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4 Reasons Why Customer Retention Matters to Your Customer Acquisition Efforts

Bob Hayes, PhD | Nov 1, 2016 298 views 3 Comments

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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 to improve customer retention, your company has the potential to generate a significant amount of 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 Onboarding 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 onboarding 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 onboarding process. This insight can be used to improve the onboarding process for your newly acquired customers.

For example, our work with 30 companies revealed two key insights about how to improve the onboarding 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 onboarding 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 onboarding 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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Republished with author's permission from original post.


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3 Responses to 4 Reasons Why Customer Retention Matters to Your Customer Acquisition Efforts

  1. Thea Millard November 21, 2016 at 2:02 am (1 comment) #

    I like that you highlighted the cost of acquisition and the cost of retaining a customer. If a customer has a good user experience, it’s likely he’ll come back to make another purchase. For beginners, a good way to find what your customers think is using surveys. Even big companies use this strategy. For example FedEx http://happycustomersreview.com/fedex-survey-www-fedex-com-welisten/ You can find about problems you never knew about. You can find what improvements are needed. Also, you can find out more about where other potential clients are (and you didn’t know about)

  2. Bob Hayes November 21, 2016 at 12:39 pm (5 comments) #

    Thea,

    Thanks for your comment. I’m a big fan of using surveys to investigate phenomenon. In customer experience work, however, it’s just one source of information. When possible, I like to integrate survey data with other sources of data. This integrated approach helps companies explore deeper relationships among a larger set of variables, helping them uncover customer insights that just aren’t possible with a single data source by itself (http://www.appuri.com/blog/analyzing-big-data-using-an-integrated-customer-centric-approach/).

  3. Andrew Rudin November 22, 2016 at 7:32 am (156 comments) #

    There is so much written about costs for acquiring customers versus the costs for retaining them. Many articles have an axe to grind, basically, passing off as an epiphany the idea that because customers require so much investment to “acquire” that it seems a profoundly sensible business strategy to just work on “keeping” them. (I use quotes around these terms because I often find a range of views among senior marketing executives regarding their meanings.)

    But I believe these arguments miss the point. To execute revenue strategy, many businesses depend on account growth – which involves increasing the number of accounts and revenue per customer. This is an integrated problem. Framing the challenge as one versus the other, or attempting to sell senior executives on the investment disparity between the two focuses attention on solving the wrong things. Simply put, businesses ultimately will not survive without growth, one component of which is new buyers, and not just hoping existing buyers will spend more money. “2X more likely to focus on acquisition efforts . . . ?” 3X? . . . more? These numbers don’t alarm me at all – what matters is the competitive situation of the company and what its management must do to survive. Thus, 2X could be overkill, or a feeble effort. Without context, I cannot judge.

    I agree that customer retention and customer acquisition are inter-dependent as they both are key pieces in planning revenue. The problem occurs with compartmentalizing customers and prospects. This is never a clean exercise. Are there “existing customers” and “prospects”? If so, where do “lapsed” customers fit in? Should companies use a third bucket (many do)?

    There other ways the pie can be sliced. And probably should. What about “active customers,” “inactive customers,” and “future customers?” And “future customers” can be subdivided into “future customers that know about our product and aren’t using it,” “future customers who are unaware of our product,” and “future customers outside of core markets.” Or, what about “customers who spend a little,” “customers who spend a lot” and “non-customers?” Finally, what about “Ideal customers”, “customers we have that we wish we didn’t”, and “non-customers that we want as customers.” I realize some of this might sound glib, but that is not at all my intention. I haven’t mentioned a single category that I don’t think merits serious consideration. There are many ways to compartmentalize the universe of customers and prospects, and few of them are straightforward. But I believe “existing customers” and “prospects” is a gross simplification.

    And before anyone starts slicing, there needs to be consensus on the meaning of these terms. People frequently argue that because existing customers are already familiar with the company’s offerings, therefore they are most likely to be satisfied, therefore they are cheaper to “maintain,” therefore they are the most profitable. But every assumed extension makes the statement more and more tenuous. At which point it contains strategic and tactical flaws that can be financially fatal.

    Consider the company that sells licensed application software that “pivots” to cloud-based solutions – a much different sales and technology model. Once some of the company’s existing customers have converted to the cloud, the company’s legacy desktop users become a drag on support, and more cumbersome to sell to. So are these existing customers better and more profitable than new ones? Emphatically, no. The strategic need for companies to expand their customer portfolios rarely evaporates.

    Boundary-risk – which considers revenue outside of core markets – has measurable impact on most enterprises. It can only be managed by deploying resources to growing customers. Companies should not pit retention strategies against new account capture, but rather they should understand how the two should combine.

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