The Hidden Metric: The Cost of Losing Shoppers to Your Competition

Are you an eCommerce brand looking to scale to the next level?

>> CLICK HERE TO HIRE OUR MARKETING TEAM

Here’s a hard truth about ecommerce: If you feel that you’re not getting enough traffic or generating enough sales, your competition is most likely spending more money than you are on acquiring customers. Sales leaders who want an immediate return on investment must spend money. In an age where ecommerce is only getting bigger, paid traffic is essential to drive lifetime customer value, and it means having a loss leader mindset.

Loss Leader Mentality

What does it mean to be a loss leader? Companies or brands frequently price product at or below cost, creating a deal that seems too good to be true. The strategy, known as loss leader pricing, assumes that customers, attracted by the sale, will then purchase other, more profitable goods to make up the difference.

Although the traditional definition of loss-leader pricing stems from brick-and-mortar stores, it certainly applies to e-commerce. Breaking even or even taking a loss in your Top Of Funnel paid ads to acquire a customer is not necessarily a loss in the long run. Once you get a customer to buy from your store, they are about 10x more likely to purchase from you again in the future, which is where our Retarget paid ads strategies come in!

Not An Overnight Success

For those just starting out in ecommerce, whether on a Shopify or CommentSold or similar platform, it’s easy to look at some successful ecommerce shops and assume the process will be an easy one. “My product is much better than what they’re selling,” you may think. But a look behind the curtain will reveal the enormous amounts of work and the detailed process that goes into creating those successful stores.

There’s an old joke about the overnight success story that takes three years of hard work. The truth is that there is a long ramp-up period for most successful ecommerce shops, and it’s not as simple as a cash-in, cash-out system. Rather, it is a game of customer acquisitions.

The Two Metrics To Rule Them All

There are two key metrics in an ecommerce store: The cost to acquire a customer and the lifetime value of that customer. Analyzing the return on investment using those metrics is fairly simple: if you pay $20 to acquire a customer and they stay in your system where you can continue to remarket to them, and eventually they spend $500 with you over their lifetime, that’s good return on investment. How about spending $20 to get back $30, though? While it’s not a large profit, it is still a profit, and if that customer is nurtured correctly there will be a much bigger lifetime payout. Larger stores don’t simply look at the up-front costs. They know that while they’re paying out $20 on the front end to acquire the customer, eventually, because of their great customer service and excellent product line, that customer will spend a lot of money over the next few years. Additionally, once you’ve built up an existing customer mailing list, it minimizes the ad spend needed to acquire new customers. Instead, existing customers receive thank you cards, or discounts for additional purchases, and they keep coming back, creating a funnel for repeat purchases. All of a sudden that $20 upfront spend has created a lifetime value – making the input period more tolerable.

The Big Picture

When looking at the bigger picture, it seems like ecommerce is a game in which whoever can spend the most money on marketing and not go out of business will be the winner. But it’s not that simple, and there has to be a balance. Don’t spend all your money up front and go bankrupt, but it is important to spend money to get in front of people and stay there while you ramp up your business – even if there is very little profit in the beginning. Building a customer base, ramping it up and then being able to sustain yourself are important parts to the game.

Another harsh truth about ecommerce is that the worst results you will ever see are when you first start out – something that can be very discouraging. Don’t let it get you down, though. The more customers you get, the more data you have, and the more information you can supply to online ad algorithms, like Facebook’s. Once you’ve done that for a while, you’ll make more sales and eventually build up a “warm” audience of people who know and trust you. Then you’ll see the kind of “overnight success” often touted in case studies.

The Strategy

Getting to that point, though, is where we come back to the concept of loss leader pricing. Let’s say there’s one product in your store that has very good profit margins – 70, 80 or even 90 percent — something that is fairly cheap to manufacture, but has a high perceived value, and ideally is cheap to ship. That is the item you want to use to get people in the door. By offering a large discount on that item, you can bring customers into your shop – which is the number one goal and the hardest battle you’ll have to fight.

However, you can’t just bring customers in the door and not do anything to keep them. You have to have customer service and products to back it up – they need a good customer experience and a quality product to keep them purchasing. And they also need to remember you exist. Email marketing, new products, information on additional products in the packaging can all keep customers coming back. Another technique is to include a second product for free — if they buy a piece of clothing, include a piece of jewelry to get them to come check out your jewelry line.

This, in a nutshell, is loss leader pricing. So now, when you look at the cost of acquiring a customer, you realize it’s not nearly as simple as the price tag associated with that acquisition. Successful ecommerce businesses understand that getting a customer and keeping them is akin to maintaining a reliable recurring revenue stream – one that, if you’re nurturing them well, isn’t going to your competition. Because the most costly customer of all is the one you pay to acquire, get in the door with a loss leader pricing technique, and then fail to nurture. The cost of acquisition combined with the loss of recurring revenue, combined with the cost of acquiring a replacement customer – that is what will drive an ecommerce shop out of business. Don’t lose customers to the competition – it’s a loss you won’t be able to recoup.

If you want someone to implement this strategy for your brand, apply for an audit so that we can take a look at your current products and give you a free strategy plan.

>> CLICK HERE TO HIRE OUR MARKETING TEAM