The Curious Case of CAC
Consumers in this digitally equipped era believe that they should get their product delivery for free. However, as a retailer you know well that delivering items to customers’ doorsteps cost significantly higher than conventional warehouse to store distribution. LCP, a global supply chain consultancy has revealed that home delivery constitutes around 20 percent of the total value of an item, while the cost of delivering to a store is only five to seven percent. Still, retailers need to offer such services at minimal charges because customers expect these, and you need to acquire them (customers) to sustain your business.
The whole thing sounds like a simple equation and yet some complex elements involve here. Acquiring and keeping customers by offering value-added services increase costs, which is a frictional approach to the core objective of keeping the overall cost low, going by the fundamental to cost-to-revenue ratio. This is where you take out your calculator, and figure out your Customer Acquisition Cost, or CAC.
In 2015, Deloitte conducted a holiday survey polling 4,009 customers all over the US. The survey result showed that nine out of 10 shoppers thought same-day, next-day or two-day delivery as fast. Only 63 percent perceived three to four-day delivery as fast. The polled respondents said they were willing to shell out just an average of $5.10 for same-day delivery, whereas a quarter of the shoppers said they did not expect to pay at all. Here lies the complexity of balancing customers’ expectations and keeping your costs low.
Some More Statistics
If we go by the report of America’s National Retail Federation, in 2015, close to 60 percent online transactions in the US involve free shipping. It’s no different in the UK as just over 50 percent of retailers there offered free standard shipping with a minimum order value in the same year.
Again, when it comes to consumers, such diverse delivery services mean cheaper delivery or more convenience. Though to keep promises of providing fast delivery and lower price to attract consumers, retailers are now hard pressed by the increasing cost of these services.
All of these costs are part of the CAC. The formula is below:
CAC = MCC/CA
MCC = Marketing campaign costs of acquisition (excluding retention)
CA = Total consumers acquired
Customer Acquisition Cost, or CAC is usually about sales and marketing costs that retailers incur in course of acquiring a customer. Bringing down this cost to minimal is one of the major objectives for businesses that want to survive the competition and keep generating revenues.
A simple example can illustrate things better. If you spend $10,000 on marketing, and acquire 100 customers in a year, your CAC is $100.
How to Reduce CAC Costs
1. Optimising Conversion Rates
Increasing or optimising the conversion rate is an effective way to reduce CAC cost. Your e-commerce portal may be attracting a steady flow of visitors, but are they converting to real buyers? Conversion will increase earnings per visitor for your site. Simply put, just getting good traffic is not the correct reflection of your business’ earnings. For example, increasing your earnings per visitor by $1.05 (or Rs.71) can generate more revenues than just increasing your portal’s traffic by 15,000 page views per month. That’s why conversion rate optimisation or CRO is so important for an online business.
Also, doing A/B testing, which is a tool to compare two business methods so that you can implement the most effective and affordable one. Unfortunately, only 52 percent companies actually test their landing pages in a serious way to improve conversions.
Funnel Optimisation is another way of boosting conversion rate by improving the overall user experience (UX). User experience is not just about how your website appears; rather the factors including easy navigation and fast loading also prove to be decisive.
Carrying out a heat map analysis of your website will also let you know about the bounce rate if visitors bounce out of your website after checking a single page. Car abandonment rate is another aspect to measure when just before checking out, customers become indecisive and bounce out.
2. Implementing Marketing Automation
Are there some marketing activities that consume too much time? Well, then trying automation is a good idea. A quality marketing automation software with some realistic features can be useful for lead generation, email marketing, data analysis, reporting, and more. The human efforts required for those activities can be used on achieving the core business goals.
An automated marketing tool can take care of various marketing efforts including automated reminder for customers to complete their purchase in case of cart abandonment. You can also use the tool for cross-channel messaging such as text messages, personalized emails, and site messages. In addition, the software can also automate the sales and fulfilment process by keeping all the customers’ records for closing sales. All of these will lead to reduction of CAC.
3. Retain Existing Customers and Bring New Customers through them
The cost of losing customers is way higher than the acquisition cost of the new ones. In fact, acquiring new customers is six to seven times more expensive than retaining the existing buyers. Besides the cost, customer who left dissatisfied can also seriously damage a company’s reputation through word of mouth or sharing online reviews.
If the instances of customer churning happen too often, even the newly acquired prospects will hardly have any trust in your business, and may leave sooner than you expect. So, the best way stop this is trying to retain the current customer base, get referrals through them and convert the new prospects.
In simple words, you wouldn’t want to lose existing customers as you could not address their dissatisfaction or negative perspective. Mature customer relationships along with empathy are decisive whether your business will be able to do cross-marketing and up-selling effectively or not. The same goes for maintaining referral relationships.
Referrals programs get a major boost with the help of referrals, and considering that 60 percent of new business comes through referrals, this investment is worth it.
Streamlining Logistics: The Missing Link
Logistics is a key component of the entire supply chain, be it e-commerce or omnichannel retailing. Despite its fast-track growth the $18 billion Indian e-commerce industry has been plagued by poor last-mile logistics. In fact, the cost of logistics is skyrocketing due to poor infrastructure and botched deliveries. Inevitably, it leads to spiking customer acquisition cost. To streamline the e-commerce logistics, the following ways can be effective:
•Automatic Shipment Release – Numerous logistics companies are thinking in the line of structuring their pricing to and asking the e-commerce companies to authorise the automatic release of a shipment. Though this strategy is not going to replace home delivery, but will reduce the cost. It’s because drivers don’t have to wait for a signature and the carriers no longer have to attempt another delivery if the recipient is not home. However, this option is not likely to work well for higher valued shipments.
•Parcel Locker Pick-up – This advanced technology-based system is providing solutions to last mile delivery woes. Just imagine, instead of courier personnel sweating out for recipients’ addresses, they can simply delivery packages in bulk to automated parcel locker terminals. These lockers are usually placed at convenient public places such as metro stations, shopping malls, apartment buildings, and community centres. As soon as the packages arrive, consumers will receive a text message on their mobile or an email. They can collect their parcel anytime within 2-3 days. All they have to do is to enter the one-time password that came in the SMS, swipe their debit/credit card, and pick the parcel. A simple yet innovative method of bringing down delivery hassles to zero and making logistics cost negligible.
•Autonomous Vehicles – Using autonomous vehicles is another option that carriers are contemplating. In this parcel delivery method, drivers sign up to drop off parcels in the allocated areas. It is a cost-effective and greener solution to the last mile challenge. However, using autonomous vehicles in India is still a concept considering the road conditions and traffic congestion in the cities.
The ways mentioned have emerged as possible solutions to end the last mile delivery issue, and help online retailers generate more revenues by going beyond break-even.
Reducing the significantly high logistics cost and increasing customer lifetime value (LTV), firms can help retailers bring down the customer acquisition cost. Here technology has an important role to play. Especially, innovative logistics solutions are offering online retailers a silver lining, which is likely to be revolutionary in the near future. If you are seeking clean, innovative, and cost-effective logistics solution that will take last mile delivery issue out of the equation, just give us a call at +91-8882-760-760. At Smartbox, our objective is to provide the safest and fastest possible package delivery solutions to make missed deliveries a thing of past.