Ecommerce trends for 2025: Customer acquisition cost will trend towards unprofitability

This article kicks off our four-part series on the ecommerce trends we see on the horizon for 2025.

Why acquisition costs are soaring

Over the past few years, digital advertising has changed dramatically, and it’s pushing customer acquisition costs to the point of unprofitability. We believe this will become blatantly apparent in 2025. From rising costs per click (CPC) on platforms like Google and Facebook to the broader macroeconomic pressures squeezing marketing budgets, smaller businesses are feeling the pinch even more. With limited resources and smaller ad budgets, they struggle to compete with larger companies that can afford to outspend their rivals. This means smaller retailers are often forced to find creative ways to optimize campaigns and stretch every dollar, while still trying to keep up in an increasingly competitive market. finding it difficult to acquire new customers at sustainable costs. While there may be a host of industry-specific and even query-specific drivers of increased CPC, common factors include a combination of platform-specific changes, increased competition, and shifts in consumer behavior.

Google ad trends

The cost-per-click (CPC) for digital advertising has been steadily climbing. According to Wordstream, Google’s average CPC increased by 10% from 2023 to 2024, a significant jump compared to the 2% rise from 2022 to 2023. Industries like apparel, fashion, and jewelry have seen even steeper increases, with CPCs rising by 24.6% year-over-year. This trend indicates that it now costs even more just to get your ad onto the search engine results page (SERP) and attract a potential customer to your site, let alone to convert and make a sale. With customer acquisition playing a key role in ecommerce outcomes, this has profound effects on marketing strategies and business models.

Several factors are fueling Google’s CPC inflation:

Google’s evolving ecosystem

Google periodically tweaks its advertising platform to boost profits, but it makes life harder for advertisers. Several decisions have reduced the amount of SERP real estate dedicated to ads. The removal of ads on the right-hand side of the SERP has condensed ad space, leaving only the advertisements that come in-line with the remainder of the search results. This drives increased competition for fewer placements. In 2024, Google also began to implement AI Overviews for some search queries. This further reduces the amount of space dedicated to advertisements and drives up costs as answers are placed front-and-center for searchers, making them less likely to click on any specific link.

Meanwhile, the introduction of other AI-driven tools, such as Smart Bidding, has automated bidding strategies but at the cost of transparency. These tools often prioritize high-value clicks, bidding aggressively during peak times and increasing costs for businesses. While this tool may improve other outcomes such as impressions, click-through rate, and conversion rate, it may also drive your CPC up. Google’s algorithms are in a constant state of flux, determining which queries trigger ads and at what cost. As these algorithms learn and adapt, advertisers often experience higher CPCs during the “learning phase.”

Increased competition

Digital advertising in ecommerce has become a particularly saturated market. The barriers to entry (BTE) are lower than ever, making it easy for new competitors to launch campaigns and drive up costs. Large players are also scaling their budgets to stay at the top of search results, creating an arms race for visibility. This inflationary pressure has been compounded by global economic trends, with businesses prioritizing sales to offset rising operational costs.

Policy changes and targeting challenges

Regulatory changes like the General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA) have significantly limited data collection, reducing the precision of ad targeting. Google has also given users greater control over cookie tracking, further complicating advertisers’ ability to target high-value audiences. Less precise ad targeting means more spending on search queries regardless of who's doing the searching. Less specificity means more competition for the same real estate. The net effect is higher spending for fewer conversions.

Facebook ad trends

While Google’s CPC increases have been gradual, Facebook’s ad pricing has followed a different trajectory. Facebook has been dealing with ad inflation since 2018, driven by platform-specific challenges. The company’s algorithm now prioritizes posts from friends and family over business content, meaning that it's much more difficult for companies to get in front of their potential customers through an organic approach. With no other options, this forces companies to invest in paid campaigns to stay visible to their audiences.

Another issue is Facebook’s “ad load” plateau. The platform has maxed out the number of ads it can show without harming user experience, meaning overall impressions have stagnated. These two factors have compounding effects. First, there is higher demand for advertisement space since it's the only way that most companies can get in front of their intended audience. Second, there is a fixed supply of advertising space as Facebook has utilized all of its available real estate. More demand and steady supply means rising costs in the form of CPC.

The macroeconomic squeeze

Economic challenges have only added to the rising cost of acquiring customers. Inflationary pressures have increased the cost of goods, services, and operations, forcing businesses to be more deliberate with their budgets. CPC tends to follow the trend of inflation - as prices for goods and services increase, larger advertisers are willing to pay more conversions, especially if ROAS remains constant. In the face of tighter purse strings across the entire marketing budget, marketers may lean more heavily into digital advertising with its promise of quick ROI.

Intensifying competition

Ecommerce is projected to account for 41% of global retail sales by 2027, reflecting a highly competitive and rapidly growing marketplace. Shoppers are more willing to try new stores and brands, creating opportunities for emerging players but increasing competition for established businesses. Advancements in technology, such as AI-driven content personalization, customer service, and more have made it easier for companies to compete in the ecommerce space. According to a GoDaddy survey, 44% of microbusiness owners (10 employees or less) believe that generative AI helps them compete against bigger retailers. Shopify President Harvey Finkelstein argues that AI levels the playing field for smaller businesses by handling tasks that bigger companies may have entire teams to handle, like product photography. This intensifying of competition in the ecommerce space, though, also intensifies the fight for customer acquisition.

Attribution challenges

Privacy concerns aren't just reducing the ability to target advertisements to specific audiences; they are also making it more difficult to attribute sales to specific ad activities. As an example, Apple's App Tracking Transparency feature, introduced in iOS 14, requires users to explicitly opt-in to data tracking by the applications on their phone. Without the ability to track customers across multiple devices and across multiple sessions, it has become a challenge to attribute specific sales to the channels and advertisements that were shown. When thinking about already-tightening budgets, this lack of attribution may make it more difficult to track ROI and justify continued expenses in customer acquisition.

Rising consumer expectations

Consumer expectations have shifted, adding further strain on the costs associated with being competitive in ecommerce. Many businesses now face the challenge of meeting customer demands for hyper-personalized experiences while working with tighter budgets. Companies often struggle to collect and leverage customer data effectively due to limited resources, making personalization difficult and costly. Expectations for personalized shopping experiences push businesses to invest heavily in data analytics and AI, technology that takes time to build and see a return on. As you can imagine, it is even more difficult for smaller retailers to implement this technology.

At the same time, economic uncertainty has made consumers more price-conscious, leading to a “race to the bottom” in terms of product pricing. Increased upfront costs with depressed revenue means that many ecommerce retailers will find it difficult to be both competitive and maintain profitability.

Changing customer behavior

The rising cost of acquisition coincides with increased inflation, which causes consumers to be cautious about their spending. And, even with increased optimism, U.S. consumers continued to "trade down" in Q4 2024 with no signs of turning around. This means that they are taking actions like reducing the quantity/pack size of purchases, changing retailers for lower prices, and delaying purchases altogether. The discretionary and luxury categories have been hit particularly hard and there is evidence that fewer U.S. consumers are planning on splurging for the holidays.

Ultimately, the digital advertisements business functions like a competitive market. Less consumer spending means fewer clicks on ads. Fewer clicks means more competition for the consumers that do click on ads. More competition means higher CPC.

Lower ROI for advertisers

All these dynamics combine for a dim outlook on ROI for advertisers. Higher CAC paired with reduced consumer spending means that companies are paying more in advertising costs for less revenue in return. For those companies that rely heavily on an acquisition strategy, it will be increasingly difficult to maintain profitable growth. These firms will need to shift their approach and consider paths to maintain the profit margins of their ecommerce sites.

Retailers will need to shift the focus from acquisition to retention

The customer lifetime value (LTV) pivot

To deal with rising costs and lower ROI on acquisition, businesses need to think beyond quick wins and focus on keeping customers around for the long haul. Prioritizing lifetime value (LTV) over average order value (AOV) enables businesses to maximize profitability from their existing customer base without relying too heavily on a steady stream of totally new customers to the site.

Why lifetime value matters

Customer lifetime value represents the total revenue a business can expect from a single customer over their relationship. Unlike AOV, which focuses on the value of individual transactions, LTV provides a more comprehensive measure of customer profitability. Companies like Amazon and Spotify have perfected this approach by prioritizing repeat purchases, subscriptions, and personalized experiences that keep customers engaged over the long term.

Investing in retention strategies offers a sustainable path to growth. By increasing repeat purchases and fostering customer loyalty, businesses can reduce their reliance on costly acquisition campaigns while improving overall profitability. One method is investing in search and discovery, ensuring customers can easily find what they need, reducing friction in the buying process. Another approach is enhancing personalization, offering tailored recommendations that align with each customer’s unique preferences, making every interaction more relevant and engaging.

Invest in search and discovery

Improving on-site experiences goes a long way in converting existing traffic into loyal customers. Advanced search capabilities help customers find what they’re looking for quickly and efficiently. Predictive search, AI-driven recommendations, and personalized search results can enhance the user experience, driving higher conversion rates and repeat purchases.

For example, AI-powered search engines analyze customer behavior to deliver tailored product recommendations, reducing friction and encouraging customers to explore more products. By focusing on search and discovery, businesses can improve retention and boost LTV.

Personalization as a retention tool

Personalization is one of the most effective ways to drive customer loyalty. By leveraging data analytics, businesses can deliver targeted marketing messages, product recommendations, and email campaigns that resonate with individual customers. According to reports from Salesforce, 65% of customers expect companies to understand their needs and preferences, but 61% of customers say that most companies treat them as a number. Further driving home the point: 80% of customers say the experience a company provides is as important as its products and services. When consumers have a positive shopping experience on your site, they are much more likely to return and continue shopping with you.

Successful companies like Spotify and Netflix use personalization engines to deliver highly relevant content and recommendations, fostering customer loyalty and repeat engagement. Tools can make it easier for businesses to implement personalized strategies, ensuring that customers receive value-driven interactions at every touchpoint.

Conclusion: Sustainable growth through smarter strategies

The rising cost of customer acquisition is an unavoidable reality in today’s digital advertising landscape. However, businesses can adapt by shifting their focus from acquisition to retention. By prioritizing lifetime value, improving search and discovery, and leveraging personalization, companies can build sustainable customer relationships that drive long-term profitability.

Businesses that focus on smarter, customer-first strategies will have the edge in the future. While acquisition costs may continue to rise, those that focus on retention and customer loyalty will be better positioned to thrive in an increasingly competitive marketplace.