How SMEs Can Navigate the Trend of Rising Marketing Costs
Have you noticed the significant rise in marketing acquisition costs? Is it directly negatively impacting your e-commerce business? It's no secret that marketing expenses have steadily increased over the last decade, affecting small and medium-sized e-commerce retailers (SMEs)adversely.
According to a study by SimplicityDX, the average customer acquisition cost (CAC) rose by 222% between 2013 and 2022. This trend is clearly impacting SME e-commerce businesses, making it increasingly costly for them to use online marketing to attract new customers and grow their operations.
To understand this issue better, we surveyed 100 of our merchants. The findings revealed that small and medium-sized online retailers are indeed feeling the pressure and expressing their concerns. Most merchants have observed a noticeable increase in cost over the past year.
“Almost 65% of the respondents reported an increase in their customer acquisition costs.“
With 30% mentioning a significant rise, roughly two-thirds find achieving their desired ROI on ads more challenging. This concern is troubling SME e-commerce business owners. A notable 88% of merchants surveyed expressed that they are "somewhat" to "very" concerned about the potential negative impact of rising costs on their businesses.
“Specifically, 36% of respondents are very concerned about the potential negative impact.”
As an SME e-commerce retailer, it’s completely understandable to have concerns. But don’t worry! This article will explore several big-picture reasons behind this trend and discuss strategies to not only manage the situation but also benefit from it.
Why Does It Matter?
As customer acquisition becomes more expensive, you may need to invest more in paid ads to maintain or grow your customer base. However, these increasing costs can negatively impact your business's profitability and cash flow, which are crucial for future growth.
Our survey found that 72% of respondents believe the size of their business impacts their ability to combat rising costs. This makes sense, as smaller businesses often lack the financial resources to buffer against increased expenses. This puts them at a disadvantage compared to larger companies with bigger budgets and dedicated marketing departments.
Your customer acquisition costs (CAC) and customer lifetime value (CLV) are key to long-term growth. To sustain business growth, your acquisition costs mustn't exceed the lifetime value of your customers. Otherwise, you'll be spending more money to acquire new customers than you'll make from them.
Staying on top of your CAC and CLV metrics is essential. Before diving into the causes of rising costs and strategies to combat them, let's start by defining these concepts.
What Are Customer Acquisition Costs?
Customer acquisition cost (CAC) represents the average expense incurred to acquire a new customer. This metric is crucial for calculating the return on investment (ROI) of your marketing and sales expenditures.
While CAC is a straightforward calculation, it remains a vital business metric to monitor closely. Unlike traditional marketing methods, online marketing makes it easier to calculate CAC due to the availability of numerous tools that track new customer acquisitions.
The Reasons Behind the Rising Marketing Costs Trend
While many factors driving costs are beyond your control, understanding the situation is crucial to anticipate and counteract these challenges. Let's explore two key reasons behind this trend.
Evolving Data Privacy Concerns and Legislation
You may have noticed that advanced privacy-related legislation has been introduced in Europe, North America, and other regions. These regulations reflect consumers' growing concerns about protecting their data.
A recent study by Cyber Security Nortons surveyed 10,000 consumers worldwide and found that 85% want to take additional measures to safeguard their privacy. According to YouGov, two-thirds of adults globally believe that tech companies have too much control over personal data.
Unsurprisingly, new regulations focusing on protecting personal data are gaining support and implementation. Examples of existing privacy regulations include:
- The General Data Protection Regulation (GDPR) in Europe
- The Privacy Act 2020 in New Zealand
- Canada’s Personal Information Protection and Electronic Documents Act
- The Swiss Federal Act on Data Protection
In the United States, several states have already implemented privacy-related regulations, such as:
- California Consumer Privacy Act
- Colorado Privacy Act
- Connecticut Personal Data Privacy and Online Monitoring Act
- Virginia Consumer Data Protection Act
Additionally, more regions are looking to implement consumer privacy protection legislation. In 2023, several US states enacted privacy laws with various effective dates, and the US Congress is proposing a widely supported Federal law, highlighting the growing importance of consumer protection.
These legislative changes and consumer sentiments are linked to the rising customer acquisition costs. The new regulations make it more challenging for companies to track and consolidate third-party consumer data across platforms, which is essential for customer segmentation.
Big tech companies are already moving away from third-party data toward first-party data. For instance, Apple, Google, and Mozilla have announced theirs shift away from traditional cookiesin their browsers.
Tech companies are also developing features addressing data privacy concerns. For example, Apple introduced AppTracking Transparency in 2021 for their iOS devices, allowing consumers to opt out of being tracked across different apps easily.
These regulatory and consumer behaviour changes complicate data collection and advertising segmentation. As audience building and ads become less effective, customer acquisition costs increase.
More Channels, More Costs
Merchants aiming to market everywhere need to keep up with the demands of various platforms. The average internet user spends at least six hours online daily for the following reasons:
- 59.3% — Looking for information
- 44.7% — Finding new ideas or inspiration
- 43.1% — Researching products and brands
Consumers search for new products and brands across various platforms, including online marketplaces, social media, Google, and more. To fully utilize each platform, you must produce unique content tailored to each one. Success looks different on every platform.
On TikTok, success comes from consistently creating engaging videos that are authentic and follow the latest trends, while on Instagram, the content can be more static. You can also engage your audience through blog writing or by creating specific ads for mobile use cases. Maintaining an active presence across many channels often requires a dedicated team and a substantial amount of content. This process can be time-consuming, inefficient, and costly, ultimately increasing your customer acquisition costs.
What Can You Do to Protect Your Profit Margins?
There is no one-size-fits-all solution for managing rising marketing costs. The effectiveness of each strategy varies based on your business type, size, and industry. However, before diving into three key focus areas, let's explore some general advice for cost management.
Metrics Are Key!
Monitoring your metrics and numbers is essential. This will help you understand your rising costs and determine if your counter measures are effective. Ensure you have access to reliable data and check it regularly.
Don’t Immediately Increase Your Prices
While increasing your prices to cover costs might seem like the obvious solution, it shouldn't be your first tactic. Price hikes can negatively impact your competitiveness and conversion rates. Though price increases are an option, let's explore other methods to combat rising costs without sacrificing affordability and competitiveness.
Retention Is Key!
When costs rise, prioritizing customer retention is an excellent way to protect your margins. Focusing on customer retention and loyalty will pay off in the long term. Increasing your customers' lifetime value (LTV) gives you more leeway for the future.
The goal is to keep your customer LTV higher than your customer acquisition cost (CAC). More than half of the merchants we surveyed mentioned they were likely to invest more in customer retention due to rising costs.
Improve the Customer Experience
Enhancing the customer experience is a significant driver for retention.
Emplifi found that 86% of consumers leave a brand after 2-3 bad experiences. They also discovered that consumers expect a response to their inquiries within an hour. While this isn't always possible, adding a live chat feature to your website can help you respond faster.
Retention Through Personalisation
Consumers are becoming more cautious about how companies use their data, yet they expect increased personalization.
These are contradictory trends, as delivering personalization without collecting data is challenging. However, there is a way forward for SME online retailers. According to research by Gartner, certain types of data collection are acceptable to customers. By focusing on these acceptable practices, you can still offer personalized experiences.
Personalisation Strategies with Rekisa
When offering personalization, it's essential to remember that not every piece of data should be used for targeting. Fortunately, there are plenty of data types that consumers find acceptable for personalization.
With Rekisa, it's easy to offer a level of personalization without over-extending yourself. Leveraging information such as location, basic demographics, and purchase history can effectively promote your brand and build a more personal experience.
For online businesses with a brick-and-mortar presence, implementing location-based marketing can boost both in-store and online sales. Engaging with your local community through a hyperlocal strategy is something that big brands often overlook.
A hyperlocal strategy extends beyond just marketing; it also enhances the local customer experience. Organizing local events or offering free local delivery, which you can easily set up with Rekisa, can significantly improve your retention rates and increase word-of-mouth referrals. Additionally, consumers are increasingly inclined to shop locally, presenting a valuable opportunity. Learn more about Rekisa’s local shipping strategy to take advantage of this trend.
Brand Is More Important Than Ever on Social Media
The benefits of having a strong brand are well-documented. Our internal research shows that businesses prioritizing their brand as a key value driver tend to attract more customers through online marketing. While this correlation doesn't tell the whole story, it highlights the importance of recognizing that your brand is crucial to your success.
Building a strong brand helps you get recognized and grow your audience and social media presence. On social media, your brand and content are what people connect with, extending beyond just the products in your store. Consumers want to engage with businesses they can relate to and whose content is valuable to them. Social media has become a primary platform for people to discover brands and products. Searching for products and brands on social media is increasingly popular, especially among younger generations, sometimes even more so than on Google.
Leveraging TikTok for Your Marketing Strategy
If your core audience is younger, incorporating TikTok into your marketing strategy is essential.
The rise of social commerce goes beyond just browsing for products and brands; it's where many products and services are sold. TikTok offers a significant opportunity for your business.
Sharing Simple, Authentic Content and Stories on Social Media
On TikTok, a strong trend among small online businesses involves promoting their products by showcasing their operations. They create videos that show behind-the-scenes glimpses of product creation, order packaging, team highlights, and even the challenges of running a business. TikTok is an ideal platform for SME retailers to grow their business and attract new audiences.
This behind-the-scenes, self-made content also performs well on Instagram Stories, Facebook, and YouTube. While you can share it on these platforms, TikTok is the ideal place for it.
TikTok encourages authentic and relatable content that requires minimal tools or expertise. Unlike Instagram, TikTok focuses less on perfectly curated content. For beginners or non-marketing-savvy business owners, TikTok may align better with your skill set. Authenticity and consistent posting will help you build a strong connection with your consumers and find loyal customers. It might even make you go viral!
Moreover, TikTok has the largest social media audience, so even a little success on the platform could significantly boost your numbers.
Embracing Artificial Intelligence for Your Marketing
Calculating your customer acquisition cost (CAC) includes all your marketing and sales expenses, such as content creation. Hiring an external agency or dedicated marketing staff might be unattainable for your business.
Fortunately, a growing number of artificial intelligence tools, like ChatGPT and Copy.ai, can help you create highly effective marketing assets. With AI writing tools, you can effortlessly generate:
- Advertisement copy
- Drafts for blogs
- Product titles and descriptions
- Social ad designs
By leveraging these AI tools, you save valuable time and create excellent content with ease. These tools also help ensure that you have the right ads tailored for each platform, maximizing your reach and minimizing missed opportunities.
You can build a large content library with specific ads optimized for each marketing channel. Best of all, these tools are generally free or a fraction of the cost of hiring an agency. Explore the Rekisa App Market for great AI tools to supercharge your marketing.
Wrap Up
While customer acquisition costs for merchants continue to rise, there are numerous strategies to counter this trend. It's important to focus on what works best for your business, as there is no one-size-fits-all solution.
Consider shifting your attention to customer retention, hyperlocal strategies, and delivering excellent brand and customer experiences. By doing so, you'll be able to better manage your costs and increase your customer lifetime value. These wins are what Rekisa aims to help you achieve.
We are dedicated to providing our SME e-commerce merchants with the tools they need to run and grow their businesses. We want to be your e-commerce partner, empowering you to grow without breaking the bank.
If you’re eager to learn more about how Rekisa can help your business cut costs, reach out to us!
Sourced originally from Ecwid By Lightspeed
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