with a discount coupon to save on their next purchases. This not only helps to build a relationship with existing customers but also help to acquire new customer without extra spending.
After going through the entire content of the blog, it is quite clear that you cannot do much about the rising cost of acquisition for gaining new customers. What you can do is- do something that can boost the lifetime value of the customers that you already have. We know that gaining new customers in your business is 5 times more expensive than retaining old ones. So, why not focus on rewarding your customers in the right way for their loyalty?
To help you gain a competitive advantage in the eCommerce world and win customers’ hearts to make them stay for a long time, Novus Loyalty, our end-to-end Rewards Management Software is the perfect choice to reward your customers effectively. If you are interested to know more about the power of customer loyalty and what it can do for your business, book a demo of Novus with our experts today.