Over the last decade, the direct-to-consumer (D2C) eCommerce industry has seen a monumental shift and has grown exponentially. Now, the D2C brands are radically changing consumer expectations and priorities.
The sales for D2C eCommerce in the US are expected to reach $175 billion by 2023. But, the high customer acquisition costs (CAC) still top D2C brands’ challenges. The brands are often at a stage where their CAC is higher than the Customer lifetime value (CLTV).
It means that the amount a consumer spends with a D2C brand is far less than the cost incurred in acquiring them. That puts all the marketing efforts down the drain.
A D2C brand can significantly increase its revenue by reducing customer acquisition costs and striking the right balance. This article will discuss CAC and how to calculate it and top strategies to keep it under check.
What is Customer Acquisition Cost (CAC)?
Customer acquisition is the total cost of sales, marketing, and other operating expenses required to acquire a new customer. It includes the costs of acquiring the first purchase, customer lifetime value, and customer lifetime value optimization.
Customer Acquisition Cost = Total marketing spends / Total number of new customers.
When calculating CAC, take into account the following:
- The cost of acquiring a customer (or user) before they make their first purchase or sign up for your product.
- The cost of keeping that person a loyal customer over time is called “lifetime value.”
- The cost of acquiring any new customers who replace existing customers as they leave over time is called “customer lifetime value optimization.”
Customer acquisition cost can be divided into two aspects: first, you need to acquire a user, and second, you convert this user into an active customer.
To calculate the cost of acquiring a user, we will use the following formula (assuming you have a 100% conversion rate):
Cost = Acquisition Cost / Conversion Rate
So if you have a conversion rate of 10%, your acquisition cost will be $10, and your total cost will be $100. Suppose it costs you $1 to acquire an individual user with a conversion rate of 0%. In this case, your total cost would be just $100
How can D2C eCommerce brands keep CAC under control?
#1 A great first experience can go a long way.
Onboarding plays a significant role in deciding whether a user will return to the app for more or not. It can make or break the deal. According to a report, 66% of new users don’t return in the first week of installing an app.
This can be because of a poor first-time experience, a higher time to value, a lack of guided walkthroughs, and intrusive messaging in bulk.
To prevent this:
- Deliver a seamless onboarding experience by easing the signup process and not asking too much too soon.
- Use interactive screen tips to reduce the friction points in navigation and employ tutorials to increase feature awareness.
- Offer an optimal value in the shortest possible time and drive them to the “aha” moment as early as possible.
#2 Recover Lost Sales and Reduce Cart Abandonment
A solid cart abandonment strategy is one of the effective ways to increase your retention and reduce customer acquisition costs. The conversion rate of cart abandonment emails is 10% higher than traditional marketing messages.
When the shopper goes through the effort of adding something to their cart means, at one point, they did consider making a purchase. All they need is a gentle nudge to make them contemplate buying.
It is essential to send personalized and contextual cart abandonment emails about the products waiting in the cart, discounts and those that are re-stocked is a great way to engage them and drive them into making a purchase.
Sending the right emails at the right time can help increase retention and reduce the cart abandonment rate effectively.
#3 Do not Overlook Cross-selling.
Customer retention is way more cost-efficient than customer acquisition. It is also easier to retain an engaged customer than to acquire, engage and convert a new one.
With the versatility of products and services in eCommerce, cross-selling items/products to customers based on their needs, transactional data, and geographical behavior is a great way to increase purchases. This also develops trust and a strong bond with your app by increasing customer loyalty and lifetime value.
Cross-selling is also an excellent way to boost sales, increase revenue, and achieve set goals. Using contextual nudges to highlight the items customers might be interested in, keeping the users engaged on the cart page, and displaying products in subsequent nudges can increase the average order value.
And the best way to do it is by staying relevant, sending the right message at the right time, and promoting the right product. Timing and frequency matter the most!
#4 Predict and Prevent Customer Churn
Customer churn rate is high for many eCommerce businesses and one of the top reasons for increased 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 a long time. As a D2C eCommerce brand, having a great customer retention strategy is the best way to prevent churn.
Make predictions by analyzing your insights and predicting which segments of users can become customers in the future. Based on these predictions, identify the segment(s) you want to target as part of your growth strategy.
For example, if high-value users are likely to churn soon after being acquired by another brand or product category (i.e., users who spend more than $500 per month), then prioritize acquiring those customers over others.
#5 Keep Acting on Customer Feedback.
Your customers are your greatest advocates and can bring in more customers through word-of-mouth, referrals, and sharing your brand with friends and family.
Listening and acting on their feedback makes them feel heard and understood, increases loyalty, and eventually turns them into your brand’s advocates. This can enormously reduce your customer acquisition costs.
Don’t forget to reward your loyal shoppers while encouraging them to spread the word about your brand.
Feedback surveys, NPS, CSAT, and so on are robust tools for building customer relationships. An intelligent survey tool can help you engage and retain your customers for a long time.
D2C brands that got it right!
LENSKART
Consumer trust is quite low regarding online purchases of eye care products that may affect one’s vision. But, things worked out well for a brand that has topped the funding table in the D2C segment with $774 Mn since its inception.
First, much like other fashion items, eyewear is a typical look-and-feel segment.
Lenskart built trust and change perception through mind-boggling product varieties, widespread sales, at-home services, and more. It focussed on fit, comfort, and accuracy. Lenskart now operates 750+ stores in more than 175 cities.
UNITED SODAS
United Sodas nails personalization. As the “People of the United Sodas of America,” they invite you to find your unique flavor. Also, they offer themed packs and variety packs to give their audience what they want.
Like Haus, they, too, have a monthly subscription that keeps customers’ fridges stocked with all their favorite sodas. With its bright, sparkly brand identity, United Sodas undoubtedly appeals to soda lovers.
Also read: D2C model: Top D2C brands and what you can learn from them
Conclusion
Customer acquisition costs can be a significant challenge for eCommerce brands. But with thorough optimization of your customer acquisition strategies, you can reduce those costs and increase revenue.
Focusing on an interactive onboarding process, personalized communication, responsible cross-selling, prevention of user churn, incentivizing loyal customers, and acting on customer feedback can lower customer acquisition costs and increase customer retention. Controlling customer acquisition costs can save time and money for other aspects of the business.
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