The Cost of Customer Acquisition vs. Customer Retention
Whether you’re a startup gearing to accelerate growth or a mature corporation looking to gain market share, one stat still matters…
Why the crazy difference between these costs? Because the barrier to entry is much higher for top-of-funnel prospects. And here’s the cold hard truth—customers don’t buy from brands they don’t trust.
Why You Should Value Customer Retention
Until a prospect becomes a customer, they won’t truly trust your brand, at least not yet. But, as a prospect flows through the funnel, that trust can strengthen. And once they become a customer, trust will be the glue that can keep them as a customer, influencing their decision to buy, or not buy, from you again. Moreover, customers serve as vital social proof that can help create trust among new leads and prospects.
Customer Acquisition Is Costly
It initially makes sense that we spend more time and money on acquisition as opposed to retention. Acquiring new customers is critical to business growth—but it comes at a high cost.
Here’s a breakdown of common customer acquisition cost centers:
- Outbound, or traditional, marketing (including advertisement, direct mail, cold calling, etc.)
- Inbound marketing (blog content, SEO, social media)
- Sales and business development salaries
- Event marketing
And the list goes on. To keep acquisition numbers growing, these programs, and their budget, must keep running.
Computing CAC: Cost to Acquire a Customer
So let’s look at how to compute your cost to acquire a customer. Take your entire cost of sales and marketing over a given period, including headcount related expenses, and divide it by the number of customers that you acquired in that period.
If your CAC is too high, i.e., it far exceeds the lifetime value of your customer, your business is going to fail. That’s why some thought leaders have called CAC a “Startup Killer.”
Retention Can Positively Impact Growth
So, if your company’s focus is mostly on acquiring new business, what impact can customer retention truly have on company growth? Retention, specifically low churn rates and recurring revenue, can increase the lifetime value of your customer and balance out the CAC.
That’s why retention can dramatically impact profit. Studies by Bain & Company, along with Earl Sasser of the Harvard Business School, have measured that even a 5 percent increase in customer retention can lead to an increase in profits somewhere between 25 and 95 percent.
But retention can also impact growth even further. Here’s how your current customer base impacts growth:
#1: Current customers are more willing to try your new product. Existing customers are 50% more likely to try new products and spend 31% more, on average, when compared to new customers, which translates to cross sells and upsells.
#2: You have the ear of your customer already, so they’ll be willing to truly listen to what you have to offer. The probability of selling to an existing customer is 60 – 70%, while the probability of selling to a new prospect is just 5-20%.
The probability of selling to an existing customer is 60 – 70%, while the probability of selling to a new prospect is just 5-20%.
#3: Customers will advocate for your company, shouting from the mountain tops about their trust in your brand or service. This “advocacy-in-trust” impacts prospects that want to know what is means to be your customer, giving prospects a glimpse of the customer experience your brand provides.
And with the use of social media, your current customer experience plays a more significant role in attracting prospects than ever before.
Here’s another way to look at the impact of customer retention. We all know that one family that visits Disney Theme Parks year after year—maybe you are that family! When you speak to them after their visit, they say the same thing as last year, “It was incredible!” They often overlook standing in long lines, the hot, humid weather, or ever-raising ticket prices.
It’s the trusted customer experience that has allowed Disney Theme Parks to have attendance growth for over 30 years. Returning customers trust the Walt Disney brand and know what to expect when they plan their visit for the coming summer. Even if you have never visited Disney, there is a small, inquisitive piece of you that wants to know what the experience is all about because you’ve heard about the experience from other loyal customers.
This same same goes for your B2B prospects. A consistent, positive, overall customer experience can drive retention, even when things aren’t 100% perfect. And these customers can speak about their experience, maybe sparking that inquisitive piece in your prospects, who will want to know what that experience is all about.
For all you know, your customers and prospects may already be speaking about the customer experience with your company. It’s a small world after all.
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