Customer Acquisition vs. Customer Retention: And the Winner Is….

Many moons ago, a retailer knew all his customers by name. He — it was almost always a “he” — knew their preferences, where they lived, and whether they could pay their bills promptly or not. Problems were resolved on the spot and customers could express their complaints directly, knowing they had the owner’s full attention. Additionally, each retailer was generally the only game in town, making it easy to corner the local market without having to do much advertising…besides a banner at your town’s Little League field.

Well, times have changed. But one thing hasn’t: whether your business is brick and mortar or strictly online, without customers, you can’t stay in business very long. Both customer acquisition and customer retention can contribute to long-term business success and growth. But how should companies allocate their limited marketing budgets to maximize their returns and growth?

A Vote for Retention: Point and Counterpoint

One school of thought is that the sales/marketing focus should be directed towards retaining your existing customers. It’s been documented over the years that it costs 6 to 10 times more to acquire a new customer than it does to retain an existing one. It’s also well known that 80% of your sales come from 20% of your customers, so retaining these relationships is critical to your livelihood. Retained customers have a better understanding of your brand’s benefit and value and they are easier to find and communicate with.

But maintaining close ties with your customers these days is not as easy as it used to be. The Internet has opened an entire new world for retailers but “with great power comes great responsibility” as newly acquired consumers can just as easily jump to your competitors with a click of a mouse. This breakdown of geographic barriers to entry makes customer retention efforts that much more difficult to get right.

A Vote for Acquisition: Point and Counterpoint

Another school of thought argues that there is only so much growth you can generate from your existing customer base, so stop worrying about your loyal customers and focus your efforts on bringing new customers to your door…or website, or call centers.

In a booming economy, new customers are flooding into the markets daily, making them easy pickings and thereby lowering your effective customer acquisition costs. As they say, “a rising tide lifts all boats.” Customer prospecting should be a major focus of post-recession marketing, and firms that fail to shift their budgets from retention back into acquisition as the economy emerges may be left behind.

But gaining new customers, educating them, and developing deep relationships is expensive and fraught with risks, perhaps leaving you only with high marketing costs and no revenues to show for it.

So What’s a Marketer to Do?

“Life, business, everything you do, every decision you make – it’s all about risk and reward” said Bill Kaplan, CEO of FreshAddress, in one of our earlier white papers. So don’t put all of your eggs in one basket. Some companies, especially those with expected high customer churn rates or a transactional sales model should focus primarily on bringing new customers in the door. Alternatively, those with longer business cycles or more relationship-building sales processes should concentrate on retention.

Additionally, your perspective on where we stand in the economic cycle should also influence your decision. In times of economic uncertainty, customers are more cautious and take longer to commit so focusing on less costly customer retention programs can help you stabilize revenues until conditions begin to improve. After all, if customers aren’t buying, you’ll need to spend more money to gain each new customer not to mention the additional educational and customer service related costs that attend new accounts. By executing a few customer retention techniques, you can build deeper relationships that serve your customers and support your business goals.

Which Side of the Fence Are You On?

No matter which side of the fence you come out on, you should never put all of your resources in one place. After all, there’s an argument to be made for customer acquisition in a struggling economy, which would enable you to pick up market share from your weaker competitors. By the same token, neglecting your existing customer base in a healthy economy forces you to reinvent the wheel each time with new business, rather than using your current customers to build upon the foundation you’ve already laid.

And the Winner Is…..

Let’s call it a draw. The sweet spot should actually be somewhere in-between customer acquisition and customer retention. Although this balancing act is easier said than done, being able to retain as many of your valuable existing customers as possible without limiting efforts to target new customers (some of whom will turn into future, high value customers) is what facilitates growth.

Focusing on one at the cost of cutting out the other will only cause pain down the line. The correct equation of old vs. new customers is different for every business and will vary over time. Optimize that equation for your business and watch your market share and profits soar!

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