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Cost of Acquiring Customers for Online Stores (India)

December 8, 2014 No comments
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How much does it cost an online ecommerce store to acquire new customers? This is a question asked by many who want to run a profitable online business

The fact is that acquiring customers in India is not easy. And once acquired, keeping customers loyal is even more challenging.

When an online store has acquired its customer base through discounting, deals and competitive pricing, it has essentially acquired a price shopper, who by nature will be happy to go with the store that gives the best deal, subject to this deal being uncovered by shoppers when they are ready to make a purchase.

An online store can acquire NEW CUSTOMERS through one of more of the following initiatives:

  1. Brand and Online Store Awareness leading the prospect to directly go to the online store
  2. Paid search – where the online store places itself in a preferable position on as search engine such as Google, yahoo and Bing
  3. Organic Search – where prospects search online and the search engine throws up the online store due to its rating and ranking within the search engine. This may be due to a variety of reasons including product tagging, page and photo tagging, rich and relevant content, social bookmarking, directory listings and so on
  4. Banner and Display advertising. Here the online business advertises on other sites such as news sites, special focus portals, newsletters and blogs
  5. Social media advertising on sites like facebook or LinkedIn. The online business is able is able to deliver targeted sales oriented messages and provide a link back to the online store
  6. Affiliate network marketing. Through this media, one can place ads and links (and also emails transmitted) on multiple external participating sites usually on a pay for performance or revenue sharing basis
  7. Teleweb – Direct Response Advertising, which is usually done on non Internet mediums such as Television, Print and Radio. Prospective consumers are encouraged to respond to the communication by dialing a number to connect to a phone based sales representative. The prospect is assisted with information and sales closure including payment collection if not a Cash on Delivery transaction
  8. Email marketing – with emails being sent to a prospect base either directly or by one or more partners from its affiliate network. Emails will usually have a link to the webstore or directly to the shopping cart where the email is for a specific product

Cost of acquisition of new customers

Cost of acquiring new customers for online stores is dependent on several factors, some of which are listed below

  1. The cost of the product and the level of decision making required to make the purchase
  2. Whether decisions are to be made by one person or require more than one person to decide
  3. The availability of the product on other online stores as well as brick and mortar
  4. The competitiveness within the product category
  5. The medium being used to reach the end consumer (as highlighted in the previous section)

Illustrations of cost of acquiring customers

The following section has illustrations of cost of acquisition based on the channel of communication and prospect outreach

Paid Search

In today’s competitive market, getting a cost per click of INR 10 is very reasonable. For key words that are more popular (and not the long tail), the figure could be much higher.

Paid Search givens quick results and that is a big advantage specially if there is a need to boost sales and customer acquisition within tight timelines

Cost of acquisition using paid search (Illustration Only)

Cost per click INR No of visitors generated Campaign Cost INR Conversion rate Customers acquired Cost per customer INR
10 10,000 100,000 1% 100 1,000
 

Search Engine Optimisation

SEO may deliver us customers at a rate much lower than paid search. However results from SEO take time to come in. And are subject to good and bad decisions made by the person who is in charge of SEO for the site as well as factors such as changes made by search engines in the way they find and rank relevant sites linked to the key words being searched

With increasing focus on content marketing and the appetite for search engines to seek fresh and unique content across the consumer buying cycle, it is absolutely important to have a big focus on this area. However getting third party agencies to deliver good content marketing is not only difficult but also expensive

Cost of acquiring customers using search engine optimization (SEO) (Illustration Only)

Monthly cost of SEO INR Target New Unique visitors * Cost per visitor INR Conversion rate No of sales Cost per sale INR
75,000 10,000 7.5 1% 100 750
 

* Target visitors need to be relevant and serious visitors, not driven by SEO practices that only drive quantity and not quality of prospects

Banner and Display Advertising

This medium is a complex one as consumer response depends on various factors

  1. The message on the banner and whether this was relevant and understood by the viewer
  2. The placement of the banner on the site where the advertisement is being displayed- both, in terms of location as well as relevance to the website visitor on the page where the ad is being displayed
  3. The incentive provided to the viewer to click on the banner ad

Cost of acquisition is varied and also depends upon the ability of the advertiser to negotiate better rates with the medium. Which is not usually possible for smaller online stores to do with paid search engines like Google and yahoo who have self-service, no touch models of advertising sales

Cost of Acquisition using Banner and Display Advertising (Illustration Only)

Cost of banner ad campaign INR Number of visitors Percentage conversion No of conversions Cost per conversion INR
100,000 50,000 0.10 % 50 2000
 

Affiliate Network Advertising

Placement of ads and links through an affiliate network is usually done on a revenue sharing basis. However, if the ad network owner is not convinced of the products’ ability to sell online, it may charge a fixed fee per click, irrespective of sales. Thereby delinking from the true Pay for Performance model.

Typically the cost of acquisition of customers through such a network could be 1-5 % of the selling price and in some cases, higher. However, where the transaction value is low, the ad network partners may opt out of the campaign, as the absolute margin amount to be earned is low

Additionally, one needs to consider the additional cost of designing the banners and ads, emailers and other materials to be provided to the network. And the cost of internal resources to manage campaigns to be placed on the affiliate network

Social Media Campaigns

These may be viewed and evaluated on lines of display and banner advertising though the conversion rates and effectiveness may be better. Hence it is safe to assume that the cost per acquisition would be anything over INR 750

Email Marketing

Though email marketing is a good medium to communicate with prospects, its effectiveness as a sale channel is questionable

Advantages of email marketing include

  1. The ability to personalise communication
  2. Reach a large number of prospects are a relatively low cost per contact
  3. To be able to create communication based on the target audience
  4. To be able to repeat the same or a series of communication to the same prospect (re-targetting) as identified by the email address
  5. To have a residual effect as an email, once delivered, stays with the prospect unless deleted

In India, email marketing suffers from the following issues

  1. Lack of good quality, qualified lists and databases of prospects
  2. Spam marketing that has lead to the medium being viewed negatively
  3. Good quality cost effective transmission services

Cost of acquisition using email marketing could have the following possible scenario (Illustration Only)

Data Size Cost of transmission per email INR Cost of campaign Conversion Rate Conversions Cost of acquisition
1,000,000 0.10 100,000 .005% 50 2,000

Additional costs include list procurement, creative and design, and co-ordination with third parties for transmission

The main lever to improve ROI seems to be to reduce the transmission cost. However that means using a service partner or platform that may not have good inbox delivery rates, thereby leaving the cost per acquisition in a similar if not higher range

Summary

This article intends to be a guide for online businesses in India. The figures provided are pure estimates based on the understanding and experience of the author

Online business owners and managers in India need to evaluate each channel & balance the need of brand vs sales

The cost of acquisition of a new customer for your online store in India can be safely pegged at the very minimum at INR 750 per new customer acquired. Though the real figure may be upwards of INR 1,000++. Not wanting to scare away budding new businesses and Brand Online Store owners, one can only say – please evaluate your acquisition channels and costs very closely – if you want to make a profit

The key take-outs are:

  1. If you want to sell your products online factor in realistic acquisition costs
  2. A large part of your business may come from paid search and you can use the number derived by you for this channel as the benchmark for customer acquisition costs
  3. Create and sell merchandise of higher value and with higher margins ( 35% and above ) so that the cost of acquiring customers is covered as a cost head

Unless, of course, you have deep pockets and are willing to lose money to acquire customers with the hope of keeping them loyal and building a lifetime value. In which case cost of acquisition may not be recovered from the first sale itself but through additional transactions through the lifetime of the customer – and that is another story and gamble…

For sharing your thoughts or to engage in a discussion please feel free to contact the author

Ajay Miglani ajay@ndslindia.com
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