How to lower customer acquisition costs in ecommerce

How often do you think about your customer acquisition cost (CAC) and its impact on your business? 

Understanding and managing your CAC is critical to profitability and sustainable growth. Neglecting it could inadvertently eat up your revenue and put your Shopify store at risk.

If it hasn’t been a priority — or you’ve shied away from the intricacies — we’re simplifying CAC as much as possible. Learn why it’s so important to control, ways to cut customer acquisition costs, and how boosting customer lifetime value (CLV) must be part of the effort.  

What is CAC?

CAC is the total cost of marketing and sales efforts to gain one new customer. In other words, it’s the investment needed to convert a shopper into a paying customer. Knowing it means you know the amount you need to recoup, at the least. 

Marketing costs are a large part of the equation. But per Velocity, a PPC company from NYC, it's crucial to also account for factors such as customer lifetime value and retention rates when evaluating the true success of your acquisition channels. Doing so helps you make fully informed decisions about which platforms are worth the investment and which may need optimization. 

Calculating CAC

For the purposes of simplicity, let’s calculate CAC at its most basic level. 

Divide total sales and marketing costs (acquisition costs) within a specific time period by the number of new customers gained during the same time. Typically, this is examined monthly.

Acquisition costs are the total expenses of your marketing endeavor. They include the price of the marketing channel (paid advertising, email, search engine optimization, social media, etc.) and any direct labor costs involved. 

Understanding the average CAC across all marketing efforts can be incredibly useful in determining the profitability of your customers. However, the real insights come from analyzing CAC channel by channel. Comparing acquisition performance can help guide your resource allocation to ensure you get the best return on investment.

For example, imagine you invest $5,000 in Google Ads over one month — ad expenses plus the working hours invested. The ads generate 100 new customers. Hence, $5,000 ÷ 100 = $50 per new customer. 

You also spend $500 on email marketing software, design, and copywriting during the same month. Email conversions net 50 new customers. So, $500 ÷ 50 = $10 per new customer.  

In this example, email marketing is the cost-effective customer acquisition channel.

• If a new customer makes a $10 purchase, it’s enough to break even and cover the cost of acquiring them
• Someone gained through ads must spend $40 for you to pay back their acquisition cost

Average CAC by industry

When is CAC a cause for concern? Unfortunately, there’s no magic number, as it varies by business.  

An online search returns a few benchmark reports you can use as general guidelines. One from First Page Sage sourced more than 80 clients over six years to determine the average CAC for ecommerce companies by industry: 

These stats can be helpful but don’t fixate on them. Realize that CAC consists of many variables, like what you sell, competition versus demand, and your acquisition strategy.

The trend of rising CAC

We’ve heard and read the laments about increasing CAC and disappointing results. 

One report cites about 61% of direct-to-consumer businesses blamed rising CAC as the most significant barrier to revenue goals. Another found CAC rose by 222% between 2013 and 2022.  

Several factors are escalating the costs and challenges of customer acquisition in ecommerce: 

• Increasing privacy. The iOS 14.5 App Tracking Transparency enables users to disallow data tracking across websites and apps. Low consent rates mean Shopify merchants have less data for targeted advertising and poorer attribution. Marketing attribution will further decline once Google phases out third-party cookies.  

• Limited channels. Only so many customer acquisition channels exist, meaning digital advertising platforms have power. They’ve been flexing it: over the last few years, ad costs have skyrocketed as much as 185% yearly.
• High competition. Ecommerce is crowded. The number of active Shopify stores alone increased 37% year-over-year in the first quarter of 2024. A saturated marketplace results in higher advertising costs to stand out.   ‍
• It’s easier to “buy v. build.” Paying the “rent” of digital marketing is more straightforward and faster than building an audience organically. ‍

The importance of CAC + CLV 

We mentioned it at the start of this post, and it’s worth repeating: CAC is a prominent factor in profitability. 

It can undoubtedly be the catalyst for improving marketing efficiency. But knowing CAC alone won’t increase your profits. Customer lifetime value (CLV) is the other half of the equation. 

CLV is the amount a customer spends on your brand during their lifetime. If you understand your typical customer’s CLV, you know the amount that you can spend to acquire them profitably. These values are usually represented by a ratio (CLV:CAC). 

A few CLV:CAC benchmarks to note:

• <2:1 — Typically indicates a lack of profitability. While you are breaking even on your CAC expense, you aren’t likely covering your cost of goods sold (COGS). (Note: You can factor this into your equation by multiplying your average CLV by your gross margin percentage.) 
• 3:1 — A good benchmark for the ecommerce industry and usually indicates a healthy customer acquisition and retention balance.
• 4:1 — A great business model and typically results in great profitability.
• 5:1 — Though a healthy ratio, you may be under-investing in marketing and have the potential to grow faster.

How to reduce CAC and boost CLV 

While various business aspects influence long-term profitability and growth, striking the right balance between CAC and CLV plays an essential role. It involves: 

1. Controlling and lowering customer acquisition costs
2. Increasing CLV

Focusing on one part is a step in the right direction. Tackling both is a better guarantee of financial progress. Choose the suggestions below that make sense for your brand to conquer.

3 ways to decrease acquisition spending

1. Regularly evaluate acquisition channels

Remember our paid ad CAC versus email marketing CAC example? Apply the basic CAC formula to each of your marketing channels and establish a metrics baseline for comparison.  

The data could support increasing spend on certain channels, while scaling back or dropping other channels altogether. Our advice: 

• Scale up channels that are delivering good CLV:CAC ratios
• Run small experiments on channels that are breakeven or have lower CLV:CAC ratios to try to improve the returns
• Shut down channels that are upside down on CLV:CAC ratios; these channels will burn your cash quickly, even if they drive new customer acquisition

2. Optimize marketing channels that you own

Turn attention to the channels that you control. Optimize your: 

• Website to boost organic traffic with search engine optimization (SEO), capture emails with banners or popups and forms, and improve the user experience with thoughtful design
• Email marketing to welcome new subscribers, nudge prospects toward becoming first-time buyers, and engage customers   
• Social media presence to build brand awareness and credibility

3. Implement referral marketing

Referral marketing can be a powerful — and potentially free — tactic to drastically lower customer acquisition costs. Embrace this form of customer-led growth by asking VIPs and loyalists to put in a good word for you to family and friends. 

Even if you offer an incentive, the cost is minimal and the effort is worthwhile. According to Nielsen, 88% of consumers trust family and friend recommendations most among all types of advertising.

3 ways to increase customer spending

1. Focus on customer retention

If you do just one thing to help your CAC-CLV balance, nurture customers toward buying again.  Growing your customer retention by 5% can increase your profitability by 75%.

Since customers have already demonstrated that they believe in you, it’s easier to gain repeat business than convince a prospect to buy. Continue to impress them by leveraging an owned channel like email marketing. You’ll stimulate more purchases while avoiding costlier acquisition methods.   

The key is personalizing communications with your promotional campaigns, based on purchase history and other first-party data collected:  

• Experiment with targeted messaging via segmentation, like granting first access to an improved version of the product they bought
• Automate the customer journey by sending timely communications, such as a thank-you to first-time purchasers 
• Offer exclusive incentives via unique Shopify discount codes

2. Boost average order value (AOV) 

Let’s presume that not every customer becomes a repeat purchaser. Forget about customer retention tactics for a moment. 

Knowing some prospects won’t return after one purchase, what can you do to bolster their spending and help the CLV cause? Here are a few suggestions: 

• Bundle products priced at a slight discount 
• Provide free shipping once reaching a spending threshold
• Offer a limited-time, tiered promotional pricing strategy featuring elevated discounts as the order value increases

Each tactic is appropriate for customer retention efforts, too.

3. Maintain healthy gross margins

In addition to CAC, gross margin is a significant determinant of profitability. Gross margin refers to the total sales revenue after subtracting the cost of goods sold (COGS). 

COGS are all the direct expenses needed to produce and deliver your product. The calculation does not include marketing and sales costs. 

With a solid gross margin, you have flexibility in running promotional sales. You can afford to offer enticing discounts to lure more customer purchases and higher AOVs. 

On the other hand, thin margins deserve corrective attention. Reduce COGS through pursuits such as: 

• Negotiating with suppliers for better pricing
• Streamlining manufacturing operations
• Sourcing more cost-effective raw materials 
• Optimizing shipping costs
  

Understand CAC and CLV for driving business growth

So, are you wasting money on expensive acquisition tools and channels? You can only answer it accurately if you understand your CAC and CLV. 

Know your average CLV, and you'll know how much you can spend on acquiring new customers. Know your CAC, and you'll separate effective channels from the ones that drain resources.

Remember, your goal is for CLV to trump CAC. Maximize lifetime value by retaining customers, boosting AOV, and managing your gross margin. Do all three to gain greater control in creating sustainable profitability.