Financial metrics are heavily relied upon before making significant decisions in the ecommerce industry. The customer acquisition cost (CAC) is a significant influencer of all financial metric movements. A company can invest in customer acquisition but still fail if they neglect to monitor and incorrectly understand the customer acquisition costs.
Continue reading to gain a thorough understanding of customer acquisition costs and why they matter in your eCommerce business.
Defining "Customer Acquisition Cost"
Customer acquisition costs are the expenses incurred by businesses as a result of their various customer acquisition strategies. Sales, marketing costs, SaaS subscriptions, agency costs, your staff, and ad spending are all essential costs of running an eCommerce business. Some additional costs include shipment of the items, manufacturing, and storage.
You can easily calculate the customer acquisition cost with the following formula:
Customer Acquisition Cost =
(Total Marketing Spend on Acquiring New Customers/Total Number of New Customers)
Different Acquisition Channels
In an eCommerce business, various acquisition channels are available. Google Ads, user-generated content (UGC), and Facebook ad campaigns are the most well-known channels.
When using any of these channels, you must be vigilant to have an efficient CAC. It is also worth noting that potential customers may have been reached through all three channels mentioned above before deciding to engage in a purchase. As a result, when analysing CAC data, keep in mind that it may not be entirely accurate.
Why is Customer Acquisition Cost Important?
The main benefit of knowing your CACs is that you will understand the costs you will incur for each of your products and will be able to plan a sustainable strategy for the growth of your business.
However, there is no one-size-fits-all strategy for maximising CAC. Different businesses can use various methods for an efficient CAC. Being on an eCommerce website is a good example. Generally, new eCommerce businesses may require a significant initial CAC budget. Over time, as your company's reputation grows, attracting new customers may require you to spend less money. This is made possible with word of mouth.
You should prioritise customer retention to reduce your CAC gradually. Customers should be retained rather than acquired, according to business strategists. This contributes to an increase in the business's regular income as a result of regular customer purchases.
How to Minimize Customer Acquisition Costs
Now that you understand how critical client acquisition costs are to the success of your e-commerce business, the next step is to figure out how to reduce them.
Regulate Pricing - As any e-commerce company knows, rising costs may entice customers to buy cheaper products from competitors. Rather than raising your rates, consider lowering your operating costs.
Reduce Cost of goods sold - You may save money by reducing your cost of goods sold (COGS), which will naturally increase your gross margin.
Offer Different Niche Options- Consider less competitive niches. If acquiring clients in your present e-commerce specialty is too costly, consider switching. This may not be feasible for all businesses, but it is something to explore.
CAC metrics and modern, targeted marketing can not only help you zero in on specific groups of people. They are great indicators of how much you're spending on each new prospect to get them onboard and convert them to paying customers.
Once you have a better understanding of the various factors that can affect your CAC, you should be able to begin gaining a better understanding of your own company's costs and their impact on your bottom line. Understanding that cost can help you price your items more effectively, find the right market, and grow your business.
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