Have you noticed the significant rise in marketing acquisition costs? Is it directly negatively impacting your ecommerce business? It is no secret that marketing costs have steadily grown in the last decade negatively impacting small- and medium-sized ecommerce retailers (SMBs).
A study by SimplicityDX calculated that between 2013 and 2022, the average customer acquisition cost (CAC) increased by 222%. We are definitely seeing the effect on SMB ecommerce businesses. It is becoming more expensive for them to use online marketing to acquire new customers and grow their business.
We surveyed 100 of our merchants to gather insights on the rising costs. It turns out that our small- and medium-sized online retailers are indeed feeling the impact and expressing their concerns. The majority of merchants have also noticed an increase in costs over the past year.
Almost 65% measured an increase in their customer acquisition costs.
With 30% of the respondents mentioning that they have seen a significant increase, roughly two-thirds of them find achieving their desired ROI on ads more challenging. This is troubling the minds of SMB ecommerce business owners. A noteworthy 88% of merchants surveyed expressed that they are "somewhat" to "very" concerned about the potential negative impact of the rising cost on their business.
36% of respondents are very concerned about the potential negative impact.
As an SMB ecommerce retailer, it’s completely understandable to have concerns. But don’t worry! This article will dive into several big-picture reasons why this is happening and discuss how you can strategize to not only manage the situation but also benefit from it.
Why Does It Matter?
Firstly, as customers become more expensive to acquire, you may need to invest a bit more in paid ads to maintain or grow your customer base. However, it’s important to note that these increasing costs can have a negative impact on your business profitability and cash flow needed for future growth.
72% believe the size of their business impacts their ability to combat the rising costs.
Secondly, the size of your business matters in your ability to handle the situation. Our survey found that merchants believe that business size negatively affects merchants’ ability to manage the rising costs — which makes sense. You probably do not have access to mountains of cash that can act as a buffer. Making it harder to compete with other or larger companies that might have big budgets and dedicated marketing departments.
Your customer acquisition costs (CAC) and customer lifetime value (average value from a customer) are key to long-term growth. In principle, you must ensure the acquisition cost does not exceed the customer lifetime value (CLV) to sustain business growth. Or you will be spending more money to get new customers than you’ll make from them.
So staying on top of your customer acquisition and lifetime value metrics is essential. Before we dive into the causes and how to combat the rising costs, let’s start by defining the concept.
What Are Customer Acquisition Costs?
Customer acquisition cost (CAC) is the average price spent for a new customer. It helps you calculate the return on investment of your marketing and sales spend.
CAC is a simple calculation but one to stay on top of as a valuable business metric. Compared to traditional marketing tools, with online marketing, it is much easier to calculate these costs since there are many tools available to track new customers.
The Reasons Behind the Rising Marketing Costs Trend
While many cost drivers are beyond your control, it is important for you to understand the situation to anticipate and fight against it. Let’s explore two reasons behind the trend.
Evolving Data Privacy Concerns and Legislation
You might have heard the news that more advanced privacy-related legislation has been introduced in Europe, North America, and other regions. These regulations reflect an increased concern among consumers to protect their data.
A recent study conducted by Cyber Security Norton surveyed 10,000 consumers worldwide and discovered that 85% of them want to take additional measures to protect their privacy. And according to YouGov, two-thirds of adults globally find that tech companies have too much control over personal data.
It’s not surprising that new regulations focusing on protecting individuals’ personal data are increasingly being supported and implemented. Examples of existing privacy regulations are:
- The General Data Protection Regulation (GDPR) in Europe
- The Privacy Act 2020 in New Zealand
- Canada’s Personal Information Protection and Electronic Documents Act
- The Swiss Federal Act on Data Protection.
In the United States, the following states have already implemented privacy-related regulations:
- California Consumer Privacy Act
- Colorado Privacy Act
- Connecticut Personal Data Privacy and Online Monitoring Act
- Virginia Consumer Data Protection Act.
That’s not all, more regions are looking to implement consumer privacy protection legislation. In 2023, several US states enacted privacy laws with various effective dates. The US Congress is also proposing a widely supported Federal law at the moment, further showcasing the rise in importance of consumer protection.
The legislative changes and consumer sentiment are connected to the rise of customer acquisition costs. These new regulations make it more difficult for companies to track and consolidate third-party consumer data across platforms — which can then be leveraged for customer segmentation.
We are already seeing big tech companies moving away from third-party data and toward first-party data. For instance, Apple, Google, and Mozilla have already announced that they are moving away from traditional cookies in their browsers.
And tech companies are also building features around the previously mentioned data privacy concern. For example, Apple introduced App Tracking Transparency in 2021 for their iOS devices, which gives consumers an easy option to opt out of being tracked across different apps.
These regulatory and consumer behavior changes make data collection and advertising segmentation more difficult. If audience building and ads are less effective, customer acquisition costs are increased.
More channels. More costs
Merchants looking to market everywhere need to be able to keep up. An average internet user spends at least six hours daily online and goes online for the following reasons:
- 59.3% — Looking for information
- 44.7% — Finding new ideas or inspiration
- 43.1% — Researching products and brands
Consumers are looking everywhere for new products and brands — on online marketplaces, social media, Google, and more. In order to use each platform to its full potential, you have to produce unique content for each one. Success looks different on every platform.
On TikTok, success comes from consistently creating engaging videos that are authentic and follow the latest trends, while the content can be more static on Instagram. You can also engage your audience through blog writing or by creating specific ads for mobile use cases. You might need a team and lots of content to maintain an active presence on many channels. Creating content can be time-consuming, inefficient, and costly, therefore increasing your acquisition cost.
What Can You Do to Protect Your Profit Margins?
There is no one-size-fits-all solution to manage rising marketing costs. Depending on your business type, size, and industry, the effectiveness of each measure changes. But before we dive into three focus areas, let us explore some general advice for cost management.
Metrics Are Key!
Staying on top of your metrics and numbers is a must. It will give you an idea of your rising costs and if your countertactics are proving to be successful. So make sure you have access to reliable data and check it constantly.
Don’t Immediately Increase Your Prices
Increasing your prices to cover your costs might be the obvious thing to do, but it should not be the first tactic you try. Raises in pricing have a direct negative impact on your competitiveness and conversion rates.
Price increases are certainly an option, but let’s explore other methods to combat rising costs without sacrificing affordability and competitiveness.
Retention Is Key!
When costs rise, a great way to protect your margins is to prioritize retention. Focusing on customer retention and loyalty will reward you in the long term. Increasing the customer lifetime value of your customers also gives you more leeway for the future.
The goal is to keep your customer LTV higher than your CAC. More than half of the merchants we surveyed mentioned they were likely to invest more in customer retention due to the rising costs.
Improve the Customer Experience
Customer experiences are a big driver for customer retention.
86% of consumers leave a brand after 2-3 bad experiences. — Emplifi.
Emplifi found that consumers expect an answer to their inquiry within an hour. Of course, this is not always possible, but adding a live chat to your website allows you to respond faster.
Retention Through Personalization
Consumers are getting more suspicious of how companies use their data. They are also expecting more and more personalization.
These are contradictory trends since, without collecting data, it is hard to deliver personalization. However, there is a path forward for SMB online retailers. According to a research conducted by Gartner, certain types of data collecting are acceptable to customers.
When offering personalization, you should always remember that not every piece of data should be used for targeting. Luckily, there are plenty of types of data that consumers find acceptable.
With Ecwid by Lightspeed, it is super easy to offer a level of personalization without overextending yourself. Location, basic demos, and purchase history information can easily be leveraged to promote your brand and build a more personal experience.
For online businesses with a brick-and-mortar, implementing location-based marketing can boost in-store and online sales. Leaning into your local community with a hyperlocal strategy is something that big brands often omit in their strategy.
The hyperlocal strategy goes beyond just marketing, it can also come in the form of local customer experience. Organizing local events or even offering free local delivery, which you can easily set up in Ecwid by Lightspeed, can work wonders for your retention rates and has the added benefit of increasing word-of-mouth. Additionally, consumers are increasingly looking to shop locally, so the opportunity is right around the corner. Learn more about Ecwid by Lightspeed’s local shipping strategy.
Brand Is More Important Than Ever on Social Media
The advantages of having a strong brand are well-known. Through internal research, we’ve discovered that businesses who prioritize their brand as a key value driver tend to experience higher success in attracting customers through online marketing. This correlation alone does not tell the complete story, but it shows the significance of recognizing that your brand is essential to your success.
Building a brand helps you get recognized and grow your audience and social media presence. On social media, your brand and content are what people connect with. It is more than just the products in your store. They want to connect with businesses who they can relate to, and whose content is valuable to them. Social media is where a lot of people are now finding brands and products. Searching for products and brands on social media is almost becoming more popular than Google, especially among younger generations.
So keep this in mind — if your core audience is a younger crowd then you should definitely start incorporating TikTok into your marketing.
The rise of social commerce and selling goes beyond just browsing for products and brands. It is actually where lots of products and services are sold. And the biggest opportunity for your business is on TikTok.
Sharing Simple, Authentic Content and Stories on Social Media
On TikTok, there is currently a strong trend of small online businesses promoting their products by showcasing their business. They create videos that show behind-the-scenes of how products are made, how orders are wrapped, simply highlighting their team, and even sharing the challenges of running a business. TikTok is the place for SMB retailers to grow their business and attract new audiences.
This behind-the-scenes self-made content also works well on Instagram stories, Facebook, and YouTube. So you can post it there as well, but TikTok is the ideal place for it.
TikTok is an excellent platform that encourages authentic and relatable content that takes minimal tools or knowledge. Compared to Instagram, TikTok focuses less on having perfectly curated content. As a beginner or non-marketing savvy business owner, the platform might align better with your skill set. Authenticity and consistent posting will help you build that powerful connection with your consumers and find loyal customers. Hey, it might even make you go viral!
And best part, TikTok has the largest social media audience, so even a little success there could help boost your numbers.
Read more
Artificial Intelligence Is Your Friend
The CAC calculation can consist of all your marketing and sales costs, including expenses for content creation. Hiring an external agency or dedicated marketing staff might be unobtainable for your business.
An increasing number of artificial intelligence tools, such as ChatGPT and Copy.ai, can help you create pretty effective marketing assets. With AI writing tools, you can effortlessly create:
- Advertisement copy
- Drafts for blogs
- Product titles and descriptions
- Social ad designs
By leveraging these AI tools, you not only save valuable time but also effortlessly create great content. These tools can also help ensure that you have the right ads tailored for each platform, allowing you to maximize your reach and minimize missed opportunities.
You can build a large content library with specific ads that work best for each marketing channel. And best of all, these tools are generally free or a fraction of the cost of hiring an agency. Check out the Ecwid App Market for great AI tools to supercharge your marketing.
Read more
Wrap Up
Though the cost of customer acquisition for merchants continues to rise and shows no sign of stopping, there are plenty of ways to stop this trend. Focusing on what works for your business is important, as there is no one-size-fits-all solution.
Consider shifting your attention to focus more on customer retention, hyperlocal strategy, and delivering great brand and customer experiences. By doing so, you’ll be able to better manage your costs and increase your customer lifetime value. These wins across the board are what Ecwid by Lightspeed aims to help you achieve.
We are dedicated to bringing our SMB ecommerce merchants the tools they need to run and grow their business. We want to be your ecommerce partner, empowering you to grow without breaking the bank.
If you’re eager to learn more about the various ways Ecwid by Lightspeed can help your business cut costs, reach out to us!
The post How SMBs Can Navigate the Trend of Rising Marketing Costs first appeared on Ecwid | E-Commerce Shopping Cart.
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Wiebe de Boer, Khareem Sudlow
