A fierce competition is taking place among original digital merchants as they work to attract customers. With retail rapidly shifting towards digital in recent months, the cost of customer acquisition has risen significantly.
Is Rent the Alternative to Customer Acquisition Costs in Retail?
A decade ago, when digital brands were just starting out, there was a saying, “customer acquisition cost is the new rent.” It was cheaper to reach customers and boost online sales than to rent retail space in the real world.
Why Do Physical Stores Attract Original Digital Brands?
Physical stores are building deep relationships with customers through interactive experiences that enhance the brand and its values. To achieve long-term success, brands need to have a presence both online and offline.
How Can Original Digital Brands Acquire Customers Through Physical Stores?
With commercial rent prices dropping more significantly than they did after the Great Recession of 2007-2008, Moody’s estimates that effective commercial rents will drop by 11.1%, nearly double the decrease seen in commercial rents after the Great Recession. “Brand owners and marketers will need to reassess their reliance on low-pay media for customer acquisition in the future. Brand building will be a fundamental requirement for success, whether in the short or long term. With lower real estate costs, we can expect to see new brands test physical retail opportunities to sell products as well as to tell brand stories. Emerging brands with a holistic mindset will also seize the opportunity to capture first-party data.” – Michael Miraflor, Independent Consultant at Third City Advisory
Details of “Rent is the New Customer Acquisition Cost in Retail”
A decade ago, when original digital brands were just starting out, there was a saying, “customer acquisition cost is the new rent.” It was cheaper to reach customers and increase sales online than to rent retail space in the real world.
That was… ten years ago. As competition in this space increased, it significantly impacted digital advertising costs: they eventually reached a boiling point. The cost of acquiring customers is now approaching the cost of renting to have a presence in a physical retail space.
As a result, original digital brands have increased their presence in physical stores. From Warby Parker and Bonobos to Allbirds, Peloton, and Casper, we now see a shift toward holistic retail where original digital brands launch online, then move to physical retail to reduce customer acquisition costs. “When it comes to DTC, one of the big core values has been lower prices due to low costs: physical store leases and rent are the biggest. But that has changed now as you have to spend money on Facebook/Instagram/Google ads to acquire customers… possibly as much or more than you would spend on rent and/or leases. Therefore, the pricing advantage that original digital brands enjoyed has disappeared.” – Griffin Caprio, CEO and Executive Director of Dante32
Why Do Physical Stores Attract Original Digital Brands?
Original digital brands have planted their seeds online, but after experiencing significant success, they began to test the waters with physical stores – a phenomenon some refer to as “clicks to bricks.” The question is: why? What drives the desire to expand into physical retail if the digital prototype is so successful? It seems that no matter how far we progress in digital transformation, having a physical store brings some unique advantages. Let’s take a look at some of them.
Retail
Physical Stores as Billboards
Just a few years ago, the internet was filled with headlines about the “end of retail.” But in reality, physical retail isn’t dead – it’s thriving. Instead of being merely a sales channel as it was in the past, the stores of the future will be all about experiences, enhancing brand image and values, and building relationships with customers face-to-face. Simply put: physical stores are billboards for the brand. “With the increasing trend in the consumer industry towards omnichannel distribution, I see owning a store as another valuable tool in the toolkit to provide deep, personalized levels of experience. Brands need to ensure each channel is differentiated and incentivized with exclusive rewards, products, and promotions.” – Jamie Schmidt, Color
How Does CARIUMA Use Physical Retail to Enhance Brand Values?
CARIUMA, a sneaker brand that offers eco-friendly products for women and men, uses its pop-up store on the second floor of Selfridges in London as a true expression of everything the company stands for – style, comfort, and sustainability.
How? One example comes in the form of an unforgettable experience. With every purchase, shoppers at their pop-up stores receive a free plant in a biodegradable pot to take home and grow. Each section of their store embodies the same small spirit: from sustainable skateboards made from recycled bottle caps to products made from mushrooms, CARIUMA has created a unique retail experience where its products and values come to life in the real world, creating a retail experience that acts as a billboard for the entire brand.
How Does Renting Help Reduce Customer Acquisition Costs?
The cost of customer acquisition has steadily increased over the past few years thanks to the explosion of digital channels (and competing products on those channels). This has led to digital saturation, resulting in increased customer acquisition costs without a necessary increase in lifetime value or sales.
And recognizing that they can’t rely on paid social media ads forever for growth, digital-native brands are expanding into physical retail as a way to reduce customer acquisition costs. By being in front of customers with a physical retail presence, brands can create unique in-person experiences and explore untapped potentials for face-to-face customer interactions. “To be a modern brand, it can be argued that you will need both channels to flourish. A store where customers can experience things (clothes, drinks, devices, etc.) and has a fantastic team will yield a much stronger customer than paid traffic with undifferentiated targeting. However, great targeted traffic will expand effectively.” – Philip Soriano, COO of Popshop Live | Co-Founder: Hugh & Crye
Omnichannel Retail: The Secret to Reducing Customer Acquisition Costs
As customer acquisition costs rise to record levels, deep-pocketed traditional retail companies have entered the online selling space, making it harder to acquire new customers through paid campaigns.
As a result, more digital-native brands are now seeking physical retail as a way to reduce costs (taking advantage of dropping rental costs) to reach more customers. Both sides are learning from each other’s experiences while working to reduce customer acquisition costs. The result: Omnichannel retail strategies are becoming essential for modern brands, regardless of their form or size.
How to Transition from “Clicks to Bricks”
How can brands bridge the gap between the digital world and the physical world? Here are six practical tips to help retail merchants smoothly transition to omnichannel retail.
1.
Validate the Idea Through Personal Events
Customers today are known for their love of experiences. Through unique business events, customers can touch, experience, and/or taste your products.
2. Start with a Pop-up Store
Transitioning from the digital world to the physical world can seem overwhelming and fraught with risks due to the costs, time, and resources required. For this reason, many digitally native brands choose to test physical retail through pop-up stores before opening a permanent location.
3. Choose the Right Location
Pop-up stores can also serve as a testing ground to find the best locations and cities for physical stores. Although the pandemic forced many people to relocate, many have started returning to cities (bringing their purchasing power with them).
4. Decide on Your Retail Model
Defining the purpose of the store is not a one-size-fits-all approach. When transitioning from clicks to bricks, you need to decide on your retail model, which may include:
- Full Inventory: Some brands form partnerships with traditional retailers to test the waters of physical retail. For example, Crate and Barrel launched a limited-edition exclusive collection with bedding brand Parachute for sale online and in 65 of their retail stores.
- Experience: Stores are not just about selling. We see this in the Nordstrom Local concept, which is a store without inventory that combines services with experiential retail. This collaborative approach helps digitally native brands gain exposure to retail chain customers and foot traffic.
- Showrooming / Low Inventory: Among those digitally native brands that have ventured into physical retail, many have adopted a showroom model that does not sell products in-store but provides consumers the opportunity to touch and feel the product before going online to purchase. This “show-and-tell” concept, or separating the in-store shopping experience from the fulfillment process, allows brands like clothing store Bonobos to create a seamless experience between online and offline.
5. Leverage Technology for a Seamless Experience
Today’s customers do not think in terms of channels. Instead, they search for products across desktop and mobile, and when it comes time to purchase, they may decide to visit a store and bring their devices with them.
What does this mean for digitally native brands? It means they need to break down barriers and use technology to provide a seamless experience across every touchpoint. Customers still appreciate the social and sensory aspects of in-store shopping, but they also want their online and in-store experiences to complement each other. Tools like Shopify’s POS system make this possible for both large and small brands.
6. Hire Talented Staff
Unlike the digital world where teams handle most customer service, staff in physical retail have a dual role: customer service and sales. Promoting sales and cross-selling are core objectives for most retail sales staff. Finding the right people and training them to develop customer awareness is a prerequisite for retail success. “To be a modern brand, it can be said that you will need both channels to thrive. A store where customers can experience things (clothing, beverages, gadgets, etc.) that has a great team will lead to a much stronger customer than paid traffic with unremarkable targeting. However, great targeted traffic will result in effective expansion.” – Philip Soriano, Chief Operations Officer at Popshop Live | Co-Founder: Hugh & Crye
Inclusive Retail: The Secret to Reducing Customer Acquisition Costs
With customer acquisition costs reaching record highs, deep-pocketed traditional retailers have entered the online selling arena, making it harder to acquire new customers through paid campaigns.
As a result
Therefore, more original digital brands are now looking for physical retail as a way to reduce costs (taking advantage of lower rental costs) to reach more customers. Both parties are learning from each other’s experiences while working to lower customer acquisition costs. The result: comprehensive retail strategies become essential for modern brands in their various shapes and sizes.
Leave a Reply