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Insight/ Lifecycle Marketing

Customer Retention Should Outweigh Customer Acquisition

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by Jerry Jao
Co-Founder & CEO
Retention Science

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Article Highlights:

  • Retention is likely to be more profitable than acquisition.
  • Customer retention can have a positive impact on acquisition.
  • Customer retention can take time to bear fruit.

Too many CMOs looking to increase their company’s bottom lines are quick to look “out there” for a solution. They focus their efforts on acquiring new customers and pouring a large chunk of their marketing budgets into advertising or public relations.

However, decades of research have shown that this method may not necessarily be the best route to take for improving sales and ROI. In fact, the numbers indicate quite the opposite: Instead of looking outside their companies to bring in new business, CMOs should turn their attention to the customers who are already within their grasp and find ways to generate more business out of them.

Consider this: According to the Gartner Group, 80 percent of your future profits will come from just 20 percent of your existing customers. That means the revenue sources you’ve been trying to find are most likely sitting right under your nose, waiting to be nurtured and cultivated.

Customer Retention Can Take Time To Bear Fruit
Frederick F. Reichheld and Phil Schefter of the Harvard Business School cited a study (conducted by Bain & Company, in coordination with Earl Sasser of HBS) analyzing the costs and revenues that came from serving customers over their whole purchasing life cycle.

They said: "We showed that in industry after industry, the high cost of acquiring customers renders many customer relationships unprofitable during their early years. Only in later years, when the cost of serving loyal customers falls and the volume of their purchases rises, do relationships generate big returns. The bottom line: Increasing customer retention rates by 5% increases profits by 25% to 95%."

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This is likely one of the reasons why marketers don’t always have customer retention top of mind. Unlike lead generation or customer acquisition, retention campaigns take relatively longer before producing results. When you publish a lead gen form or launch an ad campaign, you can easily see and measure the results. This isn’t always the case in customer retention because it deals more with loyalty, relationships, and engagement, which yield results that are not immediately seen and/or are trickier to measure.

In other words, when venturing into customer retention, you may have to wait for your investment to fully mature, before you see a return. That wait is bound to be worth it, though, as the study also showed that boosting retention rates by just 5 percent can actually raise profits by 25 percent to 95 percent. Additionally, more data by Bain & Company indicate that a 10 percent rise in customer retention yields a 30 percent increase in the value of the company.

Retention Is Likely To Be More Profitable Than Acquisition
Existing customers are much easier to sell to. According to Marketing Metrics, the probability of converting an existing customer is 60 percent to 70 percent. The probability of converting a new prospect, on the other hand, is only 5 percent to 20 percent. These numbers make perfect sense, and as we all know, people are more responsive to individuals or companies they’re already familiar with, compared to complete strangers.

Not only that, but aside from being more inclined to purchase from you, repeat customers are also likely to spend more. Data from Laura Lake shows that repeat customers spend 33 percent more compared to new customers.

That said, why are marketers not spending enough resources on their current customer base? Why, then, are companies too focused on persuading prospects who have no idea who they are when they could be strengthening their relationships with people who have already purchased from them in the past?

Customer Retention Can Have A Positive Impact On Acquisition
Customer retention and customer acquisition don’t have to be two parallel lines that never meet. In fact, when done right, customer retention campaigns can actually bring in new business. How? Through word-of-mouth and referrals, of course.

A study showed that satisfied customers tell nine other people about their positive experience, while dissatisfied customers are likely to talk about their negative experience with 22 other people. These numbers tell us that customers talk, and they talk more if they’ve been treated badly.

For the purposes of this article, though, let’s stick to the positive side of word-of-mouth. By implementing smart retention strategies and treating your customers well, you are increasing the likelihood of getting referrals. Referrals are priceless to just about any type of business, but their value can increase exponentially in the e-commerce and digital realms because they can spread much faster and easier online. As Reichheld and Schefter put it, “word of mouse spreads even faster than word of mouth.”

There’s No One Way To Best Retain Customers
If you’re now sold on the idea of customer retention, then you’re probably wondering about the best way to implement it to increase sales, boost engagement, and generate referrals. Should you introduce a loyalty program? Can you add more personalization to your services? Will engaging with people on social media help?

The truth is, there is no one best way to boost customer retention because it all boils down to the nature of your business model and customers. However, judging by the several successfully implemented retention campaigns we’ve seen, there are always two common denominators to a high retention rate: great products and excellent customer service. Before rushing off to cook up a loyalty program, start with those two components first, then go from there.

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