Customer Acquisition Costs for Fashion Companies
You lot desire as many new customers as possible, just at what cost? Spend too little and y'all miss out on sales; spend as well much and y'all're unprofitable. The math has to piece of work for your marketing to piece of work effectively.
But allow's not pull out the calculus textbooks simply however. There's a simpler mode to pulse check whether your customer acquisition strategy is on track and sustainable—and that's to look at solid benchmark information.
Nosotros surveyed 270 ecommerce business owners* selling finished goods beyond multiple business verticals to sympathise the average customer conquering cost for their brands, along with what marketing channels collection the most customers and sales. The results both confirmed and challenged some of our assumptions.
Left your graphing reckoner at home? We'll besides item how to quickly calculate client acquisition cost and what to expect out for when assessing your business model's viability. 👀
What is customer conquering toll?
Customer acquisition cost (CAC) is the cost to your business of acquiring a single client. That includes product costs, labor costs, marketing costs, and any other costs that contributed to getting your product into a customer'south hands.
It's important to understand your CAC because it gives you an idea of how much you need to earn from each customer in lodge to have a profitable concern. Put simply, if you're spending more to acquire customers than customers are spending on your business organization, your business model is not viable—only more on that later.
How to calculate customer acquisition toll
Near businesses look at their client acquisition toll to understand how successful their marketing strategies and campaigns are. Y'all might not exist a marketer by merchandise, so agreement how much marketing effort and spend you lot should allocate to acquire a customer tin be quite challenging.
To keep this CAC calculation elementary, we're going to imagine that the simply price going into acquiring a client is the price of marketing. Ready?
Let'southward say you spent $500 on Google Ads and those ads brought in 10 customers a calendar month. Your customer acquisition cost would exist $50:
A more precise way to call back about customer conquering toll
The above calculation is the most basic way to calculate customer acquisition cost, and it'southward usually constructive enough for businesses that are but starting out. If yous're struggling with marketing in particular, this calculation volition requite you a good idea if your marketing is on the right rail.
But there are other costs that go into your day-to-twenty-four hour period operations that influence your true customer acquisition price and determine your overall profitability.
We'll keep the bookkeeping jargon to a minimum, merely at that place are 3 central terms you should sympathize when yous're calculating your CAC and assessing business profitability:
- Toll of goods sold (COGS). As you create your products, you lot're incurring costs. Everything from purchasing raw materials to the labor involved in manufacturing your products is included in your cost of goods sold. In other words, it's all of the costs and expenses straight related to the production of your appurtenances. It excludes indirect costs, such as marketing and sales. Yous should tack COGS onto your total marketing spend in order to do an honest accounting of your CAC. A more precise CAC calculation looks like this:
- Average lodge value (AOV). Average order value tracks the average dollar amount spent each time a customer places an order on your website or in your shop. To calculate your company's boilerplate gild value, but divide total revenue by the number of orders.
- Gross profit or margin. The gross margin represents the amount of full sales revenue that your company retains after incurring the direct costs associated with producing your appurtenances. (You desire loftier gross margins, considering that means you're retaining more acquirement.) Gross margin may appear as a dollar value or as a pct.
Why practise y'all need to know all this? Because your customer acquisition cost on its own isn't plenty information. You calculate it in order to understand how assisting your business is. In order to do that, you need to gene in your AOV and gross margin.
📚Resource:
- Predicting Profitability: How to Exercise Intermission-Even Analysis [+ Free Template]
- Look Past Revenue: half-dozen Ways to Increment Your Profit Margins
Predicting CAC based on marketing spend
Getting your marketing budget correct is half the battle—and the hardest-won boxing for early stage founders. Since marketing is often the majority of the customer acquisition toll and the most flexible cost in your equation, in that you tin can play with your marketing upkeep more than you can with say, your raw textile costs, it'southward a number worth digging into.
Every bit a rule of pollex, y'all shouldn't spend more than v% to 8% of your total budget on marketing.
Every bit a rule of pollex, you shouldn't spend more than 5% to 8% of your total budget on marketing. Simply beyond that, our data shows that how much ecommerce brands spend on marketing depends slightly on the industry they're in.
You can apply these manufacture benchmarks to estimate what your marketing budget should be or to check if your current marketing spend is on rail.
📊 What our research shows
On average, ecommerce businesses with less than iv employees spend the following on marketing annually:
- Arts and amusement: $8,185
- Clothing, shoes, and/or accessories: $7,404
- Electronics and/or electronics accessories: $12,156
- Nutrient, beverage, and tobacco: $10,695
- Article of furniture: $12,980
- Health and beauty: $iv,939
- Home and garden: $6,988
Customer conquering cost past industry
At present that you have a better idea of how much businesses like yours are spending on marketing in gild to learn customers, let's take a look at the average customer acquisition toll by industry.
📊 What our research shows
For ecommerce brands with less than four employees, the average client acquisition toll by manufacture is:
- Arts and amusement: $21
- Business and industrial: $533
- Habiliment, shoes, and/or accessories: $129
- Electronics and/or electronics accessories: $377
- Food, beverages, and tobacco products: $462
- Wellness and beauty: $127
- Home and garden: $129
Similar with all industry benchmarks, please interpret these numbers with caution. The figures in a higher place are averages that can vary significantly from brand to brand, depending on several factors, including the target market you're in, the size of your team, and your average order value.
For example, if you take employees, your CAC will exist higher than a concern without whatever employees because salaries are factored into the cost to acquire a customer.
Or if you're a luxury clothing brand with higher product costs, your CAC will be a lot higher than a print-on-demand t-shirt business—fifty-fifty though you're technically in the same industry. Just your boilerplate order value and net revenue will as well be a good bargain higher, which means you're still profiting from each customer, despite a higher CAC. Knowing your CAC is helpful, merely information technology's non the full picture.
Knowing your CAC is helpful, only it'due south non the full picture.
How each marketing channel contributes to client acquisition and sales
Pumping coin into marketing campaigns doesn't necessarily hateful you're going to get a return on your investment. In club to create a more precise marketing strategy and upkeep, y'all want to assess your profitability past channel. That means looking at both customers acquired and sales generated.
If y'all're just starting out, we dug into the data to see which marketing channels drove the most sales for ecommerce businesses like yours.
📊 What our enquiry shows
Across industries, this is how many customers were acquired past each marketing channel on an annual ground (on average):
- Social media: 1,614
- Outdoor advertisement: 1,188
- SEO: ane,025
- Remarketing: 921
- Paid social (Twitter, Instagram, Facebook, TikTok): 776
- Email marketing: 611
- PPC/SEM (Google Ads): 523
- Straight mail: 462
- Traditional advertizing: 400
- SMS/text marketing: 365
- Pop-upward shops: 279
- Tradeshows and in-person events: 248
- Other: 112
In terms of overall contribution to concern revenue (total sales), our inquiry institute that there are a few channels every ecommerce brand should be prioritizing from the offset. Regardless of industry, the information shows that social media, paid social, and electronic mail marketing were the top three converting marketing channels.
📊 What our research shows
On average, this is how each marketing channel contributed to overall business acquirement:
- Social media: 32.2%
- Paid social: fourteen.ii%
- Email marketing:12%
- Tradeshows and in-person events: 6.9%
- SEO: five.three%
- SMS/text marketing: v.two%
- Traditional advertising: v%
- Pop-up shops: 4.3%
- Direct mail: three.7%
- Outdoor advert: three.6%
- PPC/SEM: 3%
- Remarketing (targeting abandoned cart shoppers): 3%
- Other: 1.8%
💡TIP: Based on our data, social media and email marketing are two channels to prioritize no matter what your marketing upkeep is. If you lot accept a bigger budget or if you lot have a high-revenue business earning $100,000 a year or more, PPC/SEM, remarketing, outdoor advertising, and straight mail service might be 4 channels to consider investing more in.
So, is your business model viable?
Past at present, you lot probably take a skillful thought of what marketing tactics and channels may not exist serving you in the long-run, so let'due south put your theory to the test. You'll want to take all of the information we've outlined higher up—your full marketing spend, your full number of customers acquired, and your average order values—to figure out if your business model is viable.
The real challenge of customer acquisition price is spending the right corporeality to drive new customers to your product without jeopardizing the lifetime value of and revenue from that customer. Customer lifetime value (LTV) is the predicted amount a customer will spend on your product throughout their entire relationship with your brand.
For example, if your AOV is $100 and, on average, a customer shops with you four times every ii years, you lot would calculate your LTV like this:
Average Order Value ($100) 10 Number of Transactions (4) x Retention Time Period (ii) = Customer Lifetime Value ($800)
To summarize, business model viability will come up downwards to balancing two variables:
- Customer acquisition toll
- The ability to monetize those customers, or their lifetime value
The higher your LTV is relative to your CAC, the faster your business organization can grow. More often than not speaking, a ratio greater than iii:1 is considered "practiced."
Yous would and so compare your LTV to your CAC. Your LTV:CAC ratio basically tells yous how long it takes to compensate the investment required to earn a customer. The higher your LTV is relative to your CAC, the faster your business tin abound. Generally speaking, a ratio greater than 3:one is considered "good."
How to lower customer acquisition toll
If your LTV to CAC ratio isn't three:1 or college, it ways your business isn't operating optimally and you'll eventually run out of money. In this case, I'd urge you to lower your customer acquisition cost. There are a couple of ways to exercise this for an ecommerce business concern without drastically impacting your brand. Start with these simple tips:
1. Prioritize organic marketing
The proof is in the data: organic marketing channels similar social media, electronic mail marketing, SEO, and referral marketing are effective at driving customers to your store without costing y'all much (aside from your time, of class).
Understanding the ins-and-outs of organic marketing strategies isn't intuitive to most entrepreneurs, and then we pooled some resources to assistance yous go started.
📚Resources:
- Organic Marketing Ideas for Entrepreneurs on a Shoestring Upkeep
- A Comprehensive SEO Marketing Guide
- Want to Rank Your Store? Go on Page Ane With This SEO Checklist
- How to Create a Social Media Marketing Strategy
- Instagram Marketing 101: Using Hashtags, Stories, and More to Grow Your Business
- User-Generated Content: How to Rally Customers to Create Content With You
2. Focus on your AOV
CAC and pricing go hand in hand: without knowing how much it costs to increase your customer base and aggrandize the brand, you can't know how to price your products. In the case of high CAC, it'southward possible you've either priced your products as well low or you're spending ineffectively on marketing.
If your marketing upkeep is less than 8% of your revenue and you're prioritizing the channels that we've outlined to a higher place, and then have a closer look at your pricing. Increasing it slightly can requite you a higher average order value, which means a higher gross margin per order. This fashion, y'all tin afford a higher customer acquisition price. You can increment average club value a few means:
- Create an order minimum for gratis aircraft,
- Bundle products or create packages,
- Upsell or cantankerous-sell complementary products,
- Incorporate live chat to respond questions in real time and shut a sale,
iii. Lower your cost of goods sold
If you're confident that your marketing strategy and pricing strategy are all buttoned up, you might need to cut back on your cost of appurtenances sold. Inquire yourself:
- If you're purchasing raw materials, is your supplier competitive on price? Are in that location cheaper materials you tin can substitute that won't impact your brand?
- Can you lower manufacturing costs?
- Is there any mode to streamline the production process and lower labor costs?
- Have you negotiated your shipping costs?
Driving growth—but not at all costs
For early-stage companies, the challenge with assessing if your CAC is sustainable is that you don't have plenty historical data to work with. That's where the manufacture benchmarks can help you lot gauge if you lot're on the correct runway, or bespeak you in the right management every bit you start experimenting with marketing campaigns.
If yous're an established business and you're withal lacking quality data, it'due south time to start tracking your marketing efforts. For Shopify storeowners, your overview dashboard will provide you with most of the information yous need.
Lots of customers coming through can give you lot the illusion that your business is on the up. Only without digging deeper to understand how much it's actually costing you to acquire customers relative to how much you tin monetize those customers, it'due south incommunicable to know if you're growing your business sustainably.
Remember: growth is important—but non at all costs.
* Data in this article is based on research conducted by Shopify and Angus Reid. Research information was collected via an online survey among US ecommerce business owners with less than four employees (n=276) in July 2021. All values are rounded averages. All data is unaudited and subject to adjustment. All financial figures are in USD unless otherwise indicated.
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Client acquisition price FAQ
What is customer acquisition cost?
Client conquering cost (CAC) is what it costs your business to acquire a customer. Information technology's calculated by dividing your total marketing and sales spend—including cost of goods sold and labor—by the total number of new customers acquired. You use your customer conquering price to determine if your business is profitable by comparing information technology to your customer lifetime value (LTV).
What is a good customer acquisition toll?
A good customer conquering price depends on the industry you're in and the type of business organisation you're running. Co-ordinate to Shopify data, the average customer acquisition price for a small ecommerce business with less than 4 employees is around $58.64. It's worth noting that the bigger your company gets and the more than employees and overhead you have, the higher your client acquisition cost will be. The number alone is not what's important—be sure to compare your CAC to your gross margin and your LTV to determine whether your business organisation is profitable and viable long term. You desire to make sure the cost of acquiring customers doesn't exceed your power to monetize those customers.
How do I lower client acquisition cost?
Y'all can lower your customer acquisition cost in a number of ways, including simply non limited to: increasing your average order value, lowering your toll of goods sold (due east.g., product, labor, overhead, etc.), focusing on less competitive markets or niches, and prioritizing organic marketing, similar social media, SEO, and referral marketing.
What is a good LTV to CAC ratio?
As a dominion of thumb, a good LTV:CAC ratio is 3:1 or greater. You ever want your LTV to be greater than your CAC because it ways y'all're recouping your investment faster. When your CAC is higher than your LTV, it ways your business concern model is not viable because y'all're not able to recoup the money y'all invested to acquire the customer in the first place..
Illustration by Jon Krause
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