There is a metric currently used in the cloud software industry to make sure they operate their subscription businesses successfully. It is an equation and it is:
Why is this important to the e-commerce shops too?
This is important because it changes the mindset. It changes it from each transaction being a standalone activity into thinking about the lifetime of the customer. About keeping a customer for multiple transactions over a extended period of time. And it talks about how important it is to balance the cost of acquisition of a customer the first time with the amount of revenue a customer will generate over their lifetime.
It applies to online retail because it makes them think about costs over the lifetime of the customer. It makes customer satisfaction much more important and, lastly, it makes the cost of customer acquisition something to track and minimise. The overall effect is that it makes the business fit and efficient and more long-term.
Why customer acquisition cost is so important
In a world where margins are thin and with a tendency to get thinner all the time, one of the best ways of improving the business is to reduce the cost of customer acquisition and to extent the length of time a customer stays with your company. It is increasing your competitiveness.
By tracking and focusing on these metrics, companies can simultaneously get more for less (greater efficiency) and focus the marketing budget on increasing the total number of brand new customers. There is a cost of servicing a customer - even a customer of an online store.
The effect of reducing it on your business
There are some beneficial effects in reducing this cost:
- For the same budget you get more visitors and more chances to convert them into customers. Therefore, more sales
- You can read distribute a bit of that marketing budget into customer satisfaction programmes and extend the life of your customer. Longer customer life gives more sales and, therefore, more revenue
- It contributes to a more efficient back office process. This makes the average cost of servicing a customer - a key overhead cost - per transaction lower
Online retail strategy isn't just about lowest sale price
But you do need to be in the ball park to compete.
All online stores have to balance long-term investment with the short-term requirement to drive sales. Have a reasonable margin level allows sufficient return on the capital employed in the business. And it also allows a degree of flexibility to alter prices if the environment gets very competitive for a period of time. Having an extremely efficient back office process is a very good way of giving that leeway. It means that you can focus on the extremely important - possible critical job - of keeping customer satisfaction high.
Nobody said that being great at ecommerce was going to be easy.
If you liked this blog then you might also like this previous blog too: http://inbound.itqsolutions.net/blog/what-to-look-for-in-an-e-commerce-solution