Cost of customer acquisition vs retention
Cost of customer acquisition vs retention: the trade-off should drive you in the choice of the activities to be more focused on.
There's much buzz around the topic. Sometimes you hear that is better to acquire new customers, others that customers loyalty is the key driver of success.
Fortunately, it's not a matter of point of views. Economics speaks clearly and I'm going to show you which way to follow.
Do not take me wrong, both customer acquisition and retention are important: you should care about growing your customer base as well as building brand loyalty.
But, since you need to allocate time and resources and somehow you want to employ those at best, you should know which activity is driving more value.
And, assuming a sale from a new customer to have the same average ticket of a sale to a repeat customer, the lower the cost for selling, the greater the value generated.
The cost to acquire a new customer
Since we need to understand the trade-off between the cost of customer acquisition vs retention, we can start going through the cost to acquire a new customer.
In the fight of customer retention vs customer acquisition, the latter is for sure the easiest part to cover here.
It is basically made by all your spending for the acquisition activities, divided by the number of new customers acquired.
Which costs to include in the total spending is definitely up to your choice and your specific business case. It will include for sure any direct cost (e.g: performance marketing campaigns), but it might also include non-direct costs (e.g: time spent in crafting the campaigns).
Generally speaking, if you're running only performance marketing campaigns, computing the CAC might be an easier process.
If your acquisition strategy is made of multiple streams on paid, earned and owned media along with offline activities, it can turn to be not as easy as we would like to be.
How to compute the customer acquisition cost is not part of this article since it can be complex, depending on your acquisition strategy. My ultimate goal is to show you the trade-off between the cost of customer acquisition vs retention.
So, to make this article fit your case, I considered a wide range of possible costs for acquiring new customers.
Among these, you can find yours. In case you don't, you can still replicate the analysis or contact me to have further details.
The cost to retain customers
When we talk about customer retention, we intend the ability to drive profits from people who already bought from us once.
The concept applies to any business, from SaaS companies to e-commerce ones, even though it happens in different ways.
Retaining customers in a SaaS business means pushing the product usage along months, while in an e-commerce business means convincing the customer to buy repeatedly in a given time period.
As acquiring a new customer has a cost, retaining customers also has costs. Also in this case, which costs much depends on your business and retention strategy.
In the costs, you can include direct (e.g: ad-hoc materials) and non-direct (e.g: time spent) costs for crafting the retention campaigns.
One of the costs you can't do without to implement a retention strategy is the cost of having a marketing automation software.
So, I imagined computing the customer retention cost using the cost of the marketing automation software used to up-sell to the customer base.
Your business may have other costs to be input to the customer retention cost, but the marketing automation software is for sure a key component of it.
Here is the cost of the marketing automation software I considered in my analysis.
|up to 1.000 contacts||$129 /month|
|up to 5.000 contacts||$229 /month|
|up to 10.000 contacts||$299 /month|
Given the marketing automation cost, we can assume a repeat customer rate over 12 months to derive a simple customer retention cost.
Comparison of the cost of customer acquisition vs retention
Now that we discussed both the customer acquisition cost and the customer retention cost, we are ready to compare those.
To do it, we use as a metric the cost saving of retention with respect to the acquisition.
As acquisition cost, I pick now $25, while as customer retention rate I assumed, at this stage, the 15%. Soon, I will show you results also for different values.
For the costs considered in the analysis, retaining customers drives much more profits than acquiring new ones.
And, the bigger the customer base, the greater the benefits.
But it's not enough since the picture we drew so far is not comprehensive at all from the moment it assumes a certain CAC and retention rate.
So, let's see a holistic scenario at different retention rates and CAC.
Broadening the picture with the charts above gives us a confirmation that retaining customers is definitely the way to pursue rather than acquiring new ones.
As said at the beginning, growing the customer base is important as well. But, when you need to allocate resources in one or other directions, it's better to bet more on retention.