Clicks, Costs, and Profits: Navigating Customer Acquisition in the Era of Ultra-Cheap Ecommerce

Key Takeaways for Ecommerce Brands:

1. ‍Low-cost marketplaces like Temu, Shein, and Amazon Haul are dramatically reshaping ecommerce, driving up marketing costs and forcing brands to be more strategic about customer acquisition.
2. Return on Ad Spend (ROAS) doesn't accurately reflect business profitability, as it fails to account for crucial factors like cost of goods sold, overhead expenses, and operational costs.
3. To navigate rising costs and optimize marketing efficiency, brands must deepen their understanding of financial principles, such as lifetime value (LTV) and new customer acquisition costs (nCAC).

In the aftermath of Black Friday and Cyber Monday 2024, Amazon Haul had won and lost. On the one hand, Amazon’s new low-price marketplace had its biggest day on Black Friday, reaching 2,700 best-sellers – i.e., products ranking in the top 100 across Amazon’s categories. On the other hand, most Haul products sold out that Friday, leading to an underwhelming Cyber Monday, which saw the number of best-sellers shrink significantly. 

Launched in mid-November, Haul offers items capped at $20, with most products selling for less than $10 and some priced as low as $1. Amazon’s move was undoubtedly a response to Chinese giants Temu and Shein. The two have gained serious traction in the U.S. over the past few years by leveraging the de minimis exemption to sell products at bargain prices and effectively corner the cheap ecommerce market: 

• Data from US Customs and Border Protection revealed that between 2018 and 2021, 60% to 80% of de minimis imports originated from China and Hong Kong, with Temu and Shein accounting for more than 30% of all the packages shipped to the US.

• In 2023, Temu had a 17% market share within the discount stores categories, per data analytics firm Earnest Analytics.

• According to a recent survey by ecommerce marketing platform Omnisend, Shein and Temu are the most popular Chinese shopping apps among Gen Z with 44% and 41% of respondents, respectively, making at least one purchase on these platforms monthly.

• Last April, Temu and Shein were the first and second most downloaded shopping apps on the Apple App Store.

• In September, Shein and Temu had 124 million unique visitors in the  U.S. combined – compared to Amazon's 236.1 million.

The Double-Edged Sword of Low-Cost Marketplaces

Amazon's decision to take on Shein and Temu at their own game could have far-reaching implications for brands. On the positive side, it might be a revenue booster. “Haul is just another means to help price-conscious consumers find your products more easily,” said Katie Moro, Global Director of Managed Service at Productsup, a provider of ecommerce product content. “You can leverage the high visibility of Haul to expand your reach with a few cheaper items and then continue to build the customer relationship on the regular Amazon storefront.”

On the negative side, the increased competition in the cheap ecommerce market could lead to a spike in marketing costs. In fact, it already has. According to data on Google search ads compiled by Semrush, an online marketing platform, heavy spending by Temu and Shein on search keywords made it more costly for brands to reach shoppers on Black Friday. 

“It’s brutal out there, it’s really hard,” said Erik Lautier, an ecommerce expert at global business advisory firm AlixPartners. “By definition, when you increase the cost-per-click (CPC), the return on your marketing investment decreases. In some cases, that may mean it becomes unprofitable, and that can be highly impactful for retailers that depend on paid search ads to drive their business.”

The Metrics Mirage: Why ROAS Doesn't Equal Profit

One of the main reasons brand profits are taking a hit is, ironically, that they don't prioritize business profitability. This is where ecommerce accounting and DTC marketing agencies come into play. The two main metrics DTC agencies use to track the effectiveness of marketing and ad spending are:

• Customer acquisition cost (CAC) – i.e., the amount a brand spends, on average, to acquire a new customer.
  
  
• Return on ad spend (ROAS) – the revenue generated by an advertising campaign relative to the amount spent on that campaign.

Many marketing agencies are still hyper-focused on improving ROAS, promoting it as the most important metric in ecommerce. There's only one problem: it does not equal profitability. You can have a sky-high ROAS but still make very little profit or even lose money on an ad campaign, because ROAS doesn't account for cost of goods sold (COGS), overhead expenses, and other operational costs. 

Without including all these costs, your break-even ROAS – the ratio at which revenue generated by the campaign equals the cost of advertising – will not be accurate. Unfortunately, this often happens when marketing agencies help clients calculate their gross margin. Here's a typical chain of events:

1. The agency will ask the client to share their COGS (while they should be asking for landed costs per SKU)

2. Based on the client's COGS, the agency will roughly calculate the gross margin and determine their break-even ROAS.

Accounting for Success: Understanding the Profit Puzzle

Of course, the responsibility doesn't lie solely with marketing agencies. In the end, brands are accountable for their business profitability. This requires a solid understanding of financial principles and ecommerce accounting – something few founders bring to the table. For instance, most operators don’t know their lifetime value (LTV) per SKU. This is problematic, as it can lead to overspending on acquiring customers who purchase the least valuable SKUs.

While brands are getting wise to their bottom line, there's still some catching up to do. “We're hearing a lot of people say ‘I want my agency or my performance marketer to optimize advertising for profitability,’” said Carla Penn-Kahn, an ecommerce veteran and industry leader in Australia. “But then, when we actually speak to them on how they're measuring profitability on advertising spend, they look at us pretty stumped.” 

To measure the profitability of their advertising expenditure, brands need to focus on POAS (profit on ad spend) instead of ROAS. In other words, how much money do you get back on your net bottom line per $1 you spend on advertising.

In addition, brands need to look at the right form of CAC to address the matter of scale in business. There are two main forms of CAC:

• Blended CAC (also known as normal CAC) – i.e., the costs of acquiring new customers and retaining existing ones.
  
  
• nCAC (new customer acquisition cost) – which measures the cost involved in acquiring new customers.

Since it's difficult to achieve scale in business by acquiring existing customers, brands should monitor their nCAC to evaluate the efficiency of their marketing spend.

Ultimately, it's all about adaptation. As low-cost ecommerce reshapes the competitive landscape, brands must adapt to stay profitable amid rising customer acquisition costs and increasing pressure on marketing efficiency. Those who shift focus from vanity metrics like ROAS and CAC to profitability-driven stats such as POAS and nCAC – will be best positioned to do that.