Growing your company requires earning your customer’s trust, and consequently, their repeat business. Companies budget large amounts of money and focus on various customer acquisition tactics because they know that ongoing customer acquisition is vital to keeping their businesses alive. However, so is customer retention. While both are equally important, many companies don’t see it that way and they make the mistake of neglecting what they should be doing to ensure they retain the customers they spend so much money on attracting.
Here’s why business owners great and small absolutely must place nearly equal emphasis on both their customer acquisition and customer retention strategies (and how they’ll be losing oodles of money if they don’t).
The Case for Customer Acquisition
Sales, promotions, free trials, contests and giveaways… In the process of gaining new customers, business owners will invest millions in marketing activities that include everything from hosting new client “easy-onboarding” promotions and events (think ‘mobile carriers offering a free smartphone or upgrade with every new premium phone and data plan contract’) to online contests, email campaigns and a potentially expensive mix of digital and traditional advertising. This is what makes new customer acquisition more expensive than customer retention—it always takes far more time, money, and tactics to convince potential customers to give your business a chance than it does to keep them shopping with you.
How much more time and money? Allow us to explain
Identifying Your Customer Acquisition Costs
To gauge the effectiveness and ROI of your customer acquisition tactics, you need to know your cost of customer acquisition (COCA). There are different ways to do this, but the simplest is to divide the investment you made in customer acquisition tactics by the number of customers you earned (within a 1-year period, for example).
You can also calculate your customer acquisition cost on a per campaign basis
For example, let’s say you ran a Month of May Mother’s Day Sale. You would divide the total investment you made in promoting the sale by the number of customers (or transactions) your shop had in May.
Achieving a more accurate cost per customer is easier when:
- It surrounds a specific end-date for a promotion or campaign.
- Customers must use a campaign-specific coupon or promotion code.
- You have the technology and ability to track and separate unique customer purchases from repeat customer purchases.
We advise customers to track both their cost per customer acquisition per campaign and their overall cost per customer acquisition per year. This is done by dividing the overall marketing budget invested per year by the number of new customers earned. Doing so will help you analyze which methods are most effective at promoting specific sales and overall brand awareness.
While new businesses can expect a lower return on investment (ROI) on marketing costs to acquire new customers, as your business becomes more established, your average customer lifetime value should definitely exceed your cost per new customer acquired. We’ll show you how to calculate both below:
The Case for Customer Retention
Customer retention is creating a process to encourage customer loyalty and repeat purchases. The goal with customer retention is to reduce the number of patrons that walk away or leave your business in favour of a competitor (customer attrition). Ideally, your customer retention strategy should also include tactics that encourage word-of-mouth referrals and increase long-term customer tenure.
Popular and effective customer retention tactics include offering loyalty incentives, such as:
- Introducing an “insider’s” membership and rewards program: Offering exclusive discounts, perks or value-added to long-term or repeat “VIP” customers.
- Formally tracking and acknowledging your more frequent customers, raving fans, and referral sources with a special offer, gift, or thank-you card.
- Utilizing social media and inbound marketing to capture customer emails and contact information, and stay in touch with your customers, reminding them about upcoming promotions and new products they may like, based on their previous purchases.
- Reaching out to clients you haven’t seen in a while: This is your chance to earn back their business with a personal touch.
- Booking a follow-up call or meeting with every client/patient (if your business is service-oriented, such as a spa, salon or elective medical service): This gives you a chance to ensure your client/patient is happy, and address any questions or concerns they might have.
- Making a point of collecting and listening to customer feedback, and using the insights gleaned to continually improve your products, services, and customer experience model.
- Ensuring customers are aware of upcoming sales and promotions: This is also an opportunity to provide them with a gift or coupon. It will incentivize them to attend and develop customer loyalty.
- Making cross-promotion of other products and services feel natural: No one likes to be sold, but everyone likes to be helped. Establishing a way to track your customers’ previous purchases and expressed interests will help you customize recommendations that will entice them to return to your shop or e-commerce site.
- Providing referral incentives to your current customers: Referral marketing is low-cost and effective. Referred customers are more likely to become loyal customers. It’s one of the best methods for customer acquisition.
- Making time to learn why your newly acquired customers aren’t coming back will help you build a better business. You learn from mistakes, make corrections, and come back stronger.
The Value of Customer Retention
Retaining your customers increases your ROI, and it’s not difficult to do. However, many companies emphasize acquisition over retention. They are both important, and there are statistics to back this claim up:
- Acquiring customers is five times more expensive than retaining them. Acquiring them is important, but you won’t see the full benefit of your work unless you retain them.
- 26% of companies focus equally on retention and acquisition. 18% place greater emphasis on retention. But 44% put more emphasis on gaining new customers than keeping existing ones.
- The likelihood of selling to a new customer ranges from 5% to 20%. Yet, the success rate of selling to a repeat client skyrockets to 60%-70%.
- Increasing your customer retention rate by 5% will boost your return on investment by 25% to 95%.
The proof is in the numbers. Creating an excellent customer retention plan is great for your bottom line. You can’t achieve a high lifetime value base without having a solid customer retention plan in place.
Identifying the Lifetime Value of Each Customer
Now that you know how much your business typically spends to acquire a new customer, the next step is to calculate your customer lifetime value (CLVA). Identifying your customer lifetime value is important for measuring whether the budget you invest in marketing and promotions to attract new customers is actually paying off.
There are different methods for calculating your customer lifetime value, and it starts with determining your average purchase value and purchase frequency rate. This outline from Hubspot walks you through the process.
If your business sells set-priced service contracts: calculating the lifetime value of your customers will be more straightforward because you can more easily and accurately estimate how many transactions (or the overall value) each newly acquired customer will typically spend with your business over the duration of their service contract with you.
A business that sells consumables: can expect to see a higher percentage and frequency of repeat customer purchases than a business that sells furniture, large appliances or water heaters, for example. And reaching an average purchase value typically yields a range rather than a concrete number for businesses that sell products and services at steeply variable price points.
Businesses that serve more than one market: will have a different customer lifetime value for each. In this case, you’ll want to segment your customers into relevant categories (if you sell water heaters, for example, you’ll have customers who are homeowners as well as customers who are building developers). The cost per acquisition and customer lifetime value for each will be vastly different.
To showcase the value of customer retention, it’s the customer lifetime value you want to focus on
Why? Because if your typical customer, on average, spends $ 20 per purchase, does so weekly, and typically continues to shop from you for at least 5 years, your average customer lifetime value = $5,200.00 (a $20 purchase per week x 52 weeks x 5 years). This might represent a typical customer for a small pharmacy, gift shop, or neighbourhood convenience store, which all depend on high customer volume and long-term customer retention.
The True Value (and ROI) of Customer Retention
Consider the example we used above to calculate the average customer lifetime value for a small pharmacy, gift shop or convenience store.
And let’s pretend that you invest 125K per year on marketing that attracts an average of 2500 new customers:
- Your gross cost per new customer acquisition = $50
- Your average customer value per purchase = $20
- Your average customer value per year = $1,040
- Your average customer value per lifetime = $5,200
Now let’s also pretend that your average customer retention score = 20%:
- (500 customers retained) x 1,040 per year = $520,000
- (500 customers retained) x 1040 per year x 5 years = 2,600,000
- Congratulations, your ROI on the cost per customer acquisition is excellent!
But wait!
- Imagine that out of the 2500 new customers acquired (represented by a single purchase) you only managed to retain 5% of them (125 new customers retained).
- While your gross cost per new customer acquisition is still $50.00
- And you at least made 50,000 on each new customer’s initial $20 purchase
With a 5% retention rate:
- Your average customer value per year = 13,000
- And your average customer value per lifetime = 65,000
Yikes!
You’re spending $50 to acquire a customer when 95% of them will only make a single $20 purchase from you. You know your business needs to keep attracting a high volume of new customers, but unless you can improve your customer retention rate, your marketing is now a cost, not an investment.
This illustrates only one direct aspect of the ROI potential of retaining customers.
Here are 4 Other Indirect Yet Important Benefits of Customer Retention
Removes the hole in your proverbial bucket
Unless your business model doesn’t depend on repeat purchases, if you’re losing customers as quickly as you’re acquiring them, you won’t build a customer base your business needs to grow.
Better forecasting ability
Loyal, consistent customers are much more dependable than new customers. Growing your loyal customer base will help you to make more customer-centric business decisions and improvements, more accurately forecast your most profitable revenue streams, and make your overall marketing more appealing and effective. There’s a certain level of insight you can only glean from building history with your customers.
Builds social proof and brand confidence
Beyond your logo, true branding is what your customers say about the experiences they have with every aspect of your business, products and services. This is why creating an exceptional customer experience and delivering it consistently is so paramount to retaining customers and building brand confidence. Moreover, happy and loyal customers will naturally speak favourably about your business, building more referrals and precious word of mouth. Popularity grows your brand’s social proof – people tend to have more immediate confidence in people, places and things that their peers already like and favour.
Costs less to keep them than it does to court them
We’ve already illustrated the cost of acquiring a new customer and how it can be offset by the lifetime value of each customer you retain. The only way your business is going to get a good ROI on every marketing dollar you spend is by optimizing your customer retention rate.
And, Yes, There’s an Exception to Every Rule
And the exception here is a new business. Unless a new business is a hit in its first year, it will typically have to invest more in new customer acquisition until it builds sufficient brand awareness with its target market and gains enough sales momentum to become profitable. That said, it is just as vital for new businesses to have a well-thought-out customer retention strategy in place so that each new customer they attract can help build a solid foundation of repeat customers and referrals.
In Conclusion
You can’t keep customers until you convert them, and you can’t grow unless you keep them. While investing in customer acquisition is a must, developing an effective customer retention program will increase your marketing return on investment. It’s never too early or too late to build a strong customer retention strategy while you optimize your customer acquisition strategy.
What do you think? What are some of the most effective ways your favourite brands retained you as a customer?
Looking to grow your company? Want to attract and sustain a loyal customer base? Let our experts at McAllister Marketing help. Connect with us today for a no-obligation consultation. We’ll help your business attract, convert, and retain more customers while helping you get the most mileage from your marketing budget.
