Nahla Davies is a software developer and tech writer. Before devoting her work full time to technical writing, she managed – among other intriguing things – to serve as a lead programmer at an Inc. 5,000 experiential branding organization whose clients include Samsung, Time Warner, Netflix, and Sony.
Allocation of marketing resources is the key problem which leadership teams in marketing departments are continually trying to solve.
Often we talk about PPC vs organic, brand vs conversion, SEO vs social, or any such pairing of activities. But maybe the biggest question at the top of the decision tree is: Acquisition vs Retention.
Should you try to generate more revenue from existing customers? Should you spend more effort to develop new customers? Or is there a happy medium that will work perfectly for your business?
Based on statistics alone, your existing customers are your best bet for new revenue. It is generally easier and less costly to rely on the people you have already built relationships with. But businesses that don’t take sufficient steps to bring new blood into their base will inevitably die.
In this Process Street article, we’ll attempt to answer some questions, namely:
How involved should marketing be in retention efforts? And how do different company structures or products impact that? How do we weigh those efforts against acquisition – the primary function of marketing?
To help you through the process, we’ll be looking at:
- How other companies divide their efforts between acquisition and retention
- Why do businesses spend so much on new customer acquisition?
- How should you divide your marketing spend between acquisition and retention?
- Putting it all together with process
How other companies divide their efforts between acquisition and retention
We’ll start by reviewing some recent numbers on the costs and effectiveness of acquisition versus retention. Then we’ll take a look at what businesses say they are doing. The goal is to see if the business decisions naturally flow from the data or if there is a disconnect somewhere that needs further attention.
There is no question that new customer acquisition is much more expensive than customer retention. According to Invesp, a company focused on helping companies increase conversion rates for customer acquisition, it costs five times more to get a new client than keep an existing one. Looks like a strong point in favor of retention.
But there is more to the story. Businesses also report that it is easier to get loyal customers to buy. As anyone with experience in marketing knows, turning prospects into customers is challenging, and conversion rates are often low. Indeed, the likelihood of making a sale to a new customer typically ranges between 5 and 20%.
On the other hand, your existing customers already know you and your products. You have built an outstanding customer experience, and your chances of making that sale increase substantially. Compared to the low conversion rates for prospective customers, you have a 60-70% chance of getting additional business from your current client base.
And the trust you have built with your clients extends to new products you introduce as well. Your loyal base is 50% more likely to buy your new products than are new prospects. Another point for retention?
Of course, it would be nice if it were all this simple. But everyone’s situation is different. And this is apparent when you look at how businesses actually divide their marketing resources between acquisition and retention.
Despite what appears to be clear advantages for spending most of your marketing dollars on retention, only 18% of businesses focus their efforts on building loyalty among existing customers. In stark contrast, acquisition is the primary focus of 44% of businesses. The remaining companies split their resources roughly equally between the two.
So what does this mean for your business’s decision? Clearly, retention is crucial. But if the numbers were as straightforward as they seem, then every business would be doing a five-to-one split, with the majority of marketing spend targeted on retention. So something else must be going on.
Why do businesses spend so much on new customer acquisition?
There are many reasons that customer acquisition dominates many businesses’ marketing efforts. But before we get into the specifics, we need to understand two basic performance metrics: ROI and CLV.
Measuring marketing return on investment
ROI, or return on investment, is a metric that all business people and marketers know well and many despise. It tells you how much revenue and profit you generated as a result of specific marketing spend. Unfortunately, marketing ROI can be difficult to assess accurately. And ROI numbers can also be quite misleading about the effectiveness of a particular campaign. ROI also has a short-term focus and does not adequately capture the effects of a campaign on long-term brand recognition.
There are a few accepted ways to calculate marketing ROI. The most basic calculation highlights the questions about the accuracy of marketing ROI.
Marketing ROI = (sales growth – marketing cost)/marketing cost
Seems pretty straightforward, right? The problem with this formula is that it assumes that all sales growth results from the marketing campaign in question, which is likely not a very defensible assumption.
Another approach attempts to correct this problem by removing any business growth that is not due to the company’s marketing efforts:
Marketing ROI = (sales growth – organic sales growth – marketing cost)/marketing cost
Better, but now you have to know what your organic sales growth would have been. And how good your ROI calculations are also depends on the analytical framework you used. Are you counting only sales growth in the year after the campaign? Six months? A month? Customer lifetime?
Measuring the total value of a customer
This brings us to our next metric – CLV or customer lifetime value. CLV predicts how much profit you will generate from a given customer over the time they remain a customer. The standard CLV calculation goes like this:
CLV = average order value X average total purchases per year X average retention time
If you are like most businesses, you have cloud-based accounting tools that come with critical features like branded invoicing, online payment systems, and basic financial reporting features. Perhaps you have even invested in standalone or embedded business intelligence tools that help you determine the individual pieces of the CLV equation more easily. So, CLV should be something you can determine reasonably simply (unlike marketing ROI).
But the Invesp survey tells a different story. Although the vast majority of businesses (76%) understand the importance of CLV, only 42% believe they can accurately calculate it.
Now that you are familiar with these metrics, how do they factor into a business’s decision to prioritize acquisition over retention? For ROI, it is the simple matter that it is easier to calculate ROI for new customers than it is for retaining customers. Knowing which new clients came in due to a specific campaign makes the total sales growth easy to assess – it is simply their CLV. And these are numbers that businesses can generate quickly using the massive amount of data most companies have on hand, giving a sense of immediate achievement.
For existing customers, you are trying to determine how their CLV is changing due to marketing efforts and then using that to calculate ROI. But how much of the change comes from your marketing efforts instead of other reasons? Customer retention campaigns often span more extended periods than campaigns directed at acquisition, and the results can also take longer to assess. Without instantaneous ROI to trumpet, marketers can have difficulty convincing the C-suite that retention marketing spend is worthwhile.
There is another well-founded reason businesses may choose to spend much of their efforts on customer acquisition. It is a fact of life in the business world that you will lose customers. Customer retention rates can be 20% or lower. And if you don’t replace your departed revenue with new sources, your business will not survive. So all businesses need to direct at least some of their marketing spend on client acquisition.
Further to that, many companies discount the effectiveness of marketing efforts in customer retention and expansion, leaving much of that work to customer success or other customer-facing teams, depending on their industry.
This naturally focuses marketing spend on acquisition as it’s the department which is seen to own that area of the business. But new product launches, customer education, and efficacy reports are all activities a tech company might do to increase retention and expansion – and all are often owned by marketing.
If you’re not in tech and you’re a brick-and-mortar retailer then reengaging existing customers falls even more squarely on the shoulders of marketing. Ecommerce stores will find a strong overlap between the high street world and the tech world.
How should you divide your marketing spend between acquisition and retention?
Remember, there isn’t a one size fits all marketing approach, and you shouldn’t just try to apply statistics as the sole basis for your decision. A brand new e-commerce store is going to have very different considerations than an established brick-and-mortar retailer. So, let the data be a guideline and then tailor your efforts using your specialized knowledge of your business, industry, and customers.
Start with the general proposition that both acquisition and retention are crucial for your business. You need to spend at least some marketing resources on each of these tasks.
Now let’s consider how you will balance your spend between acquisition and retention.
What are your customers’ buying habits?
Think about the data you have on how your customers buy generally. Does your business model rely on frequent, repeat purchases, like many software and website subscription models? If so, then customer retention is likely an overriding concern for you, and you want to drive your customer retention times as high as you can. Retention efforts should get more of your marketing budget.
What if you are a retailer with one main product and a wide range of accessories or add-ons? You need to develop repeat buyers with high CLV, although retention time is less critical. Once again, though, your marketing dollars will go primarily to customer retention.
What if your product or service is something that customers need only infrequently? While you will want to have very high retention times for your existing customers to help build your CLV, you have a greater need to bring in new customers in the lulls between purchases. Acquisition is the key to your growth, and you should spend less on retention efforts.
Suppose you are fortunate enough to have a manically devoted fan base, where your customers line up to buy any new product you put out. In that case, retention is less critical than acquisition. Include metrics in your analysis that measure your existing customer loyalty and reliability, for instance, the customer health index.
The more loyal they already are, the more you can focus on acquisition.
How does your marketing budget come into play?
Of course, your product lines and your customers’ buying habits are not the only considerations. Indeed, your budget may significantly impact what you can and should do. And the same budget considerations can impact different businesses in different ways.
Looking at the statistics again, it would seem that if you have limited marketing dollars, you will get the biggest bang for your buck by investing them in customer retention. But that is an oversimplification that could lead you to make the wrong decision.
Common sense has to come into play. Let’s think about that new e-commerce startup again. They have minimal funds for marketing. But, clearly, they need new clients above all else. So what little money they have should go into client acquisition. As their business grows and their marketing budget increases, they can shift more money towards retaining the new customers they brought in the door.
Also, think about whether you can push alternative business models that minimize marketing spend. For example, product-led growth may be a viable option for driving acquisition and retention with limited investment depending on your product and market.
How do your marketing channels affect your decision?
Another interesting result of the Invesp survey is how different the marketing channels are for acquisition and retention. Businesses primarily use paid search and online advertising for customer acquisition, whereas client retention relies heavily on mobile messaging.
Think about whether there are ways you can coordinate your efforts on a particular platform or channel so that you can accomplish more with every dollar. Social media, which is increasingly becoming one of the predominant marketing channels for businesses of all kinds, stands out as a natural choice.
Putting it all together with process
Acquisition or retention? Obviously, it has to be both. But every business has different needs that require it to divide its time and resources differently. And every company owes it to itself to carefully look at what split will drive growth most successfully.
Consider implementing a monthly or quarterly audit and following a clear process to determine what your core metrics are, what you’re doing to move the needle, and whether your spend is well allocated. This gives you the ability to be more agile in adapting quickly to what’s working and what isn’t.
Where do your marketing dollars go when it comes to the question of acquisition and retention? Feel free to drop a comment below, we always love to engage with our readers.