Interviews, insight & analysis on digital media & marketing

How to balance new customers and ROAS for ecommerce growth

by Sam Martin-Ross, UK Managing Director of digital marketing agency Eskimoz

Both customer acquisition cost [CAC] and return on ad spend [ROAS] are vital metrics for measuring ecommerce growth and the efficacy of marketing activities.

This often poses a dilemma for ecommerce companies looking to get the most bang for their buck. Should you be funnelling marketing spend into gaining new customers, or ensuring your advertising spend generates a certain return?

There is no straightforward answer to this, as both are needed for maintaining a healthy growing ecommerce business, though focusing marketing on generating new customers at an acceptable cost over ROAS is a key aspect of long-term growth.

Customer acquisition cost

CAC is the cost of converting someone into a paying customer and might include activities such as targeted advertising or promotional campaigns. Looking at your overall marketing spend and comparing it to the number of new customers generated each month will give you an indication of your CAC. This is an important metric to track, as a very high CAC can indicate certain flaws in either your marketing approach or the overall structure of the business.

It’s also worth bearing in mind that acquisition costs are rising across the board, with a bigger emphasis on data privacy resulting in it becoming harder to collect data and advertising becoming more costly. Each channel is becoming harder to measure because of this, such as changes to tracking affecting attribution on Meta, but there are things you can do to overcome these new challenges. Uploading existing customers to your chosen ad platforms, for example, and then negating them from customer acquisition campaigns allows a greater degree of certainty that those campaigns are generating conversions from new customers.

Your target CAC should be determined by a number of factors, but should primarily be governed by the average lifetime value and profitability of your customers, as this will provide an indication of how much you should be willing to invest to attract new customers.

From an ecommerce perspective, there are multiple approaches you might take to achieve this. An aggressive marketing strategy might involve a willingness to pay more than the average lifetime customer value if you know you’ll be able to generate more sales from referrals, while a more conservative approach might choose to maintain a certain profit margin for each customer acquired compared to the average
lifetime profitability.

Customer retention cost

Once you’ve acquired a new customer, the retention cost governs how much it costs you to have them return for repeat purchasing. Returning customers should always be cheaper to acquire than new customers. Once they’ve made a purchase with you, you will generally have contact details such as an email address, where newsletters, upselling promotions and other marketing materials can be sent to generate further sales at relatively little cost. Additionally, Meta and some other ad platforms offer
functions where emails can be uploaded, and audiences more precisely targeted to.

So, while retention costs are not as straightforward to calculate as your CAC, taking into account these activities and spend associated with them, and tracking them separately from new customer spend will allow you to track your retention costs more effectively. It’s vital to keep track of this, as retention costs feed directly into the lifetime profitability of your customers, which in turn indicates how much you should
be willing to spend on acquiring new customers. Conversely, high retention costs can eat away at your profits. If you are spending large amounts on securing return custom, each purchase is worth less and less overall.

Balancing ROAS with new and returning customers

A lot of ecommerce businesses place excessive emphasis on return on ad spend. While it’s a useful indicator for marketing performance, it does not give the full picture, and too much focus on ROAS can cause long-term issues if new and returning customers are not properly tracked.

Return customers are easier to acquire, and this can lead to a greater focus on them to drive down ad spend when taken from a ROAS perspective. However, it’s worth bearing in mind that for many ecommerce businesses, a return customer will only buy a certain number of times, and while this can be extended or increased with the right marketing, it will eventually be exhausted.

For an ecommerce business to grow, it needs to be constantly generating new customers to increase the size of the pool of returning custom and ensure it doesn’t run dry.

Ensuring you are tracking these metrics effectively, and using them to inform your long-term strategy is key. Marketing budgets need to be split between new and returning customers, with the majority going towards generating new custom, and in turn expanding your returning customers.

Final thoughts

Ecommerce businesses must take a long-term approach to marketing if they are to ensure steady growth and customer retention. While return on ad spend is an important indicator of how well your ad campaigns are performing, prioritising it above healthy grow through customer acquisition can stall growth further down the line.