Today we’re tackling an age-old debate in the marketing industry: what is more important – customer acquisition or customer retention? In which should a business invest more, what are the benefits, the costs, the risks?
In this article, we’re breaking down both strategies – acquisition vs retention – and finally clearing up the battle between the two. Even if you have your mind already set on a particular answer, we invite you to keep reading with an open mind – the answer may not be as black and white as you’d expect!
What Is Customer Acquisition?
Customer acquisition is a hot topic – and has been for many, many years. We even talked in great detail about it, in our article The Cost of Acquiring New Customers Explained. Therefore, in today’s article, we’re just glancing over some basic concepts, for the purpose of comparing customer acquisition to customer retention.
By definition, customer acquisition is the strategy through which you gain (or acquire, hence the name) new customers. This means persuading potential customers into purchasing the business’ products and/or services.
Customer acquisition strategies include, but are not limited to:
- Referral programs
- Demos and samples
The process of acquiring new customers
The budget dedicated to customer acquisition needs to be well thought out and calculated to a tee. A lot of money is spent every single year in order to create interest in the target audience, and not having a defined strategy could, in turn, mean a lot of money lost.
Firstly, potential customers for the service and/or product need to be defined and identified in the right market. We talked more about this in our previous article, What is customer segmentation.
Secondly, a buyer persona is created, in order to achieve a clearer image of the person they will be advertising to. In fact, several buyer personas can be created, depending on the size of the market.
Then, marketing departments devise strategies to market directly to their target audience. This is a lengthy, detailed and complex journey, which uses marketing automation tools and a lot of resources. Many channels are used in this stage – TV, social media, e-mail marketing, etc.
Finally, after a campaign is finished, KPIs and results are analyzed. Using the information from previous campaigns, new ones can be created better, more efficiently and for less money.
Customer acquisition cost (CAC)
Customer acquisition cost is calculated very simply, and it offers key insights into whether the marketing and advertising efforts are really worth the investment.
CAC = S&M C / CA
CAC = customer acquisition costs
S&M C = sales and marketing costs
CA = number of customers acquired
The number in itself has no value, but it becomes meaningful when placed in contrast with the earnings of the company.
Let’s take an example: Apple invests $100,000 on marketing and sales in the previous month and registers a total of 10,000 new orders as a result. Using the formula above, we will get a result of CAC = $10. This means nothing to us for now.
However, when we take a look at the average order placed by the new customers, we see that, for instance, it is $25.00. If the markup is 100% on all products, then the company makes $12.50 (on average) per sale – meaning it generates, with each sale, $2.50 from each customer that can be used to pay for staff, office spaces, and other expenses. Of course, this number will increase with each customer’s lifetime value.
What Is Customer Retention?
Customer retention is something we’re very passionate about, so we have multiple previous articles on the blog about this subject. You can read about customer retention in extenso in the following texts:
- Customer retention for eCommerce
- How do the best companies retain customers?
- How to improve customer retention
- Customer retention strategy
However, here is a brief summary of what you should know about retention marketing moving forward.
Customer retention is a collection of actions and strategies used by a company or organization, in order to reduce the number of customer defections. In other words, it is the activity through which a business makes sure to maintain a good relationship with the customer, for them to become recurring clients.
This is often done using customer loyalty or brand loyalty initiatives, as well as keeping an active communication on social media and performing periodical surveys, in order to determine the satisfaction level of the target audience. In order to retain customers, you must always keep their needs, desires and expectations in mind.
It’s relevant to keep in mind that customer retention is not a short-term process – in fact, it starts the moment the customer has their first contact with the company and continues throughout the entire lifetime of the relationship – with the aim of creating loyal customers.
Customer retention – measurements and metrics
In order to calculate customer retention, we must first understand churn rate – meaning, the rate at which customers are leaving your business – also known as attrition rate.
RR = [ (CE – CN) / CS] X 100
Then, the retention rate is fairly easy to calculate:
RR = retention rate
CE = number of customers at the end of a determined period
CN = number of new customers acquired during said period
CS = number of customers at the beginning of that period
Of course, any business is seeking to increase customer retention yearly, so they create more customer loyalty for their brand.
Why Customer Retention is Important
It’s well known that it costs more to acquire new customers than it is to retain existing ones. The proof is in the pudding – or, more precisely, in the studies done by Bain & Company. Increasing customer retention by a mere 5% can lead to an increase in profits of up to anywhere between 25% and 95%. Moreover, the probability of converting a current customer into a repeat customer is 60-70%, whilst the likelihood of converting a new lead is only between 5% and 20% at best.
It makes perfect sense, actually – already having an interested audience makes the marketing efforts run more smoothly since you already (kind of) know what they are looking for, what they are expecting from you and how they want to be approached.
Even so, companies tend to spend more money on customer acquisition – it’s because it has been viewed as a quick and effective way of increasing revenue. Customer retention is often faster and costs less than acquisition, so it has seen an increase in implementation in the last few years, as marketing as a whole is changing.
Why Customer Acquisition is Important
Obviously, any company needs to acquire new customers constantly – it’s the only way the business can grow over time. It’s especially applicable to companies that are just starting out or that are branching out into new markets, creating new products or offering new services.
Although the cost of acquiring new customers is usually higher than retaining existing customers, it is a necessary step and can be done cost-efficiently if the proper strategies are put in place, using tools and people that have experience in this area.
Customer Acquisition vs. Customer Retention
As we’ve mentioned above, there’s a pretty big argument for investing more in customer retention: it costs less. In fact, a lot less – about 7 times. Moreover, customers that are already familiar with your brand are more likely to test out new products and/or services, so even if you branch out, your highest chance of success lays, still, in your existing audience.
However, if you’re a new company or are creating something completely new (that has no tangency with the previous markets you sold in), your primary goal should be focusing on acquisition. With the right strategies and the right tools in place, the process need not create a black hole in your budget – a little goes a long way when you have the proper strategy in place.
Find a Balance Between Customer Acquisition and Customer Retention
The truth of the matter is this isn’t a debate between customer acquisition and customer retention – it’s just a matter of combining the two in a balanced manner, one in which your financial resources are used to their maximum potential.
It is said that in order to choose the right strategy you should think about this metaphor: if you have a leaky pipe, should you invest in repairing it, or keep running more water? Well, it’s a nice visual, but what happens if there is no water in the first place?
The “water” (customers) need to first be acquired – educated in the product and/or service you are selling, become interested and finally decide to purchase from you. Then, it’s important that they achieve customer success using your products. Basically, you need to make sure every single person goes through the proper buyer journey.
Once the tap starts running and the customers start coming in, retention needs to be your main focus. Giving your audience a good customer experience every time you interact with them will not only turn you a profit, but make you a household name in the industry, guarantee future sales and bring in more customers organically – through word of mouth, recommendations, or even sheer curiosity.
Finding that perfect balance may take a while, but it’s truly the best thing you can do for your business, especially in a time when reputation plays a huge role in the overall success of a company!
We’ve tackled a big debate today – which is better: customer acquisition or customer retention? As we’ve seen after analyzing all the data above, there are no right or wrong answers. Both strategies have a firm place in any business, whether we like it or not.
As a business owner or a deciding role in a company, it’s important to value each of the two for what they really are and create a healthy balance, with emphasis on always trying to increase customer engagement and provide great experiences for new and existing customers alike!