4 Reasons Why Customer Retention Matters to Your Customer Acquisition Efforts

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Business growth depends on acquiring new customers and keeping them around for a long time. Yet businesses are over 2x more likely to focus on acquisition efforts than they are retention efforts. In today’s post, I want to discuss why businesses need to increase their focus on customer retention efforts and why the are imperative to your customer acquisition efforts. Here are four reasons why customer retention is important to customer acquisition.

1. Increase Revenue

Gartner estimates that, for businesses, around 80% of future revenue comes from just 20% of existing customers. Why is this the case? Because existing customers are easier to sell to. In fact, the likelihood of converting an existing customer to buy again is 60-70% while the likelihood of converting a new prospect to buy is only 5-20%.

By focusing resources on improving customer retention, your company has the potential to generate significant additional revenue compared to simply focusing on improving acquisition. The more customers you can retain, the more money you will have to spend on acquiring new customers.

2. Decrease Costs

The cost of running a business is an important ingredient to consider when determining your customer acquisition and retention plans. Two components of costs are directly associated with acquiring and maintaining customers.

Acquisition

The cost of customer acquisition (CAC) is the price companies pay to acquire new customers. CAC is calculated by dividing the total costs associated with acquiring customers by the total number of new customers. Not only does acquiring new customers generate more revenue for your business, they also require less resources to keep. In fact, it has been estimated that it costs 4 to 10 times more to acquire a new customer than it does to keep an existing one.

Maintenance

Existing customers, compared to new customers, are more familiar with your processes and understand how and where to get help to solve any problems they might encounter. Long-term customers, because they require less hand-holding, are a lot cheaper to service. As a result, maintenance costs associated with servicing existing customers is lower than the cost of servicing new customers.

Companies need to get a good return on investment (ROI) from their acquisition campaigns, so the less money they can spend to acquire the same amount of new customers will necessarily contribute to the bottom line.

Your customer base is a great source for referrals for acquiring new customers, and your retention efforts will necessarily help grow your customer base. Keeping customers around for the long haul means you’re delivering a great customer experience or ensuring your customers are successful; high retention rates mean you’re doing something right for your existing customers. You can leverage these happy customers and turn their success stories into case studies that you can use in your acquisition efforts to prospects.

3. Improve Marketing

Your retention efforts not only generate revenue that you can direct at your acquisition efforts, they can also give you a lot of insights to improve your marketing efforts to acquire new customers. Acquisition marketing can be enhanced in two areas: 1) what content you need to communicate to prospects and 2) who you need to be targeting.

Content

Marketing is about conveying value to prospects, and you need to ensure you’re communicating the right message concerning your product’s strengths. Toward that end, you can use all the available data you have about your existing customers to identify the top drivers of retention. Top drivers of retention are those business areas that determine whether your customers stay or leave. Of the top retention drivers, identify those areas in which your company is excelling; use those drivers in your marketing material to convey your strengths and you know are important to retaining your customers.

Targeting

Even though content is king, another important question to ask about your marketing efforts is, “Which prospects do we target with our content?” Again, you can leverage your existing customers and their data to create customer segments based on their underlying value to the company.

By applying sophisticated analytics (e.g., cluster analysis) to the data, you can group customers into smaller, homogeneous segments, each defined by specific characteristics (their values, product usage, social media, etc) as they relate to their likelihood of churning. By identifying your high-value customers and what makes them tick, you can then target prospects that match their characteristics. The hope is that bringing on new customers who have the same characteristics as your most valued, current customers will lead to higher future retention rates.

4. Improve On-boarding Process

In a subscription-based business, business leaders are looking for ways to ensure their customers are successfully using the solutions they purchased so that they remain as customers or, possibly convert to a higher-tier pricing plan. The onboarding process is one way to accomplish this feat.

The on-boarding process is one in which new customers acquire the knowledge, skills, and behaviors to optimize the value they receive from your solution(s). By analyzing the data of your existing customers, you can understand the reasons why customers churned during the on-boarding process. This insight can be used to improve the on-boarding process for your newly acquired customers.

For example, when I worked for a machine learning start up a couple of years ago, our research, across 30 clients, revealed two key insights about how to improve the on-boarding process: 1) provide new customers a tutorial on how to use the product and make sure they complete it, 2) identify and remove bottlenecks where customers tend to get stuck in the on-boarding process.

Summary

I showed four ways your efforts at retaining your existing customers can feed insight and value into your customer acquisition efforts. First, existing customers are a great source of revenue that can be spent on acquiring new customers. Second, long-term customers cost less to maintain and support than new customers. Third, you can use existing customers to improve your marketing efforts by knowing the right content to include in marketing material as well as the right prospects to target. Finally, existing customers can provide a lot of insight about how to improve the on-boarding process that will increase customer retention rates.

So, while you’re considering how you’re going to improve how you acquire new customers, a good source of insight and value can come from understanding your existing customers. By applying the right analytics to your current customer data, you can help grow your company through existing customers as well as new customers.

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