Do you know the real cost of customer acquisition?

We recently interviewed Jason Smith, who is Vice President at MoEngage, an insight’s led customer engagement platform , for Series 4, Episode 11 of our #thebiglift podcast, titled 'Do you know the real cost of customer acquisition, and should you spend more on customer retention?'

Increasing customer acquisition is often a key goal for businesses. This can often be used to prove the success of a new product, a marketing campaign, user experience or anything else. It’s also easy to track how many new users are coming to your website, so businesses can clearly outline the number of visitors YoY.

However, when we spoke with Jason, he suggested there are different points of your brand journey where you should prioritise customer retention, over acquisition, and that most people aren’t aware of the ‘true’ cost of customer acquisition.

How much does customer acquisition actually cost?

A lot of companies will approach customer acquisition by spending money on a PPC campaign. But, as argued by Jason, the return on investment from this is actually quite low.

PPC is approximately £1 per click, and if you assume you get roughly 20,000 clicks on an ad, then the marketing team has spent about £20,000. The average percentage of people who visit your website and actually buy something is about 3%. So that means you get about 600 purchases out of your £20,000 worth of clicks. If you assume that each customer spends about £100 (which is admittedly quite high), then the revenue would come out at about £60,000. But most companies work on a profit margin, which would ideally be about 50% but more realistically is 30%. In which case, your revenue is £18,000 and so you would end up losing about £2,000.

Particularly as most customers in this scenario will be a one-off purchase with no relationship to the brand and no loyalty built. And that’s not even factoring in the average return rate, which is about 18% - again a high figure. Plus you have the repackaging cost, reselling cost, etc.

So breaking down the real cost of customer acquisition, from what you spend on ad campaigns to people who actually buy or just buy and then return, customer acquisition is often a much higher cost than what most people think.

Vanity vs Sanity

Based on this, Jason delves into the idea of Vanity versus Sanity metrics. So, vanity is the idea that we’ve spent £20,000 and we’ve got 20,000 new customers as that’s the number of people who clicked on the ads. So, from an acquisition perspective, it looks good. But if you peel it back you start to realise that out of 20,000 clicks you’ve got 10,000 people who are bargain hunters and are just there for a one-time purchase. You’ve got another 5,000 or so that bounce. So actually breaking it down, you only have a very small group of customers who go all the way through and who you can look at as ‘loyal’.

Whilst the numbers for vanity can look good, it is not sustainable. When you take into account all the other costs and how much you lose, the amount of ‘new visitors’ to site is not actually worth it.

Instead, there are points of your journey where you should be focusing on the more loyal and ultimately, higher spending customers.

How can we join the dots up?

Both John and Jason agree that that the ‘true cost’ of acquisition being way over the cost of retention is not something which is being acknowledged or communicated throughout the different teams in a business.

When you look at the ad spend versus the retention spend, ad spend is probably 15-20 times great than the retention spend. And yet, the profitability is in the customers second, third, fourth purchase.

So, the reality is when looking at a campaign, you need to look holistically and decide whether the amount you have invested into a campaign has materialised the right benefits for you. And this requires leveraging your insights. Not just looking at the click-through rates, but really utilising the data to make the most informed decisions.

Jason argues that these data-informed decisions should be utilised on a day-to-day basis when you’re executing marketing campaigns. For example, deciding which customers should get vouchers and discounts to reward loyalty. This will help you to determine whether you should be offering a discount to everyone, if some people are worth a 20% discount or some customers only 10%. These things need to be taken into account when looking at the true value a customer is bringing to your business. If they are someone who is going to buy something and then send it back, it’s actually going to be costing your business more money. Which goes back to the education mentioned above.

Knowing the real cost of your customers and who to invest in is a valuable asset in any business. But this only comes with education and all areas of the business aligning to know how PPC campaigns, return rates, Conversion Rates, etc. are all connected and how much it’s going to really cost.

Where else can you spend your marketing budget?

If we use the example of people clicking on your PPC link and then bouncing out again, with research, you can start to look at why this is. Have you given them the best experience? Is there a certain reason you are seeing high drop off rates?

AB testing is a really good way to analyse this. Along with other experimentation methods. It gives you the opportunity to see what your customers want and what is going to entice them in to make a purchase.

But it’s also about looking at where these customers go. Jason references a study by ASOS that said any customer who comes to your website and clicks on the ‘coming soon’ rather than ‘sale’ items is worth 60% more value to them as a business. They want to know what other products are coming (and at full price) and based on this it’s likely they will keep coming back to purchase them. And then these customers can be rewarded and in a way that’s useful to them. Like free next day delivery, or a discount off the full-price item.

Whichever way you choose to do it, it is important to incorporate testing, data and research into your customers. You can then adopt data in everything you do and create really personalised experiences to help enhance your retention strategy. This is likely to make more money for the business than just a large number of people clicking on your PPC ad. Not only is it more sustainable to value your loyal customers, it is more also more profitable.

To listen to this episode of #thebiglift podcast, episodes can be found here, or on Spotify, Apple, YouTube or your player of choice.