Don't Break the Bank to Get Customers

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A critical issue facing online retailers is the need to reduce the costs of customer acquisition while building a profitable fulfillment model driven by sustainable prices.


The cost of customer acquisition lurks quietly beneath the profitability problems that Internet retailers experience. Hiding behind more high-profile marketing metrics, such as advertising expenditure and cost-per-thousand, high customer-acquisition expenditure can prove fatally damaging to any retailer's drive to profitability.


Only a few months ago, driving growth was the primary focus of most retailers: growth in traffic, customers and revenue. However, the favored marketing mix of mass advertising and heavy discounting, while a boon for growth, has also resulted in low conversion rates and shaky profit projections. Today, among the few retailers that track customer acquisition spending, estimated costs have risen beyond sustainable rates.


Many retailers now face the difficult task of proving that their business models are both high-growth and, more importantly, sustainable.


In response to a renewed interest in profitability among the financial and investor communities, prices for many online retailers have steadily risen recently, in some cases by more than 20 percent. It seems reasonable to try to leverage an existing customer base to improve the bottom line.


Unfortunately, since heavy discounting has long been a favored online acquisition tool, sudden price increases spur large groups of price-sensitive customers to flee to other online or offline alternatives. This attrition occurs whether prices are transparently raised on products or hidden in ancillary charges such as shipping and handling.


It is preferable that customers are discouraged from fleeing across Web site windows by other online competitors that are raising prices. However, the offline world is omnipresent, wooing customers with tangible product choices, comparable prices, customer service and instant gratification.


The negative impact of customer attrition outweighs increased revenue per sale from higher prices. Couple this erosion with a potentially less attractive value proposition for new customers, and retailers are going to end up taking a joy ride down a profitability slide fueled by increasing customer acquisition costs.


Is there a way to achieve profitable growth when customers appear to be demanding unsustainable prices? The answer lies in finding the most loyal customers, understanding how to reward those customers and determining how to clone them cost-effectively.


Segmenting out loyal, valuable customers can be as straightforward as database mining to track the value of purchases over time, or as complex as conducting conjoint analysis to pinpoint drivers of purchasing behavior.


The key is to find those customers who resonate with a retailer's value proposition and have become less price-sensitive. Reaching beyond straight revenue measures to assess customer profit is an important factor in discovering loyal customers vs. those frequent visitors who buy only when a discount is offered.


Rewards for these customer enthusiasts are marketing dollars well-spent. One dollar allocated to retention of valuable customers can be worth hundreds or thousands of dollars during the life of the relationship. Critical to cost-effectively rewarding loyal customers, however, is providing something of value.


Don't send generic coupons to encourage traffic or offer intangible "points" with high threshold redemption levels and low values. Do send relevant promotions targeting life events if possible, such as a wedding or the birth of a child, or simple rewards like automatic and free shipping upgrades for frequent purchasers. Rewards with high perceived value and relevance to customers often have lower actual cost and more powerful brand extension capabilities than their generic equivalents.


Once a retailer has segmented its customer base to identify these customer enthusiasts, it has a powerful model for future customer targeting. The retailer now knows which new customers are most cost-effective to acquire and can reallocate marketing spending away from mass advertising to performance-based marketing programs.


Whether online or offline, direct marketing programs that drive transactions, rather than eyeballs or click-throughs or page hits, offer superior targeting and tracking capabilities and allow retailers to keep acquisition costs down.


The real reduction in customer acquisition costs occurs, however, when retailers augment the marketing mix with word-of-mouth marketing programs. Who better to lead you to desired customers than those desired customers themselves? Facilitating word-of-mouth among this group of customers is the most powerful and cost-effective means of acquiring new customers.


No one can argue the exponential nature of viral marketing. However, if managed correctly, retailers can not only implement programs that clone their existing high-value customers, but they can also extend and enhance their brand among current and new customers.


Rising prices will always drive some customers away. Don't mourn the loss and don't jump to replace them. Instead figure out how much you spent to acquire those customers, including all elements of your marketing mix. Then celebrate as you profitably grow your pool of valuable customers through loyalty rewards and targeted, performance-based marketing.
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