The Cost of Customer Acquisition vs Customer Retention in growing a Business
By targeting existing Customers — with a interest in your product and willingness to buy it — you’re giving yourself a much better chance of making a sale = 60-70% vs converting a new prospect is only 5-20%. (a factor of 3x-14x)
Topics: Value, Acquisition $$$, Retention = Growth, Take-aways, More interesting Facts about Retention vs Acquisition.
Whether you’re Growing a Business Startup or have been in business awhile looking to gain market share, this one statistic is the most important . . .
“It costs 5-10x typically more to obtain a new customer than to keep an existing one”.
Why the crazy difference between these costs? Because the Barrier to Entry is much higher for prospects. And here’s the cold hard truth—Customers don’t buy from brands they don’t “trust”. So, if they’re already your Customer, they “trust” you and you can sell them new products & services.
A. Why you should “value” Customer Retention > Acquisition.
Until a prospect becomes a customer, they won’t truly “trust” your brand, at least not yet. But, as a prospect flows thru your sales process, that “trust” can grow. Once they become a customer, “trust” will be the glue that can keep them as a customer, influencing their decision to buy, or not buy, from you again. More-over, customers serve as vital “social proof” that can help create “trust” among new leads and prospects.
B. Customer Acquisition is Costly $$$.
When starting up, it makes sense that we spend more time & 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 costs:
- Outbound, or traditional, marketing (including commercial ads, call centers, direct mail, etc.)
- Inbound marketing (Blog content, SEO, social media)
- Salaries for Sales & Marketing personnel
And the list goes on. To keep acquisition numbers growing, these programs, & their budget, must keep running.
CAC. Computing “Customer Acquisition Costs”.
Take your entire Cost of Sales & Marketing over a given period, including personal & overhead expenses, then divide it by the number of customers that you acquired in that period. Your CAC is too high, if far exceeds the Lifetime Value of your customer. Your business is going to fail.
D. Retention can significantly 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 & recurring revenue, can increase the Lifetime Value of your customer and balance out the CAC. That’s why retention can dramatically impact profit. Numerous studies (including Harvard Business School) have measured that only a 5 % increase in Customer Retention can lead to an increase in profits somewhere between 25 & 100%. 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 30% more (on average), when compared to new Customers, which translates to cross-sells & up-sells.
#2: More Responsive. You have you “finger on the pulse” 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 5-10%.
#3: Promoter. Customers will advocate for your company, telling others about their “trust” in your brand or service. This “advocacy-in-”trust”” impacts prospects that want to know what it means to be your customer, giving prospects a glimpse of the customer experience your brand provides.
#4 via Social Media use, your current customer’s experience plays a more significant role in attracting prospects than ever before.
E. Take-aways: Retention vs Acquisition
#1 The Experience. Here’s another way to look at the impact of Customer Retention. We all know that many families visit Disney Theme Parks year after year—maybe you are one of those families. 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.
#2 Trust. It’s the “trusted” customer experience that has allowed Disney Theme Parks to continually have attendance growth for over 30 years. Customers who return, “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.
#2 B2B Prospects. A consistent, “+”, overall customer experience can drive retention, even when things aren’t 100% perfect. And these customers can speak about their experience, maybe sparking that interest in your prospects, who will want to know what that experience is all about. For all you know, your customers & prospects may already be speaking about the customer experience with your company. It’s a small world after all – 6 Degrees of Separation !!!
More facts about Retention vs Acquisition.
#1 Conversion Rate. Studies have proven that the probability of converting an existing customer is 60 – 70%, whereas the likelihood of converting a new prospect is only 5 – 20%.
#2 Co$t of Retention vs Acquisition. US companies spend $2 billion yearly on Customer Loyalty programs. Meanwhile, over $180 billion went into advertising alone in 2014 = 90x
#3 Loyalty Returns. Not only is loyalty cheaper, it has better returns. According to research, engaged consumers buy 90% more frequently, spend 60% more per transaction and are five (5) times more likely to indicate it is the only brand they would purchase in the future. On average, they’re delivering 23% more revenue & profitability over the average new customer.
#4 The “80-20 Rule”. It’s also well known that 80 % of your sales come from 20 % of your customers, so retaining these relationships is vital to your livelihood. Retained customers have a better understanding of your brand’s benefit & value and they are easier to communicate with – than unknown prospect.
Comments: Do you know any other advantages of Customer Retention vs Acquisition?
from Marketeer Post.com 06 April 16 enhanced by Peter/CXO Wiz4biz
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