How to grow your customer base – Acquisition vs. Retention

'It costs X times as much to attract a new customer than to keep an existing one'; sounds familiar, right? Very often we hear the statement that retention is cheaper than acquisition. But is it?

Which strategy favors growth and how much emphasis should then Marketers place on retention versus acquisition?

The term customer acquisition refers to attracting brand new customers. This is the first strategy that comes in mind when it comes to increasing revenues. The cost of acquiring new customers can skyrocket, since you have to spend money on commercials or online ads to bring in new clients. In a nutshell it works like this; once you identify the potential clients, you design marketing campaigns to attract them into your website and then you follow the best practices to make them convert. As a next step, you analyze the return on investment (ROI) and it is up to you to decide on how to optimize the process and in which channels you want to invest your remaining budget in.

Customer retention refers to a company’s ability to retain its customers over a specific period. The concept here is simple; you make sure that you keep your existing customers satisfied with your services and support. Some companies go a step further offering incentives to customers; they reward them for their loyalty and increase the chances of retaining them. Therefore, it is important to calculate the cost of keeping an existing customer purchasing. Calculating retention cost is not a simple task but it is feasible.

A third strategy that I didn’t mention above is winning back lapsed customers. These customers didn’t buy anything from you the last X days/months hence you thought that is a good idea to set up a marketing campaign to target them exclusively and you managed to re-activate them.

Retention sounds like a safe bet when budgets are tight since it is the cheapest source of growth and requires minimum effort. In addition, winning back customers is even easier and cost effective since you can have minimum results by targeting a certain set of customers with a message or offer and try to get them to respond. Customers from these two categories are already familiar with your business and it would be easier to re-activate them again, if they have a positive impression of your company. Furthermore, you hopefully have a current customer database (sitting on your CRM) which you can target with various marketing campaigns (customer loyalty programs, email marketing, social media marketing) and nurture them.

But what happens if you want to grow?

Well, you have to acquire new clients. Halving customer defection rates to grow X% is neither easy nor cheap and permanently reducing customer defection to zero is almost impossible. Defection rates follow the double jeopardy law. This actually means that the number of customers that a brand loses in a time period depends on how many it has to lose in the first place. Larger brands therefore lose more clients each year but as a proportion of their customer base, they lose less than smaller brands, hence their defection percentage is lower. Thus, there is little you can do to avoid losing clients but you can experience growth by implementing a customer acquisition strategy instead.

One major mistake that businesses make is focusing on acquisition when retention is not solid. You end up spending a lot of money on acquisition, but if most of those customers don’t stick around, you have to keep pouring money into finding new customers. Without acquisition, you won’t have customers to retain and your acquisition costs may get out of control. Without solid retention, you will probably waste money on acquisition and miss out on the lowest cost driver of growth. To build a great business, you will have to do both acquisition and retention well.

Bringing it all together, it is essential to acquire customers even to just maintain your brand. The monthly revenue is driven from all three categories above hence driving growth may not be as simple as choosing between acquisition or retention. You should apply an analytical framework to understand what the opportunity is every time and prioritize to implement the strategy that fits best. But what kind of metrics you should monitor to understand if you are on track? You are doing data-driven marketing, after all. That is another topic that we will discuss on my next article. Stay tuned!