Last year, I reported on my research showing that brands were losing an average of $29 for every customer acquired, an increase of 222% in a decade. The scale of the loss highlights the dual importance of follow-on sales in recouping upfront costs while replacing the 40% customer churn in some industries.
Can merchants reduce the cost of acquisition until they break even on the first sale, or even make a profit? Is making an initial profit the right goal?
For most brands, getting closer to breaking even is the best option. The brand should not aim to make an initial profit, as this suggests acquisition expenses that are too low, hampering growth. There are certainly exceptions, like brands with an average basket value of $1,000, but balance should be the goal for most.
Acquisition mathematics
Let’s say your average order is $100, product cost is $50, and shipping and handling is $32. This leaves a gross margin of $18. But if the acquisition cost is $35, you lose $17 for each customer acquired.
Reducing the CAC to around $18 achieves the magic first-order break-even point, likely through three levers:
- Reduce advertising costs,
- Increase advertising performance, or
- Increase the margin for first-time buyers.
Let’s look at all three.
Reduce advertising costs
Strategies to reduce advertising costs include targeting lesser-known audiences and even switching to direct mail. Neither is perfect. Smaller audiences rarely move the needle on overall conversion. And the effectiveness of direct mail for acquisition is hit or miss depending on the product, list quality, and timing.
Social networks are the meeting place for consumers and therefore constitute the primary acquisition channel for brands. Competition to reach these consumers will likely intensify. The explosion of AI-generated content has already reduced organic search traffic to many e-commerce brands. The upcoming launch of Google’s Search Generative Experience could reduce it further. Thus, brands that depended on Google traffic could migrate to social networks, increasing advertising costs.
Increase advertising performance
As part of the ad acquisition process of “creative”, “targeting”, “landing” and “conversion”, targeting is more restrictive due to increasingly strict privacy rules. Conversion optimization continues to improve, but only incrementally.
This leaves creativity and landing as avenues to focus on. Sometimes creative is called “the new targeting” because of the impact influencers can bring to their followers. And landing is “the new conversion” because experiences (what consumers see in a promotion versus what’s on the advertiser’s website) are invariably poor.
Increase top-line margin
Substantially increasing the margin usually requires changing the product mix or increasing the average order value. The latter solution is simpler and more realistic for most traders.
And the best way to increase acquisition AOV is to get first-time buyers to explore the brand more broadly. It’s the antithesis of a product detail or landing page where the focus is on a single product with minimal distractions.
Yet a discovery approach that encourages new shoppers to explore the brand and adjacent categories proves to be a winner. Focus your merchandising on what visitors typically buy first and pair it with a free shipping offer for a minimum order amount. The result is higher AOVs.
This tactic alone can fundamentally change the economics of an ecommerce business.