For good reason, much has been written in recent years about the importance of customer acquisition in both B2B and B2C eCommerce. Buyers and consumers have shorter attention spans than ever before, are less brand-loyal than ever before, and are equipped with technology that puts the world of commerce never more than a click away. It’s a fast-paced and fickle digital world to be sure.
Let’s face it – acquiring customers is tough for any business. Particularly those operating online. Worse yet, getting that next order does not necessarily mean a new customer was actually acquired. Orders and customer acquisition are, unfortunately, not synonymous.
How do you know an authentic customer acquisition took place? Simple enough. Ask yourself questions about that customer.
Do you have, and do you continue to collect, robust data about the customer and their behaviors online? Will the customer opt to visit your site when ready to purchase again in the future before making a trip to Google, to Amazon, or having a conversation with Siri? Will the customer share your website as an informative resource to a colleague or friend when relevant questions arise? Will the customer be dazzled by your commitment to the post-purchase experience and share that with others?
Or, rather, was your ad or your website simply in the right place at the right time to snag a single, incremental transaction?
Customer acquisition is truly about mindshare. Has your business acquired a tiny, but valuable, parcel of real estate in the customer’s brain as a result of the remarkable value you delivered? (Sidebar - If you’re interested in seeing how a high-powered, high-cost thinktank like McKinsey researches mindshare, here’s a link to a fascinating case study from 2019 on the retail banking sector.)
Leaders from the c-suite and consultants alike are evolving and finally dialing in on customer acquisition and mindshare. They are coaching marketing directors to understand that customer acquisition is about delivering value before, during, and after each and every transaction. These leaders are building a robust value proposition that their marketers can hammer home at every digital turn. They are also now tracking Customer Acquisition Cost (CAC) in an attempt to gauge the economic viability of their business in an increasingly competitive digital world. Marketing guru Neil Patel even goes so far as to deem CAC, “the one metric that can determine your company’s fate.”
Customer acquisition is important. Calculating the Customer Acquisition Cost (CAC) is imperative. But, frankly, it’s not enough. The strongest players in the world of eCommerce are going beyond CAC, instead choosing to wake up in the morning hyper-focused on something else entirely.
Why is a focus on CAC not enough? Quite simply, the next dollar you’ll earn from a new customer is not as profitable as the next dollar you’ll earn from a long-term, loyal customer. After all, your business is about profit, right?
Let’s say Company A has a CAC of $15, Company B has a CAC of $20, and Company C has a CAC of $50. Which company is the highest performer? Which one would you invest in? It’s impossible to know.
Without an understanding of the Customer Lifetime Value (CLV), CAC is irrelevant. Yet, many businesses are focused on CAC, calculating CAC, and go no further.
If Customer Lifetime Value seems a little too tricky and a little too daunting, that’s okay. That’s natural. It is both those things. (It’s also why there is more consulting work available than hours in the day!)
An understanding of Customer Lifetime Value (CLV) requires some baseline knowledge of strategy, with a touch of psychology sprinkled in, as well as math. For those interested in the math and wanting an explain-it-like-I’m-five lesson on how to calculate CLV, Alex McEachern’s piece for Smile.io - despite being a few years old - is a tremendously insightful resource to dig into and bookmark. We will opt to focus instead on the strategic, human side of CLV and how, when optimized, it can drive profitability.
Image via Smile.io
It’s important to remember that each customer represents a relationship. Specifically, a give-and-take relationship. You, the business, give products, services, and value. The customer gives their time, their attention, their money, and – if you’re lucky – their endorsement to others. To maximize the CLV is to maximize the give-and-take from the relationship.
Fortunately, the work is, fundamentally, quite simple. There are three fundamentals to maximizing the CLV.
Grow the Average Order Value (AOV). It’s a topic that often demands its own deep-dive, but focuses on bundles, upsells, cross-sells, and value-adding services. And incentivize, incentivize, incentivize! The key is to sell more than one widget in every transaction.
Increase Purchase Frequency. There is a great potential upside to retargeting, social media marketing, and email marketing when it comes to pushing customers to put in the next order, but you’ll always be treading on thin ice as it’s easy to over-market and over-message. Knowing how and when to connect with your existing customer base requires thoughtful marketing and a keen eye on analytics.
Extend the Longevity of the Customer Lifespan. Will they still be your customer in a year? Two? Three? Five? Will they continue to buy the same products, or will you have to continually expand your offering to keep them interested? I strongly advise any business that intends to dangle discounts out there as a carrot to new customers not to do so unless they have a clear understanding of customer lifespan. Remember, it’s all about building that long-term relationship.
It’s no surprise that an increased focus on Customer Lifetime Value by the largest players in eCommerce coincides with growth in recent years of subscription eCommerce. That’s because a subscription business model is a no-brainer way to increase purchase frequency and extend the customer lifespan.
The reality is that selling items a la carte, even to the most loyal customers, won’t deliver a purchase frequency on-par with a subscription model. Ask any canine-lover that has a recurring dog food delivery courtesy of Amazon Prime. It’s remarkably frictionless. A decision to purchase never has to be made each month. It’s automatic. And perpetual.
This type of frictionless commerce is key because it also stretches the customer lifespan. Want proof of concept? Think about gym memberships. The gym never fails to take their $20 a month. That membership will continue until the next ice age unless you, the consumer, take the action to cancel. eCommerce should be the same way. Make recurring orders the default for your core customers. Make the process of opting out painless enough that it doesn’t ruin the customer experience but add just enough friction to extend the customer lifespan.
To those who think subscription eCommerce is challenging to execute, I would say it is easier than you think. It’s about having the right technology, the right partner, and the right processes.
It all seems a bit conceptual and complex, doesn’t it? That’s okay. The good news is that if you’re thinking about Customer Acquisition Cost, thinking about Customer Lifetime Value, and thinking about what it would take to make commerce frictionless, then you are already way ahead of the pack.
Feeling inspired and looking for an action item list to take with you? Here it is:
Regularly revisit your customer acquisition strategy and understand if you are genuinely gaining mindshare.
Know your Customer Acquisition Cost (CAC), but don’t obsess about it.
Understand the components of Customer Lifetime Value (CLV) and calculate CLV at regular intervals for your various customer personas.
Spend more time thinking about how to grow the Average Order Value (AOV), increase the purchase frequency, and extend the customer lifespan than you do thinking about CAC.
Make your business frictionless. If your business model in any way lends itself to a subscription model, do it.
John Bishop is a digital strategist from Dallas, Texas with a soft spot for innovative businesses looking to change the world and a love for the explain-it-like-I'm-five approach to everything. He leverages 15 years of experience as both an online retailer and a strategic commerce consultant to take the complexity out of selling online. Please note that all opinions expressed are entirely, unless otherwise attributed, the opinions of the author.