Bricks-and-mortar retailers may lament rent and business rates, but etailers have their own overheads: customer acquisition costs – and they are spiralling. George MacDonald investigates how they are coping with this digital overhead.

Bricks-and-mortar and multichannel retailers have long been accustomed to the burdensome costs of high street trading, such as rent and a business rates system seen by most as out of kilter with reality.

Selling online has frequently been seen as a lower-cost option, eliminating much of the rent and tax burden.

But life is becoming tougher for pureplay and multichannel retailers alike as the costs of customer acquisition rise.

Once the proverbial entrepreneur could build a business from their kitchen table, avoiding the punitive expenses associated with running physical shops.

But, while some retail start-ups thrive, establishing a profitable customer base is becoming more costly as businesses battle for attention and spend, and are forced to splash out more to draw shoppers through their virtual doors.

Everything from the decline of traditional TV viewing to promiscuous shopper attitudes is contributing to the increasing effort and cost of chasing online sales, according to Dan Peden, strategy director at marketing agency Journey Further.

“In the end we’re paying rent to have Facebook as a landlord”

Rowan Gormley, Majestic Wine and Naked

High marketing costs – such as pop-up ads – were blamed, for instance, for the collapse into administration last December of online slipper retailer Mahabis, once lauded as a prime example of a new breed of pureplays disrupting established retail categories. Mahabis has subsequently relaunched under new owners.

Other retailers, whether online-only or multichannel, are having to fork out more to keep the tills ringing.

Fashion specialist Asos is ploughing spend into marketing following three profit warnings

In its most recent results, Asos said that “the rate of [customer] acquisition was behind our expectations in the first half of this year”, which was “felt primarily in slower acquisition of younger customers which we are actively working to improve through our product, presentation and engagement”.

Measures to boost growth include “restoring search engine optimisation and an upweighted and refreshed marketing strategy”. 

Retailers with different approaches

Two retailers, each restructuring their operations, are adopting different approaches.

Drinks specialist Majestic Wine, while building business with existing customers, is pressing the accelerator on customer acquisition as it prepares to divest its core bricks-and-mortar Majestic business and concentrate on its faster-growth online business Naked Wines.

Fashion retailer Quiz, on the other hand, continues to recruit new shoppers but is also dedicating its attention to gaining more from its existing customer base.

The shared goal across retail though is to create lifetime customer value, rather than drive a one-off purchase.

Majestic Wine reported a fall in underlying profits last year and said “the biggest cause was a decision to increase investment in new customer acquisition in Naked”, but the retailer was confident that the investment “will drive future growth”.

Investment in new customers was stepped up by £5m to £19.1m and the retailer reported: “On average our investments are generating payback of four times, so it’s a great place to deploy capital.”

The investment is “so critical” to Majestic that it reports it in its KPIs (see table below).

 FY19FY18

Sales to new customers

£25.5m

£21.6m

Investment in new customers

(= new customer contribution)

-£19.1m

-£14.1m

New to repeat customer sales conversion

183%

168%

Repeat customer sales

£152.9m

£134.3m

Repeat customer contribution

£39.8m

£33.8m

Repeat customer sales retention

81%

83%

Forecast payback

4.0x

4.7x

Customer lifetime value

Majestic chief executive and Naked founder Rowan Gormley tells Retail Week that the cost of acquiring new customers is comparable to rent for high street retailers.

He says: “In the end, we’re paying rent to have Facebook as a landlord but in both cases [bricks and mortar and online] it’s about trying to get product to people who want to buy it. They’re very comparable costs.”

The key thing, he points out, is the average lifetime value of customers acquired. He says: “There are more people going after more customers but the market is more and more measurable. I don’t want one million customers, I want 500,000 really good customers. I’m prepared to pay more for one really good customer than one good and one bad one.

“The way we do it is investing in predicting the customer lifetime value very early on. There’s a handful of factors that give you an indication early [such as use of the app] and it’s better to be approximately right early than precise later.

“If you put fuel in, you get better results out. We’re constantly tweaking how we treat people and everything else to optimise loyalty.”

Getting more from existing customers

Quiz marketing 2019 2

Quiz says the cost of acquiring one customer is £7

While Majestic has increased its investment in attracting new customers, multichannel fashion retailer Quiz has concentrated on getting more from its existing shoppers.

In March the retailer attributed “increased costs associated with obtaining and servicing online customers” as one of the factors which prompted a plunge in profits.

Quiz has grown rapidly online. Online revenue climbed 34% last year to account for almost 32% of the total. The retailer’s active online customer base increased 56% to 576,000.

But over the year Quiz’s total marketing investment increased by 83% to £4.6m, primarily “focused on digital and social marketing to generate new customers for all sales channels, as well as increasing shopping frequencies and basket sizes”. Investment went on everything from advertising to the use of influencers.

Quiz chief financial officer Gerry Sweeney tells Retail Week that the cost of acquiring a customer had reached about £7.

He says: “One of the reflections from our review is that there are a large number of customers who bought once and not as frequently as we would have liked. 

“We have looked to take the customers we have and try to maximise the value with frequency of purchase and basket size”

Gerry Sweeney, Quiz

“Those sort of costs for a one-off acquisition start to become unsustainable. We have looked to take the customers we have and try to maximise the value with frequency of purchase and basket size.”

Initiatives have included introduction of the Quiz VIP delivery pass, offering unlimited delivery for a fee, designed to stimulate higher purchase frequency. 

The scheme has been in place about four months and, while Sweeney says he wants to see how it works over a longer period, there has been “higher frequency so far”.

Quiz also teamed up with ‘buy now’ pay later’ provider Klarna, which has helped increase transaction size.

And it is making more of its store estate to recruit customers and build long-term relationships through, for instance, the provision of email receipts, which over time help the retailer to build up a profile of the customer and create targeted offers.

About 25% of Quiz’s online sales are click-and-collect, which also creates opportunities to encourage further purchases.  

Stores, for those that have them, can be key in a wider new customer acquisition strategy, says consultancy Practicology head of client services Fiona Battle. 

She advises: “Start with having aligned internal KPIs, look at all marketing activity holistically from brand, through the funnel and into customer long-term value activity. 

“Ensure SEO is spot on, test and learn, do the best attribution modelling you can and use all the assets available, for example in-store – there is so much media value that retailers own in-store that’s simply not leveraged.”

Test and learn

Gormley rowan index

Rowan Gormley: ‘Don’t debate it, test it. People like to sit and debate because it feels like work’

Key to success, Gormley says, is to test and learn to identify which methods bring new, valuable customers on board. 

Sweeney makes a similar point. He says: “The biggest thing for us is a new CRM system that allows us to target and market to [customers] more directly. You can test things with people who are only buying one thing from us.”

Gormley maintains: “Don’t debate it, test it. People like to sit and debate because it feels like work. That can be a very destructive use of energy. If one person thinks something is blue and another thinks green, let the customer choose. The skill is creating a good test.”

The costs of acquiring customers are here to stay in the digital age but as in traditional retail, the better a retailer knows the customer the more likely the customer is to forge a long-term relationship.