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How to determine customer acquisition cost before launching the product?

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LiveEntrepreneur

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To I've been thinking about this today and I think I might have the answer but was looking to get feedback on it. I have a product that I tried to sell with dropshipping before but it failed even though some of my competitors have been running it for quite a long time. The product has room for improvement and it definitely solves a problem, though I think the reason I failed with it is because I tried to advertise it on Facebook, I should have focused on other mediums.

I've also spoken to people in person if they would be interested as sort of product validation and they all seem to like it (I still need them to pull out their wallets for pre orders to do it properly) and they all gave me the same price around $29 that they would pay for it, because it's that sort of product that has a certain perceived value.

If I order from the supplier on Alibaba a bulk of around 500 orders it will cost me around $10 per unit maybe $7 per unit if I get 1,000 orders or more (this is not counting the fee from the post office, and if I'm not mistaken there is a customs fee + GST as well) + advertising. CPC's are about $1.2 dollars when I checked on Google Ads so if I had and let's say I had 50 clicks with 3 conversions which is a 6% conversion rate.

So the maths all up seems to be:

Revenue is $87 from 3 purchases
$60 advertising spend for 50 clicks at $1.2 per click.
$60 cost of goods sold, because $10 per product + postage here is roughly $10 as well
= $-33 in profit not counting other costs lol. Am I missing something here?

I'm terrible at maths but from what I can see here and other fees like Shopify, taxes, etc, it won't add up for a healthy profit. Would I be going about the right way to determine the CPA? Or maybe it's worth running some Google ads to get a rough idea of what costs are while also testing the market validation? I do feel like with Google ads the conversion rate could be much higher at 20%, the 6% was for crap like Facebook ads.

With a 20% conversion rate at 10 purchases I would have $290 in revenue which would leave for a decent margin + I could easily increase the average order value on this. Last time I ran it, I had over $100 AOV. Are these numbers are delusional, way off, or sound correct?

Keep in mind my competitors also sell it around the $40 range as well. This is in USD currency which is 55 AUD which so far the people I talked to can't pay that much for it.
 
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Acquisition Cost =
+ Cost of product
+ Cost of import/shipping/preparation
+ Average cost to secure the new client

Fulfillment Cost
+ Average cost to process order (fees, packaging,shipping)

Google ads the conversion rate could be much higher at 20%

This seems way to high and if paid advertising in an absolute must, I'd use a much lower conversion ratio to determine ACQ cost.

$60 advertising spend for 50 clicks at $1.2 per click.

This is way, way too much for the given price point.

If the product has productocracy potential, your acquisition cost can be much lower.

Maybe @biophase can check in ... he's a master at this kind of stuff.
 

OverByte

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Agreed that 20% is way too high an assumed conversion rate for PPC (regardless of channel). Personally I would use super conservative rates when evaluating a new product since there are many unknowns. If you need a 20% conversion rate to make the numbers work I'd assume they don't work. If you can make a product work with very conservative numbers then you can prove concept and as you learn more will be in a much better position to scale advertising.
 

LiveEntrepreneur

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Acquisition Cost =
+ Cost of product
+ Cost of import/shipping/preparation
+ Average cost to secure the new client

Fulfillment Cost
+ Average cost to process order (fees, packaging,shipping)



This seems way to high and if paid advertising in an absolute must, I'd use a much lower conversion ratio to determine ACQ cost.



This is way, way too much for the given price point.

If the product has productocracy potential, your acquisition cost can be much lower.

Maybe @biophase can check in ... he's a master at this kind of stuff.
Thanks for that. In the Australian market yeah I don't think the numbers will work $10 product cost + $10 postage fees and product is $29, already $20 is eaten up. I tried in the American market but cannot get it to work for some reason (suspect I'm on the wrong platform), though what I'm doing as a final test is to run it on Google ads in the American market to see if I can get it to work because none of my competitors are doing it.

I think the only way it would work (correct me if I'm wrong) if my AOV is really high and the CPC's of the platform are really cheap which I don't see happening as everything is getting more expensive. One train of thought I had is if I can't sell 1 unit per purchase profitability, then there's no point pursuing the idea if I need people to buy multiple units to be profitable. Didn't sound sustainable to me, considering a large portion of people may only buy 1 unit.
 
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LiveEntrepreneur

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Agreed that 20% is way too high an assumed conversion rate for PPC (regardless of channel). Personally I would use super conservative rates when evaluating a new product since there are many unknowns. If you need a 20% conversion rate to make the numbers work I'd assume they don't work. If you can make a product work with very conservative numbers then you can prove concept and as you learn more will be in a much better position to scale advertising.
Yeah it is a bit. Reason I went that high was because of the buyer intent but also on my first niche I ran in eCommerce I did have a 15% conversion rate at one point, I can't remember though if it was a one off or I had multiple cases like that.
 

Matt33

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You'll never know until you split test a bunch of creative, and optimize your landing page over time. From my experience, customer acquisition cost is constantly changing from a lot of factors
 

biophase

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I think the only way it would work (correct me if I'm wrong) if my AOV is really high and the CPC's of the platform are really cheap which I don't see happening as everything is getting more expensive. One train of thought I had is if I can't sell 1 unit per purchase profitability, then there's no point pursuing the idea if I need people to buy multiple units to be profitable. Didn't sound sustainable to me, considering a large portion of people may only buy 1 unit.
You can’t really compete in e-commerce on a single product store, or business. Your competitors can do it because they are acquiring new customers for multiple purchases. Or they are acquiring customers for a future purchases on different businesses.

Therefore they don’t really need to be profitable on their first purchase. Which is why your CPC is so high because they have bid them up to the point where it is profitable for them.

To make it profitable you would need to add some upsells or warranties to get your order value up, or hit them up with another offer a month down the line, or sell their email to someone or use their email for an affiliate offer.

As a one time purchase it won’t work unless you are selling a high priced product.
 
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LiveEntrepreneur

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You can’t really compete in e-commerce on a single product store, or business. Your competitors can do it because they are acquiring new customers for multiple purchases. Or they are acquiring customers for a future purchases on different businesses.

Therefore they don’t really need to be profitable on their first purchase. Which is why your CPC is so high because they have bid them up to the point where it is profitable for them.

To make it profitable you would need to add some upsells or warranties to get your order value up, or hit them up with another offer a month down the line, or sell their email to someone or use their email for an affiliate offer.

As a one time purchase it won’t work unless you are selling a high priced product.
Interesting, thanks for that. So to confirm, it's ok if I sell product that might not be profitable to sell on its own but if I can sell multiple units on each order that should be fine?

With paid advertising people say if you aren't at least in the break even point after a few days (this is for Facebook ads) then move onto another product. This never made sense to me as you aren't doing enough testing and will have to start off with a loss initially to eventually become profitable, would you say this is accurate?
 

100k

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Average conversion rate is 1% not 20.

Go with that metric. Does it make sense then?
 

LiveEntrepreneur

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Average conversion rate is 1% not 20.

Go with that metric. Does it make sense then?
Nope, but that's a pretty low conversion rate. I think a lot of businesses wouldn't be able to do well on that conversion rate, unless I'm mistaken.
 
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MitchC

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Nope, but that's a pretty low conversion rate. I think a lot of businesses wouldn't be able to do well on that conversion rate, unless I'm mistaken.
A lot of the huge stores you see scaled up are running lower rates than that but I agree it’s not a number I’d go off, 3% would be a good number.

Instead of playing with the conversion rates, like biophase mentioned, play with the aov and ltv of the customer and the numbers will start making sense a lot quicker.

Where abouts in Australia are you? I do ecom in Australia as well and I feel your pain. The market is so much smaller to scale in, shipping is so expensive, gst takes a huge chunk and our currency sucks when you buy your goods in usd and sell them in aud. People here love spending money on good products and also shit ones with good branding though so there’s always that.

If people pay $40usd I’m sure they’ll pay $49aud, you’re just talking to the wrong people I wouldn’t even ask people what they’d pay it’s just irrelevant what they say even if they are in your market.

$49 product price
3% conversion rate
$120 ad spend is $147 in sales

$51 to buy product and fulfil
$15 in gst

Now add upsells and referrals, optimisation from data, retargeting, emails, people buying more than one, and you have a business.

4% conversion rate
25% buying 2.

$240 ad spend
8 sales 10 units.
$490 sales.

$250 net
$70 product costs
$80 shipping
$49 gst
$100 profit.

You could definitely make this work but it’s not going to be as simple as throwing up a one product store and driving traffic to it.
 
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100k

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Nope, but that's a pretty low conversion rate. I think a lot of businesses wouldn't be able to do well on that conversion rate, unless I'm mistaken.

I believe they do lead gen. first or offer splinter products (which tend to have a higher CR), and re-marketing campaigns among other things to increase the over-all life-time value of the customer. Send @Andy Black a msg. he might be able to give you better feedback.
 

LiveEntrepreneur

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A lot of the huge stores you see scaled up are running lower rates than that but I agree it’s not a number I’d go off, 3% would be a good number.

Instead of playing with the conversion rates, like biophase mentioned, play with the aov and ltv of the customer and the numbers will start making sense a lot quicker.

Where abouts in Australia are you? I do ecom in Australia as well and I feel your pain. The market is so much smaller to scale in, shipping is so expensive, gst takes a huge chunk and our currency sucks when you buy your goods in usd and sell them in aud. People here love spending money on good products and also shit ones with good branding though so there’s always that.

If people pay $40usd I’m sure they’ll pay $49aud, you’re just talking to the wrong people I wouldn’t even ask people what they’d pay it’s just irrelevant what they say even if they are in your market.

$49 product price
3% conversion rate
$120 ad spend is $147 in sales

$51 to buy product and fulfil
$15 in gst

Now add upsells and referrals, optimisation from data, retargeting, emails, people buying more than one, and you have a business.

4% conversion rate
25% buying 2.

$240 ad spend
8 sales 10 units.
$490 sales.

$250 net
$70 product costs
$80 shipping
$49 gst
$100 profit.

You could definitely make this work but it’s not going to be as simple as throwing up a one product store and driving traffic to it.
I actually find the Australian market decent to advertise to but it is definitely expensive like you mentioned. The US is brutal on the other hand lol. In terms of location I'd rather keep that private. In regards to the price, I spoke to people and suggested that price ranged and they were like "nah", I guess couldn't see the value in it. Though I have seen my indirect competitors who sell it around that same range, the product is of lower quality than mine (they have really good marketing though).

$40 USD is $55 AUD, that will be tough, I'd really have to justify the price some how. What I'll do is, I'll run those tests I mentioned on Google Ads and see how it goes and possibly come back with an update.

On your final point, that is definitely true. I think if I'm serious about this idea I will need to spend a lot of time running different split tests and stuff to make it work. I'm still sort of under the impression that if my product remains unprofitable let's say for example for a month, that whether it's worth to keep running? I've worked on eCom clients where the business has been running for 2+ years and they are real brands and still struggle to get where they need to be.
 
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Andy Black

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I believe they do lead gen. first or offer splinter products (which tend to have a higher CR), and re-marketing campaigns among other things to increase the over-all life-time value of the customer. Send @Andy Black a msg. he might be able to give you better feedback.
I’ve only skimmed this thread.

I don’t do much Google Ads for eCommerce. 20% would be a very high CR for eCom. 20%+ is possible with lead gen or to get email signups.

Some threads that might help:
 

Blackman

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The CPC of $1.2 is way too high for the revenue generated, considering a 6% conversion is also a quite decent number.

It might be worth looking at other sellers in your niche by searching relevant keywords. Are they making use of Google Ads? At what price point are they selling?

If you're confident about the product, then the best way to get answers to your questions would be to set up a store and run Google Ads for it. The question is whether you can quickly set up a store, without spending too much time on customising things, get minimum stock possible and test via GSA.
 

biophase

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I just checked my stores and my conversion rate this year is 5%. But I’ve got a pretty strong brand and people visiting my page already know the brand. I don’t get very much cold traffic. I don’t run ppc ads.

When I ran a more general store without a strong brand my conversion rate was around 1.5%.

Your conversion rate on your single product would definitely depend on your ability to sell it. But it sounds like it’s a regular product that most people can get already. I’d probably use a 1% conversion rate in my calculations.
 
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LiveEntrepreneur

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The CPC of $1.2 is way too high for the revenue generated, considering a 6% conversion is also a quite decent number.

It might be worth looking at other sellers in your niche by searching relevant keywords. Are they making use of Google Ads? At what price point are they selling?

If you're confident about the product, then the best way to get answers to your questions would be to set up a store and run Google Ads for it. The question is whether you can quickly set up a store, without spending too much time on customising things, get minimum stock possible and test via GSA.
The good news is that they aren't using Google ads only Facebook ads which I'm quite suprised.
 

Blackman

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The good news is that they aren't using Google ads only Facebook ads which I'm quite suprised.
That's not necessarily good news - it could mean that selling your specific product via Google Ads just doesn't work out in terms of numbers, so that's why no one does it.

Are you sure none of them advertise it? It's quite unusual to have a product that doesn't come up under Google's shopping ads, as they seem to have pretty much whatever your search for.
 

LiveEntrepreneur

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That's not necessarily good news - it could mean that selling your specific product via Google Ads just doesn't work out in terms of numbers, so that's why no one does it.

Are you sure none of them advertise it? It's quite unusual to have a product that doesn't come up under Google's shopping ads, as they seem to have pretty much whatever your search for.
Yep I'm 100% sure. This product is actually unique in dropshipping that there are only a couple of advertisers and it's hard to find online in other marketplaces and is mostly available on Aliexpress. They aren't really expanding though, they have stuck with fb ads, I'm guessing they are comfortable. And they are barely testing new creatives.
 
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MitchC

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Yep I'm 100% sure. This product is actually unique in dropshipping that there are only a couple of advertisers and it's hard to find online in other marketplaces and is mostly available on Aliexpress. They aren't really expanding though, they have stuck with fb ads, I'm guessing they are comfortable. And they are barely testing new creatives.
If they are dropshipping thier fulfilment costs and product costs would be much much lower than what you quoted too? I can get most stuff on AliExpress to my door cheaper than just the Australian shipping costs.
 

LiveEntrepreneur

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If they are dropshipping thier fulfilment costs and product costs would be much much lower than what you quoted too? I can get most stuff on AliExpress to my door cheaper than just the Australian shipping costs.
I'd imagine they have a 3pl, and possibly even negotiated the prices down, those advertisers are advertising in the US.
 

MitchC

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I'd imagine they have a 3pl, and possibly even negotiated the prices down, those advertisers are advertising in the US.
Likely a 3pl in China. The shipping info on their site would tell you anyway.
 
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