Anyone who's ever tried to grow a business has likely experienced at least three things:
- The challenge of getting new customers
- The pain of losing existing customers
- The frustration of having limited resources to tackle problems
Sound familiar? Given these three things, where should you spend your time and money in 2022? Will you get more bang for your buck from investing in customer acquisition or customer retention?
In this article, we'll give you the tools to make that decision. Let's get started.
What is customer acquisition vs. retention?
Building your company to effectively acquire and retain customers is hard. Defining terms is easy. So let's start there:
- Customer acquisition is the process of getting new customers into your business
- Customer retention is everything you do to keep existing customers in your business
The image below shows the comparison in more detail.
The difference between the two essentially comes down to prioritization of a new customer vs. existing customer.
But before we dive deep into each of these terms, I need to confess something:
Pitting customer acquisition and customer retention against each other is a bad idea for your business.
Don't get me wrong. It's fine to talk about the two separately and weigh their pros and cons (which we're about to do). And because you really do have limited resources, there are times when you may need to make a choice between investing in acquisition versus retention. That choice can make the two seem like opposing paths at points.
But that's a false dichotomy.
Customer acquisition and retention are both critical to the long-term success of your business. If you can't figure them both out, you'll be in trouble because:
- A business without any new customer acquisition is stagnant or shrinking.
- A business without good customer retention is stuck on a treadmill. You can keep running and running, but all of your sales and marketing efforts won't get you anywhere.
Now that I've got that off my chest, let's look at what happens when you focus on one over the other.
When Customer Acquisition Is Your Top Priority
There are plenty of organizations where customer acquisition is the king of the hill. You can recognize these companies because everything revolves around sales and sales metrics. You'll hear people say things like: "Promise whatever you need to close the deal" or "But that will hurt sales!"
But what actually happens when you prioritize customer acquisition in your business?
The customer count goes up.
The big benefit is obvious: You add a whole bunch of new customers (assuming things go well). Customer acquisition isn't easy, but if you're really good at it you can see metrics like revenue and active users grow quickly.
And that seems like a no-brainer, right?
This is especially true when you take the extra step of leveraging referrals and partnerships for customer acquisition.
What does that mean exactly?
In the below episode of "The ABM Conversations Podcast", hosted by the HubSpot Podcast Network, Raúl Galera discusses just that.
Net new customers are almost always a good thing. In the startup and venture capital world, your growth rate can often trump every other metric. A high growth rate and a lot of new customers can be a clear signal that you have great product-market fit and you're on the right track as a company.
High customer acquisition numbers are awesome. But it's only part of the picture.
If your customer retention numbers are horrible at the same time, you might as well just start burning cash.
Think about it like this. You're spending loads of money on marketing and sales. This spending is your customer acquisition cost (CAC). These new customers sign up, use your product for a little bit, then cancel.
Did all that customer acquisition spending go to waste?
If your customers stuck around long enough for you to recoup your CAC, at least your investment may have been profitable. But your return on your CAC investment certainly wasn't as good as it could have been if you'd had better retention.
This highlights one of the biggest issues with prioritizing customer acquisition: Focusing on customer acquisition over customer retention means you're leaving money on the table.
When Customer Retention Is Your Top Priority
It's only been in the last decade or so that customer retention has stepped into the spotlight. The growth of the subscription economy and the transition to subscription-based revenue models across many industries means retention is now a vital piece of long-term business success.
Twenty years ago, you'd sell software and the customer would pay for it upfront. After you closed the sale, it didn't matter much to your bottom line whether the customer used the software or not.
But today — especially in tech — most businesses make relatively little money up front. Heck, many even offer free trials, meaning customers start using your software before you get a dime of revenue. Instead of upfront revenue, your customers now pay you a subscription fee on a recurring basis. That means if they don't use your product and see successful outcomes, you're likely to lose them at their next renewal.
So what happens when you prioritize customer retention over customer acquisition?
Customer Lifetime Value goes up.
When you prioritize customer retention, the impact is obvious: you don't lose as many customers.
The most common way to measure how effective your retention efforts are is by calculating churn rate.
To calculate your churn rate, figure out how many customers you have at the start of a time period. Divide that by the total customers who canceled during that same time period. Multiply by 100 to get a percentage, and you've got your churn rate.
If you can keep your churn rate low, that means that every dollar you're spending on marketing and sales is more impactful.
Because each new customer you acquire sticks around longer, you make more money from them. The best way to track this is by measuring your Customer Lifetime Value (CLV or CLTV), which will tell you the average value of each new customer you bring into your business.
In summary, lower churn rates mean higher lifetime value, which means greater ROI on every dollar you spend on sales and marketing.
Expansion and referrals bring in more revenue and customers.
A second benefit of focusing on customer retention is that you'll often see more growth from your customers over time. This happens in two primary ways:
- More revenue from your existing customers. This is commonly referred to as expansion revenue. When your customers add new licenses, upgrade, or purchase new products from you, every dollar counts as expansion revenue. Research has shown that retaining customers is cheaper than acquiring new ones and that improving retention by just 5% can drive profits up over 25%. And this is just one of many customer retention vs. customer acquisition statistics.
- Customer advocacy and referrals. Successful long-term customers are great sources of testimonials, case studies, and referrals. As you retain customers by making them successful, you can harness those assets to drive additional growth.
Growth may be slower.
One downside of prioritizing customer retention over acquisition is that growth might be slower.
It takes time to deliver successful outcomes to customers. It takes time to expand their accounts. And it takes time for customers to trust you enough to act as your advocate and refer others to you.
But while this can mean slower growth initially, it can actually lead to exponential growth in the long run. Over time, as your total number of successful customers rises and your advocacy engine gets to work, you'll see growth rates shoot through the roof.
Focus on Customer Retention for the Best ROI
If you haven't picked up on it yet, here's the verdict: Focusing on customer retention over customer acquisition is the best decision for most businesses.
You'll always need both, but the thing that sets retention apart is that over time it can become a powerful source of customer acquisition in its own right.
Effective customer retention will improve your customer lifetime value, translating directly to an improved bottom line. It will also lead to a growing customer base, which over time leads to decreased acquisition costs through the power of good reputation and word-of-mouth advertising.
If you want to grow your business in 2022 (and beyond), focus on improving your customer retention. It may take a little time, but you'll create a flywheel effect wherein every new and existing customer will add more value and growth to your business for the long haul.