The global ecommerce market has been growing steadily for more than a decade now. This trend is expected to continue in the foreseeable future.
In other words, the industry is booming. It’s a great time to launch an ecommerce business. You can make a lot of money by selling physical products online.
However, it’s becoming increasingly difficult to stand out from the competition, especially in saturated niches. So how can you get the attention of your dream customers while staying profitable?
The Math Behind Ecommerce Success
You can use these three metrics to evaluate the sustainability of your customer acquisition strategy:
- Customer acquisition cost (CAC). How much money, on average, are you spending to acquire a single customer?
- Customer lifetime value (CLV). How much gross profit does an average customer bring in throughout their entire lifetime as a customer?
- Customer lifetime value to customer acquisition cost ratio (CLV:CAC).
Take a close look at your marketing challenges. They are probably downstream of a CLV:CAC ratio that is too low. If this ratio were high enough, you wouldn’t have these problems.
That’s why your CLV:CAC ratio is the most important issue that you need to fix!
Increase Your Customer Lifetime Value
One way to improve your CLV:CAC ratio is to increase customer lifetime value. We recommend starting there.
Improve Customer Retention
You cannot outrun terrible customer retention with good marketing. Eventually, it will catch up with you. Why?
Failure to retain customers means having to constantly acquire new ones to maintain sales. That’s not sustainable.
So before you worry about getting new customers, make sure that your existing ones are happy.
The most important factors here are product quality, shipping speed, and customer support. You want every customer to have a positive experience when buying from your online store.
Of course, that is not always possible, but you want to do your best. And if something goes wrong, be quick to fix it!
Personalize Email Marketing If Your Business Caters to Several Distinct Customer Segments
Generic promotional emails can work well if your business caters to one customer segment.
For example, let’s say that you sell beard care products. You are serving one customer segment — men interested in beard care. Consequently, generic promotional emails are relevant to everyone on your email list.
Now, let’s imagine that you sell sports clothes for men, women, and children. That’s a completely different situation. Why?
Because men are interested in clothes for men. Women are interested in clothes for women. And parents are interested in both adult and children’s clothes.
It doesn’t make sense to promote men’s clothes to women or vice versa. Neither does promoting children’s clothes to people who don’t have kids.
Doing that would only teach your customers that your emails aren’t relevant to them. Your open rates would plummet.
Fortunately, there are email marketing apps designed specifically for ecommerce. You can use them to set up personalized product recommendations based on purchase history. It’s a great way to make your emails more relevant!
Implement Upsells, Cross-Sells, and Downsells
“Upselling” means offering the customer more of the product they were about to buy at a better price per unit. You can either pitch a larger quantity or subscription deliveries.
This strategy works best for inexpensive products that run out, wear out, or get used up regularly. Examples include supplements, daily hygiene products, socks, underwear, t-shirts, makeup, art supplies, etc.
“Cross-selling” means offering the customer something that goes well with the product they were about to buy.
For example, let’s say that you sell outdoor gear. The customer is about to buy a pair of hiking boots. Why not cross-sell them a pack of hiking socks?
You can have more than one cross-sell. For example, imagine that you sell art supplies. The customer is about to buy a watercolor paint set. What can you cross-sell to them?
Well, they probably need regular A4 watercolor paper. Then, they might want an A5 watercolor sketchbook. Finally, they might be interested in a video course on painting watercolor landscapes.
“Downselling” means offering the customer something that is less expensive than the product that they considered buying but decided not to.
For example, let’s say that you sell laptops and laptop accessories. The customer considered buying your most expensive gaming laptop. However, they decided not to proceed with the purchase and are about to leave.
You can downsell them a less expensive gaming laptop. Then, if they decide to buy it, you can cross-sell them some accessories!
Decrease Your Customer Acquisition Cost
Another way to improve your CLV:CAC ratio is to decrease your customer acquisition cost.
In theory, you could do that by obsessively optimizing ad campaigns. In practice, this is probably a waste of time. Why?
Because ad costs are ever-increasing. Sure, optimization can help you make your campaigns more profitable. However, you probably won’t be able to maintain that extra profitability for long.
This is where organic traffic comes in. Build your email list, blog, social media presence, YouTube channel, and TikTok channel. This will enable you to promote your products to your dream customers directly.
The more organic traffic you can generate, the lower your customer acquisition cost will be!
Outspend Your Competitors on Customer Acquisition
A high CLV:CAC ratio enables you to be aggressive about customer acquisition.
You can simply outspend your competitors if you have a better ratio than they do. Social media ads, search engine ads, newsletter ads, influencer marketing campaigns, you name it. They won’t know what hit them.
Of course, that’s assuming that your business is profitable overall. Understand that this ratio only shows the profitability of customer acquisition. It doesn’t account for overhead costs, unexpected expenses, and taxes.
Aim for a CLV:CAC ratio above 3. Get more than $3 in gross profit for every 1$ you spend on customer acquisition. That should be enough to reach and maintain overall profitability.
If you are still unable to generate profit at that point, analyze your business expenses. Something must be dragging you down. Perhaps your overhead costs? Whatever it is, it needs to be addressed.
Don’t Get Too Confident If You Start Doing Well!
The higher the CLV:CAC ratio, the higher the likelihood that the business will be profitable.
However, there are no guarantees, regardless of how high it is. You can always get hit with some crazy unexpected expense.
Moreover, as market conditions change, the ratio is bound to change as well. Just because it’s high now doesn’t mean it’s going to stay that way forever.
The reality is that entrepreneurship is unpredictable. There are many things outside of your control that can destroy your profit margins.
So play it safe. If you have plenty of money left over, don’t spend it all on growth. Put some aside for rainy days. Those rainy days will come sooner or later!
