Reduce e-Commerce Acquisition Cost (CAC) and increase ROI

In this article we’ll look at what are CAC and ROI, how to find even better KPIs, and a few tactics to increase ROI and reduce CAC while removing dependency to paid traffic channels.

Definitions – the First Principles of CAC

The CAC, customer acquisition cost, is a common metric, also called KPI, in digital marketing and e-commerce.

Its definition is clear : how much does it cost to acquire 1 new customer.

The formula is equally straightforward : add up the total of your acquisition costs, and divide by the number of customers.

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More customers for less money is surely better than less customers for more money, isn’t it?

Let’s examine the 2 sides of this ratio.

Increase Customers

You can buy the same amount of traffic for the same amount of money and have more or less customers.

This difference would be a function of your conversion rate.

Main factors influencing your e-commerce conversion rate are:

• qualification of the traffic
• appeal of the product(s)
• appeal of the website
• UX of the website

Acting on those levers might dramatically change the amount of customers you acquire from the same marketing spending.

Reduce Costs

You can optimize the costs of traffic on existing channels, like Facebook Ads or Google Ads, with:

• better messaging
• better creatives
• better targeting
• technical improvements

You can also optimize costs by finding:

• cheaper channels (usually with less competition)
• better aligned channels

Reduce cost while increasing customers

Sometimes, both sides of the ratio affect each other.

This is an ideal scenario for accelerated growth:

• economies of scale, especially through amortization of fixed costs
• popularity and reputation of your brand(s)

When CAC is not enough – Marketing ROI

The KPI “CAC” is not accounting for the revenue generated, it only looks at the amount of new customers. This might be an issue. For examle, what would you prefer:

• paying $50 per client with an AOV or LTV of 1000?
• paying $100 per client with an AOV or LTV of 5000?

If you picked the first choice I want to hear from you.

To better account for the value of the customers created, other KPIs are needed. A common metric for e-commerce acquisition is ROAS, but this KPI includes only Ad Spend on the cost side, so it’s not sufficient for an apple to apple comparison.

When you want to really understand the efficiency of your marketing, you should look at more comprehensive ratios, like the classic ROI.

ROI of marketing is return of marketing (revenue generated by marketing minus cost of marketing) divided by investment (all marketing costs).

An even better ratio to look at is CAC/LTV.

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LTV stands for LifeTime Value, that is the average cumulated revenue per customer. To calculate your LTV, divide your total revenue by your total customers.

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Try to set up your analytics and reporting so you can track this ratio ASAP (but keep in mind that this metric is nearly useless if you’re just starting up).

How to Lower your e-commerce CAC – a framework

Optimizing for a KPI without understanding its meaning and limitation is a terrible idea, and that’s why we just took time to unpack the CAC metric.

Now let’s see a simple to understand but not so easy to practice diligently framework to lower your CAC.

1/ Clear your Vision

Of course you came for the juicy actionable tactics and crisp definitions, not for a “start with why strategy” advice.

So why are we dropping the V-word here?

The hard thing about scaling and being more efficient is people. People are messy, so communications and management can absorb most of the time and effort of your people, and subsequently most of your money. It will also reduce execution and speed, which is even worse for growth (and mid-term cash).

That’s not how you lower your CAC.

Vision is the foundation that makes people aligned, autonomous and fast.

Here are a few ways to leverage vision for dramatically lower marketing costs.

Building a Brand

Visionaries build brands.

A good brand makes marketing cheaper, and margin bigger (just ask Apple and Tesla).

Good brands are built on vision, positioning and messaging. Just do it.

Being Compelling

From the right product to the right copy in the right UX, being customer centric makes the same people buy more of your stuff. That’s better conversion rate, better retention, and obviously lower CAC here for you.

Scaling your Team

Having a low CAC when you’re tiny is not interesting. What you want is keeping a low CAC while selling more and more.

To scale you need more done. To do more, you need more efficiency and/or more people.

To manage more people you need more people, time and money.

That’s how you hit a growth plateau or at least increase your CAC as you scale, that’s the law of diminishing returns.

The way to make more people work in a same direction without scaling management and communication to an unsustainable bureaucracy level is to have a strong vision that everyone in the team feel compelled to aim at.

More about that below.

2/ Get More Agile

Lowering CAC and increasing ROI comes down to increasing efficiency. Efficiency is mainly tied to the way you work.

• Can you move faster than the competition?
• Can you adjust costs quickly?
• Can you try new things and learn from them?
• Can you stay consistent month after month?

You’ll need structure, vision and culture to make your team more Agile.

Learn more about agile way of working in this upcoming article.

3/ Scale With Data

What good is a very low CAC on 5 sales a month? Optimizing something small is just not worth it.

So now that you’ve started improving your e-commerce business, you’ll have to keep those good numbers while getting bigger and bigger.

The way to reach that grail is to be data driven.

here are a few tactics that will help you stay on track:

• every time you spend, try to learn something
• document what you learn, understand what it means, and take better decisions
• drop the budgeting, just double down on everything that’s winning
• don’t invest on projects and programs that have not showed promising result in a test phase

DTC vs Retail – Mind the differences

Ecommerce can mean a very different business whether we’re talking about a retail business or a DTC brand.

Here are a few key differences that could transform CAC significance

• DTC has higher margin
• DTC can be super focus, sometime even single-product
• Retail has to manage a huge catalog and find economies of scale, use a lot of automation…
• Brand is harder to build for retail but still crucial
• for DTC, the website is 1 piece of the product, for retail the website is the product

Lowering CAC channel by channel

Key to growth if finding good channels, scaling and optimizing those channels, while testing for new formulas on other channels. For sustainable growth, you’ll need to mitigate and manage your dependency to third party channels, especially the paid ones.

1/ Optimize existing channels

Try to measure better KPI like ROAS or even CAC/LTV and optimize for those KPIs.

Understand and measure your whole funnel so you do not over-optimize at one level while unknowingly decreasing the total performance. Integrate with product teams to do so.

Improve conversion rates with CRO, email-automation and remarketing tactics.

2/ Add “owned” and “earned” channels

Dependency to paid channels like Facebook Ads or Google Ads is a CAC killer. It eats your margin and you never know when the cost will surge.

That’s why adding new channels, especially “owned” channels is a great tactic, but it’s also tricky because

1. It takes effort and patience to pay off (usually)
2. ROI attribution is harder than with paid channels

This is how so many ecommerce owners, founders or managers end up handcuffed to their paid traffic sources, with no money left to start a significant organic effort.

Owned channel are:

• SEO
• Content
• Social
• Owned communities

Earned channels are:

• PR
• Influencers
• third party Communities

Usually all those earned and owned channels mix together very well. You have to build your synergic flywheel.

Finding and scaling the right architecture comes to having an agile team, a data driven approach and a crisp vision! See our 3 step framework above.

Lowering CAC with Agile SEO

Here at semtasks.com, SEO is the channel we specialize on, so here is a bonus material about how to use Agile SEO to lower your cac

How much to budget for SEO?

If you’re bootstrapped and your short term cash flow is tied to paid traffic, we recommend that you allocate a percentage of your total spend, maybe start with 10% and see it as an insurance. You can then ramp it up based on data and results.

You can also use your paid search traffic data to assess the SEO opportunity and build your budget accordingly.

If you’re funded, do some research upfront to define the appropriate budget for SEO.

How to assemble an e-commerce SEO team

if your funding allows you to hire full time SEO and content specialists, you can adjust the team roles based on how many people you can afford.

If you can’t hire full time roles, you can still benefit from specialized roles by using fractional SEO specialists, experts and assistants.

An outsourcing service like semtasks.com will help you do so.

How to brief properly an SEO team?

Clear vision, explicit business goals, the right incentives and relevant KPIs will make your team efficient.

You’ll also have to provide a lot of context, domain specific knowledge and target customer insights for maximum ROI of your spending.

Of course you don’t have to do it at once, better to start lightweight and keep compounding on documentation and learnings.

How to monitor and adjust?

You’re busy and you can’t look at everything.

You can use a rank-tracking software but in the short term a simple and free tool like Google Search Console + watching the revenue of Organic Search traffic in GA (Google Analytics) is enough.

To level up, you’ll want to compare the ROI of SEO against other channels. Finally don’t forget to understand how attribution works as looking at a biased picture might lead you to the wrong conclusions… and decisions.

For how long should you keep doing SEO?

If you’re happy with the level you have reached, you might stop investing in Growth.

But remember that if you’re coasting, you’re certainly going downhill…