MARKET INSIGHTS

Rethink Acquisition Cost from a Retail Perspective

September 8, 2021
Rethink Acquisition Cost from a Retail Perspective

Every brand needs to grow. To drive growth, you need to acquire customers and foster repeat purchases.

Today’s new, modern brands excel at the former: launching new products, hyper-targeted email marketing, rolling out limited-editions and collabs, and designing programs and experiences that engage and reengage their shoppers. They have fine-tuned their capability to win repeat business and create strong customer relationships.

However, the other half of the equation—customer acquisition—holds many of them back.

Lifetime Value (LTV) is the metric that measures your success at retaining customers, and Customer Acquisition Cost (CAC) is the measure of your total spend on winning the business of a new customer.

The high cost of customer acquisition holds these modern brands back and keeps them from the next level of growth.

Businesses live and die by understanding, managing, and optimizing their customer acquisition cost. When they fail to do so, entire organizations and even business models can fall with them. However, brick-and-mortar retail can offer a surprising alternative model for a sustainable, long-term customer acquisition strategy.

Many strong, new brands have struggled to manage mounting CAC. Let’s look at some of those examples to see what they’re up against:

Examples of brands facing high acquisition costs:

Outdoor Voices was one of the hottest new fitness apparel brands on the market. After six years of success, they charted rocket ship growth, driving $40 million in sales per year across their stores and ecommerce. However, their bubble burst once their Customer Acquisition Costs became untenable. Before restructuring, the brand was spending $2 million a month to make $3 million in sales.

HelloFresh has emerged victorious from the meal-kit wars of the 2010s while competitors Blue Apron and Plated have fallen by the wayside. Competition became fierce when heavy venture capital investment in similar and identical meal-kit and subscription businesses led to more and more businesses fighting over the same group of customers. The cost to acquire new users via social and digital ads rose to new heights, leading HelloFresh to spend over a third of its revenue on marketing.

Casper, Helix Sleep, Purple, and many other DTC mattress companies have been locked in a decade-long battle to top the sleep category. As in other verticals, customer acquisition cost has ballooned. This has led to competition over new acquisition methods, such as affiliate marketing. While standard practice is to pay affiliates around 5% for every sale they drive, top-ranking mattress affiliates were making 25% off of every sale during the height of the mattress frenzy.

And it’s not just DTC brands that are feeling attacked by CAC. Everyone is being squeezed. For example, a report by AdStage has found that the median cost-per-click for Facebook News Feed ads had risen 48.8% year-over-year in 2019.

In her most recent Internet Trends Report, Mary Meeker said of digital advertising that “there are areas where customer acquisition costs may be rising to unsustainable levels.”

CAC only continues to rise in the digital realm, especially among competitive direct-to-consumer segments. What does that mean for retail brands, and what can they do to control these costs?

Why is customer acquisition cost rising?

The easy answer is competition. Digitalization has lowered the barrier to entry for starting a brand. What would once require large investments of capital to create systems, hire staff, and build out manufacturing infrastructure is now easier than ever to assemble using existing software and solutions.

This, combined with infusions of capital from VC firms looking to pick a winner in a hot new space, means two things:

  • More money being spent on marketing, and
  • More brands competing for the same customers.

Many digital advertising solutions like Facebook newsfeed ads, Google Search ads, and sponsored Instagram ads are priced based on bidding among competitors for impressions among specific groups of shoppers. The costs for each of these solutions can rise indefinitely as long as retailers are willing to pay for it.

Rethinking Customer Acquisition Cost

How much should customer acquisition cost?Customer acquisition depends on customer lifetime value. 3:1 is a healthy LTV to CAC ratio. That means if you spend $100 on marketing, staff and other expenses to acquire a customer who generates $300 in revenue, you’re in a good position. The higher the LTV:CAC ratio, the better.

CAC vs. LTV matrix diagram

You can increase a customer’s lifetime value by ensuring that they make larger purchases, make more purchases more frequently, and shop with you for as long as possible.

The following kinds of businesses are all vulnerable to rising customer acquisition costs:

  • Low-margin businesses like car dealerships or furniture stores
  • Businesses with long repurchase times like mattresses
  • Businesses in verticals with high levels of customer churn like meal-kit delivery services
  • Niche businesses with lower numbers of total potential customers, like bespoke tailoring

Managing customer acquisition costs while increasing lifetime value through retention programs and loyalty marketing is an essential balancing act for a modern brand. You need to grow and replace lost customers without neglecting your existing shoppers or overspending on these or other areas of the business. It isn’t easy, but lowering CAC will mean you have a little more breathing room.

How can you lower customer acquisition costs?

That really is the multi-million dollar question. If you can lower CAC, you can worry less about the more complicated factors that determine your shoppers’ lifetime value and scale your business with speed.

Because the more straightforward forms of digital marketing can so easily skyrocket when competition is fierce, the best way to lower customer acquisition costs is to diversify your acquisition methods to avoid competing exclusively in the field of digital marketing.

You shouldn’t pull out your investment in things like social media ads and SEO, but should temper them with cheaper, more organic forms of customer acquisition and marketing to lower your overall CAC.

4 strategies with lower customer acquisition cost:

Embrace an omnichannel ecosystem:

Customers expect to be able to interact with your brand in myriad ways, and retail drives those experiences. Retail has been a customer acquisition channel for about as long as there have been customers to acquire, and it drives results. Ecommerce accounts for nearly 11% of all retail sales in the U.S.—a significant percentage, but that still means that 89% of purchases happen at physical stores.

Brick-and-mortar retail isn’t just a conversion channel, it’s an acquisition channel. Take New York’s flagship Macy’s in Herald Square. The largest department store in the United States, Macy’s Herald Square location sees over 20 million shoppers annually and $1 billion in sales. Physical stores like their flagship play a significant role in driving ecommerce traffic and sales as well: Macy’s digital sales are 2-3x greater in locations where they also have department stores.

That’s because a retail store increases brand awareness among every person who walks by, and delivers a better customer experience that leads to a higher conversion rate and lifetime value than an ecommerce-only experience. While there are inbuilt costs, when done right, retail stores can acquire these shoppers for a lower cost than digital means. And this CAC is more stable, as it doesn’t revolve around outspending the competition. A great store should acquire more and more shoppers without a constant need to increase spend.

Of course, launching retail with less cost and less risk is what we know best, and we believe it is the most effective way to acquire more high-value shoppers for life.

Macy's flagship store in Herald Square.

Adopt word-of-mouth marketing:

The original marketing channel—while not as easy to track and measure, word-of-mouth marketing is a cost-effective way to scale your acquisition strategy.

It’s estimated that word-of-mouth drives 13% of all consumer sales, equivalent to $6 trillion in spending. Shoppers are also 90% more likely to trust and buy from a brand recommended by a friend. Many brands have seen big returns from tapping into this age-old acquisition method.

Let’s look at the example of Rent the Runway. They acquire a whopping 94% of their customers through organic marketing. How do they do it? Their approach is simple:

  • Search their branded RTR hashtags on social media.
  • Find photos of happy customers sharing their latest fit pic.
  • Amplify this content by sharing on their own social channels.
  • Boost posts with paid promotion when needed.
  • Rinse, repeat.

To bolster their approach, RTR also works with local ambassadors to drive referrals, set up special events, and runs exclusive promotions to spread the word about their brand—all at a much lower cost than traditional promotion.

RTR’s word-of-mouth marketing really works. We’ve seen it firsthand. When we partnered to launch their first Powered by Leap store in Dallas, our first day had lines out the door and down the block.

Our joint approach to promotion was able to drive tons of excitement. Leap sent out a nationwide email campaign, geo-targeted social ads, and mobilized a street team to hand out flyers, while RTR’s networks of ambassadors and engaged shoppers were able to spread the word across the city and beyond. Currently, the store has doubled its expected monthly revenue in its first weekend.

RTR shoppers line up out the door in Dallas

Leverage micro-influencers:

The rise and fall of big-name influencers has been well documented—with Instagram influencer engagement at an all-time low, it may seem like the age of influencers is behind us. However, there’s more to this story. While engagement with big accounts (10K+ followers) is dropping to 3.6%, engagement with smaller accounts (1-5K followers) is highest at 8.8%!

The influencer market is changing, and smaller really is better.

These micro accounts are more relatable than big accounts and have engaged bases of real users following them. They’re also less expensive. It’s a perfect blend for customer acquisition success.

Take Stitch Fix. They’ve assembled a network of micro-influencers dubbed the Stitch Fix Stylists to share their personal style in videos, interviews, and blog posts in exchange for discounts and gift certificates. They also mobilize their followers to share their own photos and become stylists themselves with regular style challenges and other contests and events. They’re able to reach a much wider audience of followers from all different age groups, locations, and backgrounds by tapping into this diverse network of Stylists and Influencers—all for less than if they did a single sponsored post with a 1 million follower account.

Stitch Fix's micro-influencer strategy in action.

Take a content-first approach:

Content marketing can be a powerful tool for customer acquisition. If you create great content, then people will seek it out. Great content isn’t free, but it doesn’t have to cost as much as a giant squid statue either. Once you build that content-creation muscle and start putting out blog posts, social posts, and videos that resonate, you’ll see customers come pouring in.

Making great content to attract new customers can start with a simple statement. How about, “dogs are funny”? That’s what BarkBox started with, and they’ve grown their audience to over 500K monthly visitors.

It all began when they noticed that more and more customers filmed doggie unboxing videos of Barkbox deliveries each month. People love their pets, and people love watching other people’s pets tear into a box full of toys. Barkbox tapped into the micro-influencer effect outlined above and started engineering their approach to encourage and incentivize shoppers to make more unboxing videos of their own.

But that was only the beginning. BarkBox built out a complete content studio to create funny, lighthearted pet content of their own. They stood out from other pet brands, attracting more shoppers with less spend and cementing their place in the industry. And, they went from spending 75% of their marketing budget on Facebook ads to just 25%.

Bark Box's fun pet content all started with doggie unboxing videos.

Leap’s platform approach

Brands launch on Leap because they’ve seen again and again that an immersive, omnichannel retail store can attract and retain shoppers for less than digital marketing spend and large ad campaigns.

The result is not just that more customers shop at your store, but that the customers who do build a stronger relationship with your brand. With retail, you aren’t competing for eyeballs like you would be on a platform like Facebook. You win with things like eye catching window displays, effective merchandising, and personalized service and clienteling that serve as the connective tissue of the retail experience.

The customers you acquire through a retail store are even more valuable than those you acquire through digital marketing. That’s because they build an emotional connection with your brand that they wouldn’t through traditional performance marketing advertising similar products for less.

Retail can be a customer acquisition engine. Avoid the CAC trap and don’t compete in an arms race to outspend your competition with digital ads. Instead, build a strong, sustainable brand experience that attracts loyal customers over time. You’ll have to be nimble and creative, but your hard work will pay for itself.

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“Leap allows companies to expand into retail without throwing too much money into it or incurring much risk at all.”

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