Customer acquisition: the cost of key words. Without the visual presence of high street store fronts, retailers need to invest in drawing shoppers through their virtual doors. The costs of customer acquisition are on the rise and standing out from the crowd in an increasingly competitive market is not easy and can be a huge drain on retailers’ resources.
Next, for example, has ramped up investment in its website and marketing capabilities after admitting it had “fallen behind the best in the sector”. The retailer spent £46m on digital marketing last year and expects to splash out £76m in this, compared with just £19m in 2018 and just £8m in 2016.
Battling to attract customers can also take a toll on a business’s bottom line. Fast fashion retailer Quiz blamed “increased costs associated with obtaining and servicing online customers” as one of the factors behind a 97% plunge in profits to £200,000 in the year. The better than expected trading performance means Next now expects to make profits of £300m, more than 50% up on the £195m it forecast at the end of last year.
The dominance of powerful platforms such as Facebook, Instagram and Google in the world of online advertising can lead to high customer-acquisition costs.
“Around 80% of our business comes from online, and most of our marketing budget goes on customer acquisition,” explains Joel Jeffery, CEO and co-founder of luxury pyjama brand Desmond & Dempsey. “Paid social, like Facebook and Instagram, drives our customer acquisition.”
Retailers can use paid search to ensure their website to appears when customers search for particular words or phrases on platforms such as Google.
“These are super-heavyweight platforms that a lot of retailers have to advertise through and as a result, there can be a full-scale bidding war on the key terms customers are searching for,” Capgemini’s Unadkat argues. “Ten years ago, the online terms retailers were bidding on might have cost 25p or 30p. Now, they might cost £6 or £7. Retailers need to scrutinise every penny of what they’re spending and be disciplined if key words or campaigns are not delivering return on investment.”
Erica Vilkauls, former CEO of premium retailer LK Bennett agrees: “Retailers need to ensure they understand which activity is driving what and the resultant profitability. Calculate the return on investment to ensure that it is not only revenue growth but margin growth that is being achieved. This will mean marketing is effective.”
Chief commercial officer of ecommerce consultancy Practicology stresses that retailers need to spend as much time, money and effort on customer retention as acquisition.
“When you look at the structure of a retailer’s P&L [profit and loss account], the costs of returns and delivery is high, and marketing costs are another big one. Retailers tend not to be as good at retention as they are acquisition. Quite often, retailers might be paying three times for the same customer: they might come to your website via a paid search query, through a voucher code website or a paid link. There’s a lot of focus on paid search and paid social, without the same focus on re-engaging those who have already purchased and are driving lifetime value. That’s something a lot of retailers could do better.”
As Capgemini’s Unadkat concludes: “Retailers need to able to use data and insights to truly measure the performance of their businesses. They need to scrutinise every penny and challenge every process.”
Online can be a valuable – but potentially costly – channel for fashion retailers. Convenience means this is increasingly many shoppers’ channel of choice and retailers need as many touchpoints with customers as possible to stay competitive in today’s landscape. A good digital offer needs investment to keep up with customer demand and stay ahead of the pack. Retailers need to keep tight control of what is being spent and where to maintain profitability. Using data can be a key tool in their arsenals.
Many retailers are able to make a profit online and it is a brave business that chooses to shun ecommerce altogether. The only high street giant not to have a transactional website is Primark, which eschews ecommerce because the cost of doing business online would eat into the profit margins of its low-cost product. However, for most, not having a digital offer is unthinkable.
Rising costs combined with slowing growth rate could pose a problem for the sector. To combat this, retailers need to be strict about how and where they are spending.
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