Tags: soaring | customer | acquisition | costs | retention | investment

Soaring Customer Acquisition Costs Make Retention Smart Investment

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By    |   Monday, 04 February 2019 07:45 AM

In a recent analysis of the 2019 marketing landscape, Adweek reported that it is five times more expensive to acquire a new customer than to retain a current one, while the probability of selling to each target is estimated at 60% for existing customers but as little as 5% for new prospects.

A 2017 Forbes article noted that soaring acquisition costs “can easily exceed $100 per customer,” with companies like Blue Apron spending upwards of $400 per subscriber. Across the entire retail and eCommerce business spectrum, maintaining the path to sustainable profitability requires merchants to shift focus from customer acquisition to lifetime value.

Highlighting the danger of “unsustainable customer acquisition costs,” Forbes contributor Steve Dennis noted that eCommerce giant Amazon “has amassed cumulative losses in the billions” and “still operates at below average industry margins.”

He suggests several factors are contributing to eCommerce merchants’ shrinking margins and rising losses, including frequent returns and exchanges, free two-way shipping offers, ballooning online ad budgets and promotions that “train” customers to expect discounts on all orders.

It is a warning here that a single-minded focus on customer acquisition can negatively impact a merchant’s long-term profitability and sustainability. When retailers invest heavily in acquisition but fail to properly analyze the outcomes, they can end up paying big money for a one-time order or, even worse, a refund or chargeback that results in a net loss. That’s why it’s critical to focus on quality over quantity, which means making an effort to determine your customers’ lifetime value.

Customer acquisition cost, or CAC, simply divides total acquisition spend (such as adverting and promotions) in a given period by the number of new customers gained during that time. By comparison, customer lifetime value (CLV) looks at a customer’s average order value, repeat purchases and retention period. This means that a customer who makes ongoing purchases over a period of years has greater value to a merchant than multiple customers who place a single order, even if the number of transactions and order values are the same, since the retailer spends more in acquisition costs in the second scenario.

I would caution that the risk of fraud can grow as a merchant’s customer base expands if they aren’t tracking the value of customers acquired from each source. If a particular promotion or advertising platform is bringing in customers who make a high number of returns, refund requests or chargebacks, the merchant’s losses could exceed the value of those sales. For the retail industry as a whole, 18% of fraud losses are due to friendly fraud and 20% to fraudulent refund requests; yet for eCommerce merchants, those figures are 30% and 27%, respectively. In addition, fraud costs as a percentage of revenues average 1.8% for all retailers but climb to 2.38% for eCommerce merchants.

If merchants begin shifting more of their acquisition budgets to retention, it could pay off handsomely in the long run. Retailers’ own customer data holds the secret to improving CLV.

Here are a few tips to boost retention and CLV:

  1. Run contests that encourage existing customers to interact with your products, such as writing reviews or posting photos on social media.
  1. Feature customers in your blog posts and other content.
  1. Solicit customer feedback and suggestions, then credit and reward them if you implement their ideas.
  1. Make sure your newsletters, emails and other communications provide value rather than just pushing for a sale—deliver content customers will use and share.
  1. Include an upgrade or unexpected gift when you fulfill orders for your best customers, which can build loyalty and encourage repeat purchases.

It pays to learn which platforms and marketing activities draw high-value customers versus those that yield a poor return on investment. It’s also important to take proactive steps to combat fraud and other ‘profit parasites’ that contribute to growing costs and losses.

Monica Eaton-Cardone is an entrepreneur and business leader with expertise in technology, e-Commerce, risk relativity and payment-processing solutions. She is COO of Chargebacks911 and CIO of its parent company Global Risk Technologies.

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Industry sources say acquiring a new customer costs 5 times more than retaining an existing one, often exceeding $100 per customer. Per loss prevention specialists increasing lifetime value is the key to sustainable profitability.
soaring, customer, acquisition, costs, retention, investment
Monday, 04 February 2019 07:45 AM
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