Customer Acquisition: Understanding the Basics
This is the second in a series of posts about e-commerce and beverage alcohol. The previous post provided an introduction to the key concepts of e-commerce: Alcohol E-Commerce: A Primer.
Customer acquisition is the process of finding prospective customers and persuading them to purchase your product in a way that is both measurable and consistent. We previously introduced the concept of acquisition and how it is the foundation for e-commerce, but there are still many open questions about how much a brand needs to invest into acquisition strategies, as well as the process for determining which strategy works best.
Recent marketing trends have revealed that within the last five years, the cost of customer acquisition has increased by over 50%, as companies spend more on their marketing campaigns than ever before, with digital marketing spaces becoming highly-competitive and over-saturated. For brands with an increasing direct-to-consumer (DTC) sales model, online marketing is an essential component for growth. In particular, the beverage alcohol industry is driven heavily by consumer preferences, so investing time and money in acquisition can guarantee sustainable growth and customer loyalty.
This post will help you understand the basics of customer acquisition, as well as describe the metrics and Key Performance Indicators (KPIs) that are necessary to help you track how effective your acquisition strategy is. By the end of this post, you will be able to assess where your customer acquisition stands and how you can tweak your strategy to better fit your brand’s needs.
Why is Acquisition Important?
In today’s digital environment, it is easy to engage in micro-targeted campaigns that allow you to track users as they move from being prospective customers to paying customers. Acquisition can take place both in an offline or online setting (or a combination of the two), but with growing technologies and a larger presence of e-commerce, we are focusing on tracking online acquisition. Tracking offline conversions is a much more complex topic.
One of the advantages in the context of e-commerce is that customers move through a “funnel” that tracks their journey through the different stages of the acquisition process before they purchase a product.
The journey begins with customers gaining awareness about the brand itself, and being exposed to the product or service offered. If the brand appeals to them, they will move to the interest stage, as they will now consider purchasing the product. There are a variety of metrics that are used to track the different stages of the funnel, and this post will primarily focus on acquisition metrics that help measure the top of the funnel. This is because the bottom of the funnel (decision and action) focus on conversion strategies, and those are typically dedicated towards converting customers that have already been attracted to your brand.
The average American customer is exposed to 4,000 to 10,000 ads per day, so brands must find a way to stand out against their competitors. In order to find the right strategy, it’s important for brands to fully understand who their customers are and where those personas are most reachable. This can be done through analytics tools, surveys, or demographic reports. Brands also need to understand which strategy fits the needs of their business model best. For an e-commerce business in particular, it’s all about making a smart and calculated choice in deciding which channels to put money towards.
This, however, will not happen overnight. The process of finding the most effective channels will likely involve running experiments and trying out multiple methods, to understand the success rates of different channels. As a result, testing and optimization should both be an integral and continuous part of your overall strategy.
The key elements of a winning strategy are to ensure that it is sustainable, flexible, and targeted.
For an acquisition strategy to be considered sustainable, it must work in the long run, and any investments made will be upheld in the foreseeable future. A great example of a sustainable strategy is using blog posts for marketing, since once you have the resources and platform to create content, it exists on the internet for months or years to come and helps to prolong acquisition.
Flexible strategies ensure that you can respond to market trends in a quick and easy manner without having to restructure your acquisition plans.
Targeting the right users can help save considerable time and money, since not all people are your consumer base. It’s important for your target to be precise, and leverage the channel that is popular and influential to your particular target. A good example of this would be how recent trends have shown that brands targeting adolescents have found platforms like TikTok and Instagram to be more effective compared with Facebook, but platforms that heavily include younger populations might not work as well for a brand with a typically more mature consumer base. Thirstie provides brands with the ability to identify personas, or segments within their customer base, to help identify with more precision who the audience is and what drives their online activity. This can help the brand think about what channels will work for those personas.
Finding the Right Strategy
There are a variety of acquisition strategies that e-commerce brands can focus on, all of which provide multiple acquisition channels, but the key idea is to focus on a strategy which will allow you to develop a niche audience. At the end of the day, if your brand’s goal is to acquire customers and convert them into buyers, the quality of traffic should be the primary driver of your strategy. Since alcohol brands are historically good at traditional marketing which draw customers into stores to purchase products, having an e-commerce presence adds to this approach and provides them with the opportunity to engage in different acquisition strategies that lead to direct sales online. As a result, alcohol brands have an existing rapport with their customers, and having an e-commerce presence makes it easier to track. A good way to track how many customers are actually purchasing a physical product is with the use of conversion rates.
Conversion rates can be split into two different types: session-based conversion rates and user-based conversion rates. A session can be thought of as a visit to your website. Session-based conversion rates are measured by dividing transactions by the total number of sessions, whereas a user-based conversion rate is calculated by dividing transactions by the total number of users. Since a single user can account for multiple sessions, we focus on the user-based conversion as a more robust metric to use. Thus, when we measure how effective a strategy is in ‘acquiring’ a new customer, it is helpful to utilize the user conversion rate to understand how many of those acquired users are turning into paying customers.
Once you decide on the correct strategy for customer acquisition, there are certain metrics and KPIs that help measure the success of a campaign.
Managing your Customer Acquisition Cost (CAC)
After implementing your acquisition strategies, there is no doubt that you will want a yardstick to measure your progress,
in order to understand which strategy works best for your brand. The customer acquisition cost (CAC) is a metric which determines how much money it costs to acquire a new customer — this is what establishes whether a strategy is worth pursuing over the long run. CAC is calculated by dividing total marketing expenses on customer acquisition by total new customers. The objective for any business is to find a strategy that will bring them the highest customers with the lowest CAC, while finding a way to retain customers.
($) Sales & marketing expenses / (#) new customers acquired = ($) CAC
The average CAC for e-commerce companies for Google Paid Search Campaigns was around $45.27 in 2018, and will be higher or lower depending on the level of acquisition you are engaging in. Once you find a way to effectively reach your target audience, this cost will naturally lower. There is no magic number for CAC as it varies based on the size of your business and how established the brand is. For smaller brands, the CAC will be much higher in the earlier stages as you’re investing in marketing, and will pay off over time. Even if your CAC is initially high during the early stages of your acquisition process, you should focus on ensuring that it follows a downward trend in the years to come rather than aiming at a particular dollar value. A general rule of thumb is to also make sure that your CAC has a low value as compared to your Customer Lifetime Value.
Understanding Customer Lifetime Value
Customer Lifetime Value (CLTV) is a metric that portrays the average revenue a single customer is predicted to generate over the duration of their account. It’s important to understand how acquisition translates into long term retention, and identifies which customers are most profitable between new and returning users. Since acquiring a new customer can be 5 to 25 times more expensive than retaining existing ones, it’s important to understand where your CLTV stands to assess if you are spending too much or too little on acquisition.
There are ways to increase your CLTV without drastically increasing your costs by implementing simple strategies like increasing your average customer lifespan, increasing the volume of customer orders, and increasing the amount of time customers spend on your site. Amazon is a great example of an e-commerce company that has an exceptional CLTV, and the reason more than 100 million people pay for an Amazon Prime membership is because of fast and free shipping. Most customers are inclined to return to your business if their shipping needs are fulfilled, and this helps incentivize additional purchases. Using a combination of CLTV and CAC helps determine a good ratio which helps to answer the question of ‘how much do I really spend on acquisition?’ Generally, a good CLTV: CAC ratio is about 3:1, meaning customers are spending more than its cost to acquire them.
($) LTV / ($) CAC = (#) LTV to CAC Ratio
Customer Churn Rate
The acquisition process is heavily focused on acquiring new customers, but it’s equally important to gauge the quality of your customer acquisition strategy by understanding your churn rate. The customer churn rate measures the number of customers you lose over a given period of time, and is an important metric because it tells you how well or poorly you are retaining acquired customers.
((#) Customers beginning of the month — (#) Customers end of the month) / (#) Original number of customers x 100 = (%) Customer Churn Rate
In an ideal situation, the smaller your churn rate is, the better it is for overall performance. Tracking this metric will allow you to understand why you are losing customers, and the potential areas of improvement to increase your retention.
Conclusion
We’ve discussed different ways to approach the idea of customer acquisition for alcohol brands, along with the KPIs necessary to measure how effective your existing strategy is. Companies can use a variety of channels in their acquisition strategies to attract new customers, but at the end of the day, those strategies must be flexible and sustainable through periods of economic changes, industry trends, and focus on a targeted audience. Acquisition is an important part of growth, but it is also important to make sure your efforts are profitable.
Understanding the type of customers you want to target is key to ensure that you can retain them over a prolonged period of time. Analyzing factors such as the different types of traffic, customer demographics, purchase frequency and lifetime value will all help you optimize your acquisition strategies over time.
Understanding your customers is the foundation of drawing them towards your brand. The next article in this series will discuss different ways to analyze your customer’s behaviors, demographics, and introduce the use of personas, so you can leverage Thirstie’s data solutions to measure your performance at each stage of the customer journey.
Cheers,
Sophia Ahmed, and the Data Team at Thirstie.
