Average Customer Acquisition Cost for Ecommerce
Customer Acquisition Costs By Ecommerce Industry
We researched every website on the internet with data on the average customer acquisition cost for ecommerce. Then we used math to determine the average customer acquisition (CAC) for ecommerce from all that data and calculate customer acquisition cost. We found that the average ecommerce customer acquisition cost is $49.06. We took the data we found and calculated the customer acquisition cost for each ecommerce industry. Here are the costs for customer acquisition for each ecommerce industry:
- The arts and Entertainment ecommerce products industry has a customer acquisition cost of $21.
- The business & industrial ecommerce products industry has a customer acquisition cost of $533.
- The clothing, shoes, and accessories ecommerce industry has a customer acquisition cost of $129.
- The food, beverages, and tobacco ecommerce products industry has a customer acquisition cost of $462.
- The health & beauty ecommerce industry has a customer acquisition cost of $127.
- The home and garden ecommerce industry have a customer acquisition cost of $129.
According to Oberlo, the average order value for ecommerce is $106.89, with average customer acquisition costs of $49.06; this leaves more or less 50% for profit without factoring in the cost of goods and services. Now the question becomes how do I reduce the costs of good customer acquisition?
How to Reduce Customer Acquisition Costs
There are two ways to reduce customer acquisition cost (CAC):
- Increase your Customer Lifetime Value (CLV)
- Decrease your Costs for Marketing and Production.
You may need to become more familiar with customer lifetime value; it is the total amount of money a customer spends with a business over the lifetime of the relationship. For instance, our CBD clients have an average customer lifetime value of $588 on average which means the average customer spends $588 on CBD over the lifetime of their relationship with the CBD company. If they have a customer acquisition cost of $49.06 and their average order value is $129. They could spend up to $196 per customer in marketing costs to acquire a new customer. This is because the best customer acquisition cost is a 1 to 3 CAC ratio with customer lifetime value. Meaning you should spend at most 33% of your customer lifetime value to acquire a new customer this way, you can still make a healthy profit of a 1 to 3 CAC ratio.
If you wanted to reduce your acquisition cost to acquire a new customer as a CBD company, you could increase your customer lifetime value from $588 to $1,764; then, you would reduce your acquisition cost by three times. If it costs you $49.06 to acquire a new customer and your CLV is $588, then you are spending 8.3% of your CLV on acquisition cost to acquire a new customer. However, suppose you increase your CLV from $588 to $1,764 while keeping your costs to acquire a new customer at $49.06. In that case, you only spend 2.7% of your CLV to acquire a new customer. This is about a three times reduction in acquisition cost and a three times increase in profit while keeping your total marketing spend the same. This is why CLV is largely known as the most important cost metric to evaluate marketing success.
Now the question becomes, how do you increase your average CLV?
To answer this question, we must understand how to calculate CLV in the first place. Your CLV is your average order value multiplied by your average purchasing frequency to determine your average CLV. For instance, in the CBD industry, the average order value is $129, and the average customer makes a purchase 4.55 times over the lifetime of a relationship with a CBD business. To calculate the CLV, we multiply the average order value of $129 by the average purchasing frequency of 4.55 to get a CLV of $588. Therefore if you would like to increase your CLV, you need to increase your AOV or purchasing frequency and ideally both to maximize your lifetime value per customer (LTV). For context, LTV is just another way of saying CLV.
To increase your AOV per customer, you could execute upsells and cross-sells at checkout and post-checkout. Even more, you could create new products for your business that are in need by your existing customer base and sell them to your customers too.
One of the best ways to increase purchasing frequency and AOV for your business is email marketing. For instance, one CBD company surveyed by Metrilo has a 99.3% retention rate which means they have a very high purchasing frequency and LTV. They earned a high retention rate by utilizing personally timed replenishment emails based on the average time a customer runs out of CBD of 61.1 days. Email marketing effectively allowed the company to have a high retention rate, purchasing frequency, AOV, and LTV.
What if you have higher than average business customer acquisition costs due to expensive fees for marketing and advertising?
How do you reduce your acquisition cost to reduce your CAC and increase your gross margin profit margin?
There are multiple ways to reduce the costs of marketing and, therefore, your CAC. One of the best ways to reduce your CAC and the cost of marketing is to reduce your business dependence on paid advertising and Amazon to earn new customers. Since the cost of paid advertising only goes up over time, here is how much paid advertising has been increasing year over year:
- Meta (previously known as Facebook) CPM (cost per thousand) increased 61% year over year to an average of $17.60/CPM.
- Google’s programmatic display CPM (cost per thousand) increased 75% year over year. Search ad CPC (cost-per-click) increased 14% year over year.
- TikTok’s CPM (cost per thousand) has increased 185% year over year, averaging USD $9.40/CPM.
- Instagram’s CPM (cost per thousand) increased 23% year over year.
Advertising costs only go up over time due to increased demand and competition. If your business depends on paid ads for your customers, you may spend double your current CAC over the next year to two years. Remember that your business should focus on short-term tactics like paid advertising. Still, in the long term, your business needs to diversify its marketing to gain new customers at a lower CAC.
Which Ecommerce Customer Acquisition Tactics Reduce Costs the Most
The best marketing and advertising tactics to generate traffic and bring down your average CAC while increasing your LTV are earned and owned media.
Earned media is traffic and exposure that is earned and not bought. The benefit of earned media is that even after your business stops investing in attracting earned media, all the traffic and customers gained continue for your business. Unlike paid marketing, where the moment your business stops paying for traffic and customers is the moment all traffic and customers stop coming to your business. Earned media reduces your CAC by providing leveraged returns on your investment over time, unlike paid advertising, where your returns are given as soon as you pay for exposure.
The returns for earned media compound over time, so you get greater returns for the same investment over time. Investing in earned media can help your business reduce your marketing spend dependency on paid media and your CAC. Remember that it takes time to receive leveraged returns on earned media. You may not see a return for months when you begin investing in earned media. Still, your returns exponentially grow over time while your marketing spend stays the same. A good rule of thumb is to use paid media in the short term while you await exponential returns from your long-term investment in earned media.
Examples of Earned Media:
- SEO customer acquisition.
- Social Media Marketing customer acquisition.
- Digital PR customer acquisition.
- Traditional PR customer acquisition.
- Content Marketing customer acquisition.
- Video Marketing customer acquisition.
Owned media is online property controlled and operated by your business and used for marketing to gain new customers. The difference between earned media and owned media is that earned media is technically rented. Think of social media marketing; your business owns the social media channels, but the social media companies own the entire platform and can do whatever they want with your social media channel. However, only your business owns your website, and you can do anything you would like with your business website since it is your platform.
The challenge with owned media is that you need to use earned and paid media to grow your owned media channels. However, you control that data once you own the audience that you grow using earned and paid media. You could do a lot more with it than if you did not use owned media as the foundation for collecting the data. The best example is your email list, which you do not grow without using earned or paid media.
However, once you have an email list, you can sell anything you want to your audience that you control. You can do anything you want with the audience’s data, which you control. That is what makes email marketing another form of owned media. Since you own the audience, you do not need to consistently pay to access your customers via paid media or consistently invest in accessing your customers via earned media. Owned media creates some of your company’s highest LTVs and AOVs while reducing your CAC with marketing.
Examples of Owned Media:
- Text message marketing
How to Calculate Customer Acquisition Costs
To calculate your cost of customer acquisition, you take all of the spend used to gain new customers (marketing) and divide the total by the number of customers gained during the spend on marketing to gain new customers. For example, if a company spent $21,000 on marketing to gain new customers over a year. If the company gained 1,200 new sales over the year, then the company’s CAC is $17.50.
What is a Good Customer Acquisition Cost?
To determine a good customer acquisition spend, let’s use the example above, where a company has a CAC of $17.50. How do you know this is a good CAC to gain new customers and sales? We would use the spend ratio we discussed earlier in the article. For instance, this company has an overview LTV of $52.50 from customers. Meaning customers spend $52.50 with the company before they stop spending with the company. To determine if $17.50 is a good CAC for $52.50, we would divide the LTV by the CAC, and if we got more than 3, then the CAC is not good. For instance, $52.50 divided by $17.50 (CAC) is exactly 3, which means the ratio is 1:3 for every customer acquisition the company makes three times this amount over the lifetime of those customers.