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Acquisition Verses Retention

December 7, 2012 by  

Although I couldn’t find any hard data on what percentage of their marketing budget the average company spends on customer acquisition vs. customer retention I feel that it’s pretty safe to say that the scale is always tipped in the favor of customer acquisition.

It’s not an unfair assumption, as most marketing dollars spent are on ad buys, SEO, or social media strategy that is generally custom tailored to increasing ROI, and the fastest way to increase ROI is to acquire new business.

But that doesn’t mean it’s the correct way to do it. The again, it doesn’t mean it’s incorrect. Let’s take a look at both arguments and then you can decide what percentage of your business to allocate to customer acquisition and what percentage to allocate to customer retention. Fair enough?

Arguments for Customer Acquisition

Let’s start by saying that heading is a bit unfair. We’re not arguing about whether you should spend your time acquiring customers or retaining them. In a perfect world, you’d spend equal amounts of your resources on each, but the reality is that most small businesses just don’t have the time or money to run two distinct marketing departments (acquisition and retention) like the big dogs out there.

In our example business we’re going to pretend that we own a cable company called “Hosting Company A” and we sell an unlimited shared hosting package for just $120 a year. The main argument against allocating big portions of your budget toward customer retention all boils down to two main arguments, the first of which is:

1.)   If your competitor lowers their price and you are forced to lower yours to compete, that cost is now tied to customer retention, not acquiring new customers.

In our example above, we own a hosting company that provides a $120 yearly rate as an acquisition tool. Now, if “Hosting Company B” moves into town and offers the same level of service for $90 it stands to reason that they are going to acquire (if all other factors are equal) more new customers than you as well as stealing some of your opportunities for customer retention. Of course, other factors such as industry reputation come in to play, but let’s keep this as simple as possible. “Hosting Company B” is undercutting you and forcing you to drop your price to compete. So you do.

Now your price is only $90 a year. Guess where that $30 per year (per customer) that you lost in revenue goes? It’s not a cost of client acquisition; it’s a cost of client retention! Simply put, most of the numbers you read about how client retention is cheaper than acquiring a new client are complete garbage. That’s not to say it isn’t cheaper to retain customers than acquire new ones, it’s just saying there is no real way of measuring the cost of acquisition vs. retention as there are too many variables at play.

The second argument for acquisition is something along the lines of:

2.)   Nothing shows ROI or growth better than customer acquisition.

Valid point and a point that’s very true for all but the Myspace’s of the world. Unless you’re a business that’s just hemorrhaging customers like the above-mentioned former social media king did during its “abandon ship for Facebook” days – you’re probably going to show better month-over-month growth by adding customers rather than keeping them.

Arguments for Retention

Every statistic I can point to shows that it’s cheaper to retain a customer than it is to acquire new one. As I mentioned above, I’m not completely sold on those stats but it does appear that they are at least based on truth. Acquiring customers is expensive and in general, I do believe that keeping the customers you have is a cheaper proposition.

Let’s look at some of these statistics from a great Slide Share presentation via Customer Thermometer.

  • 43% of people felt less inhibited about complaining once they get online
  • Satisfied customers tell 9 people how happy they are while dissatisfied customers tell 22 people about their bad experiences
  • A 5% customer increase in customer retention can increase profits from 25-125%
  • Repeat customers spend 33% more than new customers
  • For every cent spent on customer service companies can expect to see a return of 34-400%
  • 60-75% of customers will do business with a company again if it deals with a customer service issue fairly even if the result is not in their favor.

Shocking, right?

While the numbers we’ve heard a million times “it costs 6 to 7 times more to acquire a new client than it does to retain an existing one” might be a bit skewed, statistics show that it’s easy to argue that customer service and thus customer retention leads to increased profits and higher average lifetime values per customer.

In short, customer retention relies on the lifetime value of the customer which looks much less sexy on a spreadsheet or a line chart. Although much less sexy, having a customer for life is certainly an asset and it’s one of the arguments that I’d make against point number one in the “Arguments for Acquisition” section above. The point would simply be that brand loyalty is an often overlooked bullet point in this argument. Some people are loyal to certain brands, period. Whether it’s perceived value or just an attachment they form from the familiarity the brand breeds not every customers motivation is price, and those that aren’t motivated by price are much more likely to chose the brands they feel most comfortable with. It’s the exact reason why I haven’t switched cable companies or merchant service companies. We work with National Bank Services and like the service, get good rates – if it’s not broke, don’t fix it. Right or wrong, I perceive my company to be of higher quality and to offer more for the money than their cheaper competitor. I could be wrong, but I just don’t care to research it. I’m happy where I’m at, and I’m not alone in my thinking.

Conclusion

Depending on your business, or the state of your business, you might not even be in a position where retention is much of an option. If you’re a new hosting provider with 10 customers, you’ll spend far less time retaining those 10 customers than you would trying to put smiles on the faces of 10,000 customers.

Here’s the bottom line. This shouldn’t even be an argument. They are both required to run a successful business. I can settle the debate right here, smaller businesses need to spend a bigger portion of their budget on client acquisition while bigger businesses need to shift some of the focus away from acquisition and on to retention. What percentage? Any number I could give you would be a guess at best and a complete falsehood at worst. I’d rather not speculate.

If you have happy customers you’re spending enough in retention and you might even consider allocating some of that budget to acquisition. If you are churning customers at a rate of 75-percent a month, it might be time to look into allocating some funds for customer service and retention. It’s not rocket science. Do what works for you; but both aspects of marketing should be on your radar.

Good luck!

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