One of the biggest challenges when it comes to scaling a business is knowing whether to focus on increasing your customer base or improving the experience for the ones you already have. However, the customer acquisition vs. retention debate is fraught with challenges and critical considerations.
From sales challenges and revenue dips due to lost customers and dealing with limited resources, where should you spend your time and money in 2023? 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.
Table of Contents
- What is customer acquisition vs. retention?
- Why Companies Focus on Customer Acquisition
- Why Companies Focus on Customer Retention
- The Outcomes of Focusing on Customer Acquisition
- The Outcomes of Focusing on Customer Retention
- Focus on Customer Retention for the Best ROI
What is customer acquisition vs. retention?
Customer acquisition is the process of getting new customers into your business, whereas customer retention is everything you do to keep existing customers at your business. The image below shows the comparison in more detail.
The difference between the two essentially comes down to the prioritization of a new customer vs. an existing customer.
While the two are often compared, they are equally important. It all comes down to what your business is currently prioritizing and the outcomes you expect from focusing on one over another. When resources are limited, there are times when one must take priority over the other.
“You can't really choose one over the other,” says Alan Stoffer, Partner at Worqflow. “You need both. You have to bring customers in, and once you get them, you must engage in activities that will keep them engaged and help them realize value.”
Why Companies Focus on Customer Acquisition
In any business, it’s natural to focus on customer acquisition. Your company needs customers to be successful. But even in an established business, there are a few key reasons for acquisition to dominate sales and marketing strategies:
- Profits are down, and new target audiences and markets must be mined for new revenue sources.
- Competitor-based targets are driving a focus on customer numbers and revenue to achieve competitive advantage.
- Economies of scale can lead to reduced costs and improved profit margins, so higher customer numbers are needed.
- A new product or service is being launched into an entirely new market.
- Stakeholders and investors expect to see growth, and customer acquisition is still the go-to focus.
- Compensation structures for the sales and marketing team reward acquisition over retention.
Another important factor to note is the opportunities to acquire customers in the digital age. Companies have more touchpoints open to them than ever, and the cost of advertising online is far lower than traditional print media tactics.
In fact, by 2024, digital advertising is set to take up 65.1% of global ad spend.
With new customers more accessible than ever, it’s not surprising that brands want to take advantage of these growth opportunities.
Why Companies Focus on Customer Retention
Some reasons for prioritizing retention over acquisition are similar to why a company would go after new customers. Often, it comes down to the existing size of the business and the financial and market considerations at play.
Reasons for a company to focus on retention over acquisition include:
- A highly competitive market means brand switching is easy for customers, so the company maintains a competitive advantage.
- Being assured of your customer numbers makes revenue modeling and financial stability more predictable.
- The business wants to focus on upselling and cross-selling, especially if there are new product lines in the works.
- Long-term product usage and customer experiences provide better data for new product development.
- Loyal and highly engaged customers can be a great source of inspiration for research and development.
- During economic stagnation, difficult market conditions make customer retention a risk mitigation strategy.
- Retaining existing customers is a much more sustainable practice than acquisition, which can feed into a company’s ESG score.
Like all things in business, it mostly comes down to the bottom line. Retaining customers is cheaper and provides better long-term gain than acquisition. A brand has a 60-70% chance of making a sale to an existing customer, but this drops to 20% when it comes to new customers.
Plus, customer retention is getting harder in some industries. In 2023, the average customer retention rates for consumer services and manufacturing industries fell by 8%. Retail was down by 12%, and businesses in the hospitality industry suffered a 20% reduction in their average customer retention rates.
Economic downturn also has an impact. According to HubSpot’s State of Consumer Trends Report, 64% of consumers think the US is in a recession, and 63% are reducing their spending as a result. In times like these, new customers are harder to come by, so holding onto the ones you have takes precedence.
The Outcomes of Focusing on Customer Acquisition
Customer acquisition is all about growing existing revenue. So, what are the outcomes, both positive and negative, that you can expect from prioritizing it over retention?
Your 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.
This is especially true when you take the extra step of leveraging referrals and partnerships for customer acquisition.
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.
Your customer churn may increase.
High customer acquisition numbers are awesome. But it's only part of the picture.
If your customer retention numbers are horrible, you might as well just start burning cash.
Let’s say a large proportion of your customers are signing up, using your product for a little bit, but then cancel. They may stick around just long enough to recoup your cost-per-acquisition (CAC), but your growth is likely to stagnate.
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.
According to research from the Customer Success Collective, the average monthly churn rate for B2B companies is 6.2%. Keeping your churn rate on an even keel is essential to profitability and long-term growth.
The Outcomes of Focusing on Customer Retention
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 upfront. 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.
Research from Yieldify shows that, in a post-pandemic world, 59% of e-commerce companies are focusing on improving customer retention as a top priority.
So what happens when you prioritize customer retention over customer acquisition?
Customer Lifetime Value goes up.
From a revenue impact perspective, losing a customer costs a business $243 on average. 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 number of 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.
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.
“The decision to prioritize customer acquisition or retention depends on your business goals. If you're in a competitive market and need to rapidly grow your customer base, prioritize acquisition. On the other hand, if you have a solid customer base and want to maximize ROI, retention strategies are key,” says Mario DeAlmeida, vice president of marketing at Building Security Services.
“In terms of ROI, customer retention often outperforms acquisition. Existing customers are more likely to make repeat purchases and spend more over time. However, it's essential to strike a balance between acquisition and retention to ensure sustainable growth,” he says.
Finding the Right Balance
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 2023 (and beyond), focus on improving your customer retention. It may take a little time, but you'll create a flywheel effect where every new and existing customer will add more value and growth to your business for the long haul.