Customer Acquisition Costs (CAC) are arguably the most important dimensions of the retail business model.
Without a solid grasp on them, most are doomed to fail.
eCommerce and Retail business models have already been under enough pressure as it is, and now we can see how shifts in digital advertising have caused CACs to increase even more. What can be done to optimize the eCommerce business model?
Additionally, we know that Customer Acquisition Costs tend to increase over time in any market, and the explosion of D2C (Direct-to-Consumer) eCommerce startups has helped contribute to an array of new competitors in the market across categories.
While New Customer Acquisition Costs are moving higher, the data shows that Repeat Purchasing Behavior is trending in a positive direction and may be the key to unlocking the eCommerce business model.
Repeat Purchasing Behavior Is Positive
What is unexpected to some – perhaps – is that during that period (2013 – 2022) the average Repeat Purchase per customer increased from $28 to $39.
This data aligns with a few key themes that have come through during the research into LTV (Lifetime Value) for Retail brands and Customer Analytics research into companies like Farfetch:
- many retail companies will rise or fail based on their Customer Acquisition strategies; it became extremely commonplace in the ‘pandemic years’ for D2C brands to acquire customers at all costs, and now many of those same brands are downsizing or extinct
- companies like Farfetch built their online luxury fashion marketplace on the back of Customer Retention, with Cohorts achieving 55% retention rates at the time they went public; they also managed to stabilize their CAC around $100 and earn a Premium Take Rate
- it can be seen as necessary to compete on digital advertising platforms like Facebook, Google Ads, etc. for customers; yet those Channels can also eat into valuable resources and create unprofitable dynamics at the Customer level. Other Channel strategies are more desirable for certain companies, they just take longer to execute
Referrals + Retention
And then there are referrals, the golden child of Customer Analytics in relation to retail, yet in most cases (seemingly) the least likely strategy to be used. The reason for saying this is that Referral Data shows that 83% of satisfied customers are willing to give a referral, but 29% actually do, in most part due to lack of incentives.
But the Referred Customer has much different characteristics to the Acquired Customer through Paid Channels for example.
There are obvious reasons for this from the perspective of consumer psychology:
- a ‘warm reference’ creates a greater sense of trust and confidence, which manifests in a much higher likelihood to place an order and at much greater value compared to paid ads
- once that purchase is made, odds are likely that the customer experience itself will be better since a “peer” (the referrer) has already validated the company and its products prior
- that creates a cycle where, depending on referral incentives, that new referral customer is much more likely to then refer another customer
Retention Drives Revenue
This emphasis on Customer Retention is reflected in certain ‘Cohort Dynamics’ as outlined in the Farfetch data above. If the % of Repeat Customers is high on a mid-term basis for a brand, the spend on Customer Acquisition will naturally be much lower. This in turn leads to a much higher likelihood of being profitable.
Those profits can be used to pursue Customer Acquisition across virtually any channel (Paid or Organic or both). But if a brand starts out deep in the red on Customer Acquisition/Contribution Margin for any given Cohort, it is much more difficult to make that back in the future.
Overall, the increase in Customer Acquisition Costs (CAC) for retailers and brands on eCommerce platforms means that a greater emphasis will be required in the future on Customer Retention. Referrals are one way to drive this funnel, but there are many others. In whatever way you slice it, the Customer Relationship is returning to heart of retail.