How to Reduce Customer Acquisition Cost (CAC) for eCommerce Stores

Customer acquisition cost (CAC) is a key metric for any business, particularly eCommerce businesses. It’s an indicator of how effective you are at bringing in new customers, and how sustainable your current marketing and sales strategies are.

In this article we’ll share our top tips on cutting down your customer acquisition costs, so your business can start making more profit.

What is Customer Acquisition Cost?

Customer acquisition cost is the average amount of money you spend to attract a new paying customer.

It takes into account the cost of marketing, advertising, and anything else that contributes to the acquisition of a new customer, and divides this figure by the number of new customers you acquired.

Let’s say you spend $4,000 on ads, and another $2,000 on associated costs (like software, wages for staff to run your ad campaigns, ad creative).

This comes to a total of $6,000. If you got 500 new customers from these ads, your CAC would be $12 ($6000 / 500).

Why Does CAC Matter?

CAC matters a whole lot, because it makes up a big part of whether or not your business is profitable, and whether or not your current marketing strategy is sustainable.

The lower your CAC, the better. A low CAC means you can take more profit from each sale, and bank it or reinvest it into growing your business.

Alternatively, it could allow you to sell your products at lower prices and undercut the competition.

Imagine you pay $10 for every customer, while your competitor (who sells the same kind of product), pays $20 for every customer.

They almost certainly can’t match you for price, because doing so would likely mean they’re losing money on each sale. This gives you a huge competitive advantage.

CAC is Most Valuable in Relation to AOV and LTV

While CAC matters a lot, it matters most in relation to average order value (AOV) and customer lifetime value (LTV).

On its own, CAC doesn’t mean much.

For example, how can you know if a $50 CAC is good?

$50 to acquire a customer is amazing if you’re Apple, and selling $1,000 iPhones.

It’s not so good if you’re selling $10 t-shirts.

That’s why you take average order value into consideration when judging whether your CAC is good or bad.

For the money you spend to acquire a new customer, how much are they paying you? The more money customers spend in each transaction, the more you can afford to spend to acquire them.

LTV:CAC

Customer lifetime value (LTV) is also important – perhaps more so than AOV.

Lifetime value is the total amount a customer typically pays you over their lifetime as a customer.

So if people typically come back and buy from you multiple times, they’ll have a higher LTV, and you can afford to spend more – possibly more than your AOV – to acquire them.

For example, if your AOV is $50, and customers only ever buy once, your CAC has to be significantly below $50 to be profitable.

But if your AOV is $50, and customers typically come back and buy from you a total of 5-7 times, you can afford to lose money on the initial sale, because you know these customers will likely buy from you multiple times.

In fact, it’s not uncommon for businesses to lose money on each new customer. One report finds that merchants on average lose $29 for every new customer acquired.

LTV is king. You typically want to aim for a 3:1 LTV:CAC ratio – meaning for every $1 you spend acquiring a new customer, you generate at least $3 over their lifetime.

9 Ways to Reduce Customer Acquisition Cost

Now we know what customer acquisition cost is, and how to judge it in context with other metrics, let’s look at some ways to reduce CAC for your eCommerce business.

Improve Your Conversion Rate

Conversion rate is a key driver of whether or not your CAC is sustainable.

Think about it.

If you spend $10,000 on sales and marketing, get 5,000 people to your website, and 1% convert, that’s an average CAC of $200 (50 converting customers; $10,000 / 50 = $200 average CAC).

Now if your conversion rate was 2%, instead of 1%, what would the equation look like?

• $10,000 total cost
• 5,000 website visitors
• 100 buyers (5,000 x 2%)
• $100 CAC ($10,000 / 100)

Through no changes to your advertising, you’ve made a significant improvement in CAC.

That’s why the first thing you should look at to improve your CAC is how well you’re converting people who land on your website.

Some things you can do to improve conversion rates include:

• Making your website mobile friendly (conversion rate is typically lower on mobile, because many websites are not mobile friendly).
• Cut out unnecessary steps in your purchase flow.
• Optimize your call to action buttons.
• Improve your product images.
• Display reviews and social proof.
• Show personalized experiences to every visitor.

Most stores have many seemingly minor things they can do that will have a positive impact on conversion rate, and CAC too.

Recover Abandoned Carts

Abandoned carts are another low-hanging fruit for improving CAC.

People who abandon their carts have already shown higher intent than a typical website visitor, and have even told you which product(s) they are interested in.

Often there is some small objection that’s stopping them from buying (such as price, shipping, or a lack of trust), which is much cheaper to get past than it is to acquire a whole new customer.

In some cases, the customer simply forgot to check out, and a quick email, SMS or push notification can be enough to get one more sale that would otherwise have been lost.

Approximately 70% of online shopping carts are left abandoned, which means there's a significant opportunity to reclaim lost revenue, increase the number of customers, and therefore decrease CAC.

Narrow Your Target Audience

If your ad spend is too high, you might be trying to advertise to too many people.

It’s natural to want to get in front of as big a market as possible, but a smaller, more targeted audience will often be more cost-effective.

This lets you tailor your copy, customer experience, design and messaging to a specific segment, rather than trying to please everyone.

Do some research and figure out what your most profitable segments are, and consider doubling down on these people as your primary target audience.

Invest in SEO and Content Marketing

While you could focus on optimizing your paid ads to be more cost-effective, you could also branch out or pivot into more cost-effective channels.

SEO is one of the most economical traffic channels, and can deliver an incredible ROI if done right. If you’re able to get visibility in Google (and other search engines, such as the app stores), you may be able to generate sales for very little ongoing cost.

As a plus, content marketing and SEO helps position your brand as an authority in your field, increasing trust and conversion rate.

SEO takes time, and some investment in the cost of creating content, but is not nearly as expensive as paid ads, and adding a trickle of sales from this channel can help offset more costly acquisition channels.

Utilize Email, SMS and Push Notifications

Direct communication channels like email, SMS and push notifications are more cost-effective alternatives (or complements) to paid ads.

In the retail, eCommerce and consumer goods sector, email marketing has an average ROI of $45 for every $1 spent. And with email becoming more saturated, and more people today going mobile-first, SMS and push notifications can be even more effective.

Focus on getting contact information from people who land on your website but don’t buy – offer an incentive for them to sign up to your email list, to give you their phone number, or to download your app.

This will give you the ability to market to them further, for much lower cost than most other channels.

Start a Referral Program

Referrals are yet another super cost-effective way to get new customers.

A study by Wharton Business School found that customer acquisition costs were significantly lower for referred customers (20 euros, or $22-23 lower in their study). And what’s more, they found that referred customers delivered 25% more value than non-referred customers.

With the low cost, low effort required to manage, and solid return from referral programs, this is a great opportunity to reduce your overall CAC and again offset your more expensive channels.

Partner with Influencers/Brand Ambassadors

The ROI of influencer marketing can vary a lot, but brands who do this well can see an incredible return on their money.

Influencer Marketing Hub finds an average ROI of $5.78 for every dollar spent on influencer marketing, while the top 13% of businesses are able to generate $20 of revenue per dollar invested.

Look for influencers to partner with, whether it’s on Instagram, TikTok, podcasts, or any other platforms where your audience is. 

Larger brands can consider signing brand ambassadors to represent them, a tactic major brands have been doing for decades to grow visibility and build trust and credibility in their niche.

Test, Test, Test

There’s a one-size-fits-all approach to improving any metric in your business – test.

You can listen to as much advice as you want, on how to get a better ROI from your paid ads, how to improve your conversion rate, which channels to use for a better CAC… but it won’t always work out as you expect.

The best way to figure out what works and what doesn’t, is to test.

Test everything – test pricing, test different audiences to target, test ad copy and creative, test different images on your product pages.

Your tests will result in many micro-optimizations, which add up to a significant difference in time.

Launch a Mobile App

Finally, an incredible way to lower CAC, as well as increasing AOV, LTV and more, is to launch a mobile app.

This ties in to several of the previous tips we mentioned.

Mobile apps help you improve conversion rate for mobile users, by offering a better, smoother, self-contained experience on mobile.

They give you access to push notifications, which you can use for promotional campaigns, and to recover abandoned carts.

They help you get more loyal, repeat customers, who can become valuable assets for your referral program and send new customers your way.

Mobile apps also let you get into the app stores, and act as a powerful authority signal, boosting trust with your customers and increasing visibility.

There’s a reason so many brands today have their own app. The mobile commerce market is booming, to the tune of more than $2 trillion per year worldwide, and shoppers on the whole prefer apps to mobile websites, spending more time and money and converting at a higher rate.

How to Launch an App

If you don’t already have a mobile app, and think you simply can’t afford such an investment, think again.

With MobiLoud, launching an app is quick, affordable, and easy. And best of all, you don’t need to sacrifice on quality.

MobiLoud helps you convert your existing website into iPhone and Android apps.

It takes zero effort on your part – we do all the technical work for you, and simply use what already works for you on the web to deliver a great app experience, fully synced with your website.

The cost is a tiny fraction of what it costs to build a fully custom app, and it comes with none of the complexity and overhead.

Your app updates with your website, so there’s virtually nothing extra to maintain, while you get the benefits of having your own app.

High-revenue brands such as Rainbow Shops, John Varvatos and BESTSELLER have all used MobiLoud to build apps, which drive significant revenue for them for very little cost.

You could be live and in the app stores in less than a month. Get in touch now to learn more about what’s possible.

Cut Your CAC and Boost Loyalty and Retention Now

It’s worth the time and effort for almost any eCommerce business to devise a way to spend less money acquiring customers, and make more profit on every sale.

The best part is that there are so many opportunities to optimize your CAC, whether it’s by improving conversion rate, building low-cost acquisition channels, or improving the efficiency of your paid ads.

You can also launch a mobile app, which will not only help you reduce CAC, but boost long-term revenue and loyalty, delivering more value from the money you spend on marketing and sales.

Get in touch and book a free demo to learn how easy it is to grow your business and reduce CAC with MobiLoud.