What’s NEXT 2023: Why e-commerce brands must focus on customer lifetime value over customer acquisition

Negar Mokhtarnia
What’s NEXT 2023: Why e-commerce brands must focus on customer lifetime value over customer acquisition

In the past year, growth through acquisition has become more expensive as Cost per acquisition (CPA) increased across most channels, attribution became opaque, and cookies became less reliable. Furthermore, in the past 6 months, the financial outlook has drastically changed, and with an increase in the cost of capital, it has become less prudent for companies with limited runway to spend large sums on acquisition. 

Additionally, as Cost of goods sold is increasing and customers are not ready to absorb additional price increases due to the higher overall inflation, there is additional pressure for lean operations and reduced spending. Acquisition investment as high as 10% of total revenue has now become a challenge to maintain due to lower overall revenue and even smaller margins; hence, the focus of e-commerce operators and investors has shifted from the growth rate to operational efficiency, bringing about a big change in direction from the last few years. 

Focusing on retention and keeping your existing base engaged

Over the last 3 years, e-commerce saw an outpaced growth rate during COVID that is now becoming more stable. The question we are all trying to answer is whether it pulled the growth forward by a few years or actually changed customer behaviour. I would argue, like most things, it’s probably a bit of both, but companies who assumed that the growth rate will be maintained will face a challenge as they may have over-leveraged for growth that is now going to take a few more years to materialise. 

Most companies have to make a hard choice, whether to raise prices to maintain profitability or reduce margins to keep their base growing! I think the third less obvious option is to focus on retention and increase the profit per customer. By focusing on creating a relational e-commerce experience that delivers value to what customers deem as necessity and accepting that customers will cut their overall spending, companies can ensure that they don’t lose their existing customers and can, therefore, increase overall revenue by increasing the Share of Wallet (SOW) of existing customers. 

Brands in e-commerce that look to unlock this path will likely invest in owned channels that would keep their existing base engaged, developing automated programs to lead customers through the lifecycle from onboarding and growth to rescue to advocacy. Meanwhile, many companies use their CRM strategy as the only part of the business to engage existing customers, however, most CRM systems are not able to go beyond the basic e-commerce tools of engagement such as abandon browse and repurchase and reactivation type campaigns, unless paired with a comprehensive source of customer data. 

Leveraging data to boost brands’ customer experience

To create effective engagement, brands in e-commerce must bring together all the sources of data to create a contextual understanding of their customer’s needs and habits. Brands are able to collect zero-party data as customers engage with the site and triangulate their profile info, purchase habits, on-site browsing behaviour as well as the customer segment definitions to create a comprehensive view of their current customers and predict potential behaviours of future customers.

Brands can also use this data to identify which portion of the customer SOW is necessary and will likely continue and, on the other hand, which the customers will decide to curb spending on. This will allow them to optimise inventory, pricing, and promotions decisions for a financial downturn. For instance, one company may use points and special offers to discount categories that customers may be hesitant to spend, and on the other hand, drive orders of the essential categories to maintain profitable operations. 

Additionally, without a doubt, the best way to improve the retention of existing customers is to provide an excellent customer experience. The next few years will set a new standard for what customers expect from e-commerce platforms in terms of customer service, delivery speed and refund/return policies. To protect their market share, said platforms will compete to stay ahead of the customer’s expectations and their competitor’s capabilities. 

Hitting the home run in relational e-commerce experience

Brand recognition will also play a big part as advertising budgets shrink. The best brands will focus on customer experience and brand values rather than splashy advertising. This approach helps them to stay top of mind, bringing existing customers back to the site and focusing the smaller acquisition budget on truly new customers who are highly aligned to the near-future growth strategy of the company, and likely in categories that are less recession-affected. 

Finally, to fully leverage site traffic, e-commerce players must focus on increasing the conversion rate by reducing friction in the buying journey and focusing on increasing the basket size of customers. 

It is worth noting pricing competitiveness is still quite important as we go through a financial downturn but has historically been a smaller contributor to longevity over the brand and customer experience. Many successful brands in e-commerce will use loss leaders to harness demand and drive retention and lifetime value. 

The most successful brands provide exceptional relational e-commerce experience rather than a transactional one by knowing their existing customers better and aligning their strategy to where the customer expectations are going. 

In 2023, brands ought to focus their strategy to balance Customer lifetime value and Cost per acquisition to ensure sustainable growth without the need for constant injection of acquisitions cost. To navigate this complex plan, they must bring together teams from multiple disciplines to allow coordination of data modelling, customer engagement, and customer experience to best engage and grow the SOW of existing customers. 

This article is written by Negar Mokhtarnia, Director of Product at Pet Circle.

The insight is published as part of MARKETECH APAC’s thought leadership series under What’s NEXT 2023What’s NEXT 2023 is a multi-platform industry initiative which features marketing and industry leaders in APAC sharing their marketing insights and predictions for the upcoming year.

If you are a marketing leader and have insights that you’d like to share on upcoming trends and practices in marketing, please reach out to [email protected].com for an opportunity to be part of the series. 

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