The old rule of thumb was that new customer acquisition costs roughly 5 times more than retaining an existing one (exact number depending on the particular industry).
However, the mentioned rule was mostly based on dated business models, mass-produced products and on different sales tactics. For instance, modern services made possible by digitalisation can significantly increase overall consumer spending.
The scope of services and solutions offered today is generally much more rich and complex than in the not so distant past.
The ongoing dilemma
Both retention and acquisition are important for a company’s success, but which is the more cost-effective strategy? Many sources emphasize the value of customer retention, and the reason may be that a lot of businesses still don’t take it seriously enough.
It requires real commitment to a customer-focused approach, everything from providing excellent customer service, customer support, using customer’s preferred communication channels, and more.
It’s like welcoming a guest and making him feel at home, so they don’t want to leave.
With acquisition, companies have to get the guest to walk through the front door and the main focus is on marketing and sales. Depending on the needs of the industry, the investment may be significant: outbound marketing, inbound marketing, sales team salaries, events and shows, and other.
Customer retention may seem more affordable, with higher long-term return on investment. But decisions about customer acquisition, development and retention should not be driven solely by cost considerations, at least not in the sense that most companies do.
The deciding factor should be the future value. For instance, what is the value difference between retaining mediocre customers and acquiring new ones, potentially much more valuable?
Customer lifetime value
Some customers bring business more value than the others. Therefore, it’s crucial to know which ones are worth the investment and effort. When considering how much to spend to create or retain customers, it’s important to consider the customer’s lifetime value, or CLV, which is used as a metric that represents total profit a company can expect from a customer.
But customer lifetime value only makes sense if other important metrics are taken into account, such as customer acquisition cost and cost to serve.
These metrics are usually customer-specific. If the cost of serving an existing customer becomes too high, the real value of the customer may be actually very low, despite their customer’s seemingly high CLV. When dealing with these calculations, it is necessary to understand these ideas on a deeper level. Sometimes companies are not even aware how much time they spend on certain customers as they only take into account the direct costs incurred.
Instead of focusing on the most cost-effective strategy, companies should be determining how much their customers are really costing them.
What is the value difference between their existing and potential new customers? Most successful companies find a way to balance the two strategies.
By focusing exclusively on cost, others may lose focus on what really matters – connecting with customers and delivering value.