This is probably the biggest challenge faced by DNVBs (Digital Native Vertical Brands) since their emergence: the generalized explosion of acquisition costs.
Many brands are now seeing their margins shrink to the extent where they threaten the survival of their model.
But rising acquisition costs are not inevitable. There are solutions to better control your budgets, optimize your acquisition channels and create the conditions for sustainable growth. We will look at this in great detail in this article.👇
Why do we talk about a CAC crisis in e-commerce?
The CAC or customer acquisition cost is an indicator used by companies to evaluate the costs associated with the acquisition and conversion of new customers. It allows to measure the profitability of sales and marketing efforts, in relation to the generated revenue.
Today the issue is that for a large majority of companies, this famous CAC is rising in a major way. According to a study published by the marketing platform Integrable, increasing acquisition costs is the number one priority for 65% of marketing professionals.
And this is even more true in the world of e-commerce, where companies are suffering considerably from this plague. As a result, many brands are struggling, as shown by the movement « We are Lucioles » in France, which includes around 60 DNVBs and is calling for government support.
Across the Atlantic, several iconic DTC brands are also facing multi-million-dollar deficits as a direct result of the rise in CACs. This is the case, for example, of the responsible sneaker brand Allbirds, the dog accessories brand Bark and the mattress brand Purple.
What are the causes of this CAC crisis? 🤔
The first explanation is simple: there are now many more advertisers fighting for the same audience. Result: you must spend more to remain competitive.
But to actually understand the origins of rising acquisition costs, we also need to look at privacy initiatives, which indirectly have had a major impact on DNVBs. Here is a quick summary.
Two new measures, with the aim of better protecting users' personal data, have come into force in the recent years:
· The RGPD, a European regulation that forces publishers of websites, mobile applications, advertising agencies and social networks to explicitly ask their visitors for their consent to collect personal data, via the possibility of choosing a navigation with or without cookies.
· Apple's iOS 14.5 update, which imposes the concept of ATT (App Tracking Transparency) and requires mobile applications to ask permission from their users to access their browsing data.
Since these two initiatives, it is becoming increasingly difficult for brands using online advertising to target the right audience. Even so, many DNVBs owe their success to acquisition strategies which are largely based on paid media, especially Facebook Ads and Instagram Ads.
These brands must spend more to maintain their acquisition levels. For example, the average cost to acquire a click on a Facebook ad increased by 15% between 2020 and 2021, according to figures published by online advertising platform AdEspresso. This largely explains the CAC crisis that DNVBs seem to be currently coming across.
What are the solutions to reduce CAC and get back to profitability?
The rules of the game have changed. To remain competitive, brands must understand that it is no longer enough to allocate a budget for Facebook and Instagram Ads and wait for the magic to take place
Brands need to change their acquisition strategy in a sustainable manner, to build a truly profitable growth model. But how do you get there?
Here are a few ways:
💡 Get a better handle on paid media
The algorithms and advertising networks that used to allow reaching targeted audiences at a low cost no longer exist or are no longer as effective as before. Therefore, brands need to take a step back from their paid media strategy, and calculate the precise ROI of their campaigns.
This doesn't mean they have to stop investing in Facebook or Instagram Ads, but they can't depend on these acquisition channels anymore, and must control their expenses more than ever.
💡 Diversify your acquisition channels
In order to stop depending on online advertising, brands today must turn to other acquisition channels. And there are many of them! Earned media, influence marketing, affiliation...
The challenge for brands is to test and iterate to build a successful acquisition mix. To do this, you need to adopt a resolutely analytical approach: measure the results and draw objective conclusions about what works and what doesn't. To do so, it can be useful to calculate your CAC per acquisition channel.
You also need to be creative and be bold enough to venture into uncharted territory. For example, think about little-used acquisition channels, such as partnerships (if you don't know how to do this, Sqwad has your back 😉). TikTok is also a high potential acquisition channel, less saturated than Facebook or Instagram.
💡 Build on branding and community.
One of the answers to the CAC crisis lies in what makes DNVBs strong: branding and community.
Indeed, these brands have been wildly successful thanks to the establishment of a disruptive direct-to-consumer model. It is thanks to this proximity to their target that they have been able to create engaged communities and unique brand universes, compared to traditional brands.
Today, more than ever, they must leverage these assets to create strong relationships with their audience and acquire new customers. For example, by launching an ambassador program, or by encouraging UGC (User Generated Content).
Of course, the performance tracking of branding and community actions is often unclear, and the ROI is less immediate than a Facebook Ads campaign. But the results are nevertheless much more sustainable.
💡 Increase your Customer Life Value or LTV.
Last but not least, in addition to looking for ways to decrease their CAC, brands need to work on improving their overall profitability. In other words, they must seek to increase their revenues, without necessarily focusing on acquiring new customers.
This is the challenge of calculating and optimizing the Lifetime Value (LTV), which is the sum of expected profits over the life of a customer. Some examples of actions to increase LTV: implement an up-selling or cross-selling strategy, a loyalty program, or use email marketing.
Working on increasing the average basket or promoting repeat business and maximizing the value generated by each customer is undeniably an alternative to the race to acquire and a response to the current CAC crisis.
As a conclusion, many DNVBs are going through a difficult time due to the rising costs of online advertising, and are seeing their profitability suffer. But if this backdrop is rather gloomy, everything is not entirely black, far from it! The CAC crisis is an opportunity for these brands to review the foundations of their acquisition model, and to ensure their long-term development. The outcome will be worth it: healthy and profitable growth.