What’s more important for your business - acquiring new customers, or improving retention?
Typically, retention delivers more value over time. In fact, on average, loyal customers are worth up to 10x as much as their first purchase.
And yet if you looked at where the majority of time, resources and effort is usually spent, you’d think the opposite were true - 44% of businesses put emphasis on acquisition, rather than retention.
So the debate continues. Acquisition keeps the future of your business looking bright, but retention gets more value out of your existing customers. Which does your business need more? Let’s compare the two in order to make a better judgement.
Customer acquisition vs retention: which costs more?
It’s widely known that customer acquisition costs a great deal more than retention. According to Harvard Business review:
“Depending on which study you believe, and what industry you’re in, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one.”
While the imbalance is stark, higher costs aren’t necessarily a bad thing - BUT only if you have taken a considered approach that considers the customer’s lifetime journey.
Zoom out from your acquisition costs for a second and pitch them against:
- The CAC payback period.
That is, the number of months it takes to earn back the money invested in acquiring customers. Learn more about CAC payback period here.
- The customer’s lifetime value
Your customer’s LTV is the revenue you get from a customer over their entire lifetime of interacting with your business.
Without being able to offset your acquisition costs, you cannot justify any of the spend - no matter how much you attempt to reduce. This highlights the importance of retention; your business can’t afford to maintain a revolving door of one-time customers!
Customer acquisition vs retention: which delivers better ROI?
Given that the cost of customer retention is far less than acquisition, retention is much more likely to be ROI positive.
In fact, statistics show that increasing customer retention rates by a mere 5% increases profits by 25% - 95%. A KPMG study also states that the biggest revenue driver for companies was, in fact, customer retention.
This data makes a compelling case for businesses to devote more effort toward retention, but the reality is that acquisition often takes priority. Understandably, new customers are perceived to be more impressive and more exciting. They are the lifeblood of your business and your sales department.
At alphawhale we think acquisition does deserve the huge focus it gets, but businesses should take a quality over quantity approach.
Bring the right kind of customers in through the door with the vision of building their loyalty over time so they don’t drop away the moment after they’ve purchased from you. Ultimately, you want your acquisition to bolster retention rather than having the former undercut the latter.
Overall importance to your business: which wins out?
As tempting as it may be to pit acquisition against retention and sacrifice one for the other, it would be more ideal to have them work hand in hand, building an ecosystem where new customers are more likely to transition into devoted followers of your brand.
“But that’s not how our budgets, KPIs or marketing plans are structured!”, I can hear you protest.
It’s true that sales and marketing departments don’t always have the framework to support a balancing act of the two. Stats already demonstrate that acquisition takes the lead because it’s regarded as more important, which makes it harder to plead the case for retention.
Strategically however, a mutually-inclusive approach can increase your profitability and bring acquisition costs down at the same time.
It’s also worth noting that you don’t have to make colossal sacrifices to bring acquisition and retention closer together. Start with some relatively simple methods that can have a dual impact on both your new and existing customers:
- Support a shared cause with your audience. 37% of customers say they are loyal to companies that support a shared cause.
- Delight them with amazing customer service. Good customer service is, in part, about over-delivering. It’s also a relationship that gets built throughout the entire customer journey from the first sale to many repeat sales later on.
- Be proactive about creating moments of joy. Again, you can do this with both prospects and existing customers. Borrow a page from Nike’s book - their membership benefits include access to Apple Music, ClassPass and Headspace.
- Don’t be too generous with discounts. Discounts are commonly used to bring new customers into a business, at the expense of loyalty. Instead of competing solely on price, try to focus on fostering common values with your buyers.
Ultimately, if you want your new customers to stay loyal to your business, then your acquisition strategy should parlay into an effective retention strategy. They’ll need to work together, requiring an aligned effort across every department.