When considering a business' return on investment (ROI), two popular metrics come to mind: customer acquisition and customer retention. While both hold significant weight in assessing a business' success, determining where to allocate resources can be a strategic challenge. Read on to uncover key considerations, and the optimal balance for your organisation.
What is the difference between retention and acquisition?
Customer acquisition involves attracting new customer to your business, while customer retention includes all your efforts to maintain and grow relationships with existing customers.
Here's a breakdown of the two concepts:
Customer acquisition - acquiring new customers
used by: Marketing and Sales
common metrics: customer acquisition cost (CAC), customer count close rate
Customer retention - retaining existing customers
used by: Customer Supprt and Account Management
common metrics: retention rate, churn rate, customer lifetime value (CLV)
Since both acquisition and retention bring a return on investment, they are both equally important, however, they can be prioritised differently depending on your aims and resources. If resources are limited, it can make it difficult to focus on both at one time, making it often more effective to select one approach.
Pros and cons of customer acquisition
Pros of customer acquisition
- Can increase revenue if you're able to obtain a large number of new customers who become loyal to your brand
- If profits are down, targeting new customers and markets is needed to increase revenue
- A focus on customer numbers and revenue, driven by competitor-based targets, can be instrumental in gaining a competitive advantage
- If you're launching a new product or service into a new market, acquisition is vital
- Can help please stakeholders and investors that put an emphasis on growth
- If your sales team(s) earns commission, acquisition usually offers the highest rewards
Cons of customer acquisition
- It can cost five to twenty-five times more acquiring new customers compared to retaining existing ones
- It requires lots of resources to reach new customers and can take time to turn a prospect into a sale
- Customer churn could increase - it's expensive to acquire new customers so you want them to stick around at least long enough for you to recoup your cost-per-acquisition (CAC), but ideally long term to generate a worthwhile profit and a positive lifetime value
- Focusing on acquisition over retention means you're potentially failling to maximise your profits by looking after the customers you already have
- Focusing too much on new customers can alienate existing customers, especially when you make special offers for new customers that exclude those have been loyal to your business
When executed well, customer acquisition strategies can be highly beneficial to your business, helping to generate revenue. The main drawback is that it can be mosre costly than retaining existing customers, especially if your churn rate is high.
Pros and cons of customer retention
Pros of customer retention
- Customer retention is far cheaper than acquisition and is a more sustainable practice
- Having a clear understanding and assurance of your customer base makes it easier to predict revenue and makes your business more financially stable
- In competitive markets, having loyal customers helps give you an advantage over your competition when they choose to stay with your brand
- Helps a business focus on upselling and cross-selling if you have loyal customers who trust your brand already
- New product development benefits from the richer data obtained through long-term product usage and customer experiences
- Customer retention is an important mitigation strategy during challenging market conditions and economic stagnation, knowing you have a consistent revenue stream
- Presents opportunity for free marketing - when customers trust your brand, they may tell their friends, family and wider networks about you or leave positive reviews online
Cons of customer retention
- Growth can be slower as it can take time for a new customer to trust your brand and want to spend money on different products or services
- Marketing, sales, and customer service teams need to coordinate efforts to provide a smooth and consistent experience for customers, which can be challenging to achieve
There are definitely fewer downsides to customer retention and keeping your existing customers happy. However, the challenge comes with having the available time, resources, and teams to identify valuable customers and create a customer experience that encourages retention.
Our value based management platform is designed to alleviate this challenge, helping businesses identify and focus on customers who provide the highest value, and how to strategise for retention.
Why is it more expensive to acquire new customers?
The cost of acquiring new customer has increased by nearly 50% in the last several years. There are a number of different factors that make the cost of acquiring new customers higher than retaining your existing ones.
Brand loyalty
Consumers will typically buy from brands they trust. If a customer doesn't know your brand or hasn't purchased your product or service before, it will take a significant effort to convert them into a loyal customers. Existing customers are far more likely to buy again if they trust a brand because they like what it offers, it's a reliable solutions to a problem, or delivers strong customer service.
Marketing and advertising
One of the primary reasons acquiring new customers is so expensive is due to the price of marketing and advertising to new audiences. Whether you use Google AdWords, social media or any form of paid advertisement, the cost of trying to reach new customers can quickly add up. It also requires lots of hours to create a targeted marketing campaign.
Needs lots of resources
Getting a lead to convert into a new customer requires plenty of resources. Your digital or offline marketing team needs to identify leads in order for your sales team to have a list of potentialcustomers they can reach out to. Finding out exactly what customers need from a product or service and if what you offer matches their needs takes time, and even if you tick all the boxes, convincing a prospect to buy isn't a guaranteed outcome.
Targeted campaigns
In today's digital world, we're overloaded with information. Marketing campaigns have to cut through the noise and really resonate with the end-user in order to be effective. The problem is, this often requires research to really understand the needs of your target market segments. Without this, it hinders your ability to create ad copy or develop a strategy that effectively targets the intended customer.
Retaining existing customers on the other hand helps you gather internal data about your customers, developing a better understanding of what they value. In tien, this helps you tailor your marketing efforts towards retaining these customers.
New customer take time to contribute to profit
Adding up all the costs of customer acquisition, a new customer will take time before they start contributing to your business' profits. If they churn quickly, that customer will most likely have cost money without making any profit on their custom. A prime exmaple of this is in the telecoms industry where 1 in 5 new customers forecast a negative lifetime value. In order for a new customer to offer any value, they need to stay longer than your cost-per-acquisition (CAC).
How customer retention helps your bottom line
It's vital for a business to retain their current customers as they play such a pivotal role in generating revenue. You're 14 times more likely to sell to an existing customers than a new customer. Therefore, keeping current customers happy should be a priority for every business wanting to increase their bottom line. Research by Frederick Reichheld of Bain & Company found that by increasing customer retention by 5% could generate a 25% increase in overall profit. Ways a business can profit from retaining customers include:
Upselling or cress-selling existing customers
If you have loyal customers who trust your brand, there's a possibility you'll be able to upsell products, higher-level subscription packages and any additional add-ons that you think they may be interested in based on their previous purchases. On average, existing customers are 50% more likely to try new products and spend 31% more, compared to new customers.
Needing less resources
Retaining a customer doesn't demand any many resources. You'll have a customer service department or account management function responsible for checking in on existing customers who act quickly if they have any issues with a product or service.
Additionally, offering incentives such as discounts, small gifts, or vouchers may also be used to tempt a customer to stay. These routine measures can often prove to bemor ecost-effective instead of spending your budget on ads and investing resources and time ine acquiring new customers.
Calculating retention and acquisition costs
To do this accurately, several types of costs and spend need to be included. These include advertising spend, employee salaries, creative costs, technical and production costs, as well as any inventory upkeep spend. Calculating retention costs is very difficult to do and we recommend getting expert help to do this.
Our value based management platform provides one of the easiest ways to accurately calculatee your retention and acquisition costs. If you have high retention costs, you'll be able to identify exactly which areas are causing this. This will help you lower costs in order to increase your overall margin of profit and individual customer lifetime value.
How can Sagacity help with customer acquisition and retention?
It's all about finding the right balance between both customer acquisition and retention. The latter is cheaper and has fewer negatives but a small business still needs new customers to grow, so it should never be customer acquisition vs retention. A business needs to carefully analyse a customer's lifetime valye so they are attracting the right customers who will have the biggest impact on revenue.
Get in touch with our team to see how we can help you with your customer acquisition and retention to increase your bottom line.
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