The Cost of Customer Acquisition vs. Customer Retention

March 1, 2019 AJ Morris

Finding customers is a challenge faced by businesses of all sizes.

Sure, there’s the initial buzz and influx of new customers that comes in the early days when your brand is shiny and new, but how do you sustain that interest over time and bring in new faces month after month?

That’s where most companies look to a customer acquisition strategy.

The trouble is, if those efforts are impacting how you maintain your relationships with current customers, you could be leaving money on the table. Obtaining new customers is important, but acquisition is not the only focus. Other activities around customer experience and content should be top-of-mind, too.

And for many, it is. According to Econsultancy’s Digital Trends 2018 report, 38 percent of companies cite content and experience management as a top priority.

A bar graph showing 2018 most exciting opportunities - predicted vs actual

What does this tell us? It tells us it’s not enough to sell customers on a product and expect them to continue to make future purchases based on that sale alone. Instead, you have to think about how customer journey will evolve over time, across touchpoints, and through different channels. That’s customer experience.

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But let’s circle back to the value of customer acquisition. We know it’s a critical part of growing any business, but how is it possible that something so important can sometimes be so distracting?

How Much is Getting New Customers Really Costing You?

You know the familiar song and dance. Your team spends time, money, and effort trying to get potential customers to convert … only to be met with little return. Cue the frustration and crescendo of pressure to fulfill this month’s quota around new customers.

There’s no denying that acquiring new customers is a facet of sustainability and growth for any business. However, there can be a major (costly) downside when it comes to finding them.

Customer acquisition can cost up to 7 times more than selling to existing customers — while the probability of selling to a new customer hovers around a mere 5 to 20 percent. Meanwhile, the likelihood of selling to an existing customer is between 60 to 70 percent. That’s quite the jump.

Despite these figures, there’s still hope for cost-effective customer acquisition.

With the recent influx of analytics software and tracking tools, marketers can now monitor every move potential customers make, and gain insight from their various journeys. This insight can then help determine how much is being spent on customer acquisition. Businesses can more accurately calculate ROI, and make data-driven decisions.

By calculating your customer acquisition cost (CAC), you can accurately determine whether your efforts are profitable. This simple calculation can not only help you identify your best and worst efforts, but it can also help you make smarter investments that widen your profit margins.

Calculating Customer Acquisition Costs

Your CAC can be found by dividing all costs spent on acquiring more customers, otherwise known as your marketing expenses, by the number of customers acquired during the time that money was spent.

For example, if your company spent $1,000 on marketing in one year and acquired 500 customers as a result, your CAC is $2.00.

This simple calculation makes it easy to see how your money is being spent and if you’re actually seeing a return as a result. It may seem counterintuitive, but spending the majority of your time trying to attract net-new customers may end up costing you more in the end if you don’t have a pulse on your CAC.

What About Customer Retention?

You can’t let existing customer relationships fall to the wayside. After all, data shows repeat buyers can be some of your biggest spenders over time, making up for around 40 percent of a company’s total revenue. The same report showed that repeat customers often spend an average of 30 percent more per purchase than first-time buyers.

It’s clear that maintaining positive relationships with your existing customers can be one of the best things for your business. Finding net-new customers isn’t always the right way to grow or increase your profits; there is a lot to be said for the customers who know your brand and have made a purchase in the past.

Weight watchers encourages customers who recently downloaded the fitness app Aaptiv to join WW Freestyle

Did you know that U.S. companies lose around $136.8 billion per year due to customer switching? That’s a ton of cash out the door for no good reason.

So how can you prolong those existing customer relationships? The answer is simple: provide unmatched customer service.

Top-notch Customer Service as a Retention Strategy

Customer service is one facet of the overall customer experience, and 89 percent of companies see it as a key factor in driving customer loyalty and retention. It is also significant that more than half of U.S. consumers have decided not to go through with a planned purchase or transaction due to bad customer service.

Our world of constant connectivity demands customer service that can keep up with customer behavior, and the difference between good and bad customer service could cost you.

From live chat to designated customer service agents, there are several ways to take your customer service to the next level. Customers expect their issues and questions to be resolved on their schedules to make it easy for them. Provide a variety of channels where they can contact you.

In addition to making it easy for customers to reach you, it’s important to collect feedback at different touchpoints. One example is after a customer makes a purchase.

Customer feedback provides insight and can help you resolve key customer experience issues.

Survey email from car2go customer has clear timing and CTA

This email from car2go makes it easy for customers to provide feedback by encouraging them to share their experience and ideas. This feedback creates a dialogue between the brand and customer which can be beneficial for both parties. Giving customers a voice can help you improve your customer experience and shows them their opinions are important and valued.

Ways to Increase Customer Retention

Let’s take a look at a few other ways you can improve your customer retention and nurture your existing customers.

Personalize, Personalize, Personalize

Whether it’s a tailor-made shopping experience in the form of product recommendations, a roundup of articles they are likely interested in, or a series of discounts based on a customer’s shopping history, personalization is powerful and makes every interaction feel tailor-made.

Amazon shows recommendations based on purchase history

Amazon is an excellent example of the power of personalization at work. Based on data it collects from the time you spend browsing the site, Amazon creates a list of high interest items which encourages more purchases.

Use Referral Programs

The “you win, I win” mentality is one that can work for you twofold when it comes to customer retention. By leveraging referral programs, you can inspire brand advocacy and gain new customers as well.

Exercise clothing line Outdoor Voice makes it easy for customers to share discounts with friends

Incentivizing existing customers to refer friends who may be interested in the brand can build brand loyalty and grow your customer base. Your existing customers have relationships with people you may not otherwise be able to reach.

A/B Test Everything, Then Test It Again

A/B testing can be used for a myriad of purposes. Whether you want to test the layout of an email or the effectiveness of a CTA button, you can learn what works best (and what doesn’t). As you make more money (and have less to spend on re-engaging customers), it’s crucial to understand the entirety of your online shopping experience.

Consider A/B testing the following elements:

Split testing will reveal how existing and potential customers interact with your site as they shop. You can use that information to optimize your pages and create a better overall online experience.

Find a Balance Between Customer Acquisition and Customer Retention

You can’t rely solely on your existing customers for revenue and sales, but they can be your most profitable customers. As for potential customers, you must grow your customer base at a sustainable rate and price.

Finding a way to maintain a balance between acquiring new customers and nurturing your existing ones will help you maximize your profitability and grow your brand loyalty.

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The post The Cost of Customer Acquisition vs. Customer Retention appeared first on Liquid Web.

About the Author

AJ Morris

AJ Morris is the Product Innovation and Marketing Manager at iThemes. He’s been involved in the WordPress community for over a decade focusing on building, designing and launching WordPress websites and businesses.

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