Both customer acquisition and customer retention marketing are the pursuits of finding fitting answers to competition. Customer acquisition refers to creation of new customers and customer retention refers to nourishment and maintenance of existing customers. To keep the profit machinery of your business well-oiled and running, consistent profitability is a must. While both the aforesaid options are capable of yielding the same, customer retention achieves the results in a more reliable, time-bound and economic manner compared to customer acquisition. Businesses must spend 7 times more to attract new customers than selling to existing ones.
While customer acquisition is healthy and can keep your customer database live and counting, what is more significant is the potential of customers to stay devoted to your brand, time and again. To fuel this brand affinity factor, it is a must to keep existing customers energized and engaged. Pathwwway acquisition cannot be dispensed with. After all, without new customers, there will be no new entrants and as a result no customers to retain. The bottom line is in deducing the quantum of priority, focus and budget allocation that must be divided between the two, which necessitates an objective cost-benefit analysis.
What it costs to create customers
CAC – customer acquisition cost can be broken down into the following brackets:
- Lead generation, lead validation and conversion costs
- Outbound marketing expenditure including advertising, outdoor publicity, e-mail campaigns, press releases
- Inbound marketing costs including SEO (search engine optimization) costs, content marketing and social media marketing
- Staffing and incentivising the sales department
- Market penetration costs whenever new target markets are identified
Calculating CAC can be critical to evaluate and justify the spend on customer acquisition. The rule of thumb is that, if products are mature enough to have gained the trust of customers and if the business is keen on leveraging profits in preference to expanding markets, then spending on customer acquisition ceases to be profitable.
Selling to a returning customer is easier than to top-of-funnel prospects
The costs of acquisition also include the costs of sales required to sell to a new customer who is yet to sensitize himself to the brand of the business. Converting a new lead becomes twice tedious when compared to selling to existing customers as they revisit.
- In the case of an existing customer, the sales team can rely on past buying trends and preference patterns of the customer. As a result, selling becomes less strenuous.
- Over years of associating with your brand, the loyal customer will find your product indispensable to the extent that he becomes more accommodating and less complaining.
- In case of product portfolio expansion, selling becomes a breeze with existing customers. Customers hesitate to buy products from new brands that they don’t trust. Selling your new product to a new customer is less profitable than selling the new product to old customers.
- Volume of sales is more in case of returning customers, who do not mind adding a few more items to their shopping cart, since the items are embossed with their trusted brand. The wary new customer is bound to seal his wallet sooner and close the sale, since the adhesive called trust is absent in the deal.
Only customer retention marketing can leverage CLV (Customer Lifetime Value)
Customer Lifetime Value is the quantum of net profits that can be generated by a customer over his lifetime of associating with the business. Incremental improvements to CLV is achieved only by handcrafting effective retention strategies. To explain this better, consider a case where your customer generates $30 revenue for your business per month. Retaining this customer for even 6 months will generate a CLV of $180, and a bunch of about 500 happily retained customers for one year could add up to $ 180000. This is much more than the costs of acquiring 500 new customers. It is evident that Pathwwway customer retention marketing is more profitable than acquisition.
The impact of revisit by a customer on your profit figures
One of the most frequently published statistic in marketing is that an increase of 5% in customer retention marketing can impact profits incrementally by 25%. And increasing retention can be achieved with comparatively less investment than that of acquisition. In addition to the direct impact on profits, every customer retention endeavour is:
- A tool to control churn and its cost. Customer churn occurs when your customer’s loyalty breaks and he prefers another competing brand to yours. Every departing customer is a cost which can be set off by adopting effective nurturing or loyalty generation programs.
- Cultivator of the intangible asset called trust. A pipeline of retained customers becomes a marketing tool in itself. A database of loyal customers improves goodwill and reduces future CAC.
- Instigator of word-of-mouth publicity and referrals. Loyal customers are bound to boost sales and profitability by bringing in more customers by referral. This can lead to increased market share.
Selling probabilities to retained customers is more
The concept of customer retention marketing, in a nutshell, can be stated as the art and science of making customer subscription to your brand, habitual. It is the sum total of all efforts made by your marketing team to make products figure in customers’ shopping lists repeatedly. The probability of selling to retained customers is about 60%-70%, while the selling probability to a new market is only 5% to 20%. To boost sales in new market segments, heavy investments in terms of reach out is required. Customer retention marketing, on the other hand is more profitable since the customer has already tried out your brand and is willing to lend a ear to listen to your marketing pitch.
The above analysis sets forth the tangible advantages of customer retention over acquisition. Still, customer retention has not been accorded the priority it deserves and takes a backseat, since business development managers are so carried away by the ROI on acquisition, which is easy to compute. The lesser visible benefits of customer retention which reflects the long term potential of a customer over his lifetime are ignored. Cultivating customer loyalty accounts to taking conscious efforts to understand customer psychology and influence the re-purchase decision positively.