Customer acquisition vs retention: which is more important?
It’s a typical dilemma for small business owners. Should you focus on reaching new customers or invest in nurturing your existing customer base?
If there’s one mistake that entrepreneur Olivia Carr watches new business owners make, time and time again, it’s pursuing new customers at the expense of their existing ones.
“I mentor e-commerce brands and they’re always chasing new customers,” says the founder of wellness and beauty brand Shhh Silk. “I go into their Shopify [analytics] and I see their return customer rate and think, ‘Whoa, we have some work to do here.
“If [business owners] want more sales, it’s important to look at the customers they already have. Those customers already know the brand and have experienced the quality of the product.”
“Businesses who want more sales should look at the customers they already have."
In reality, customer acquisition and customer retention are both important for growth. And there will be times when businesses choose to focus on one over the other - depending on the maturity of their business, their industry or even the time of year.
“Acquisition and retention must ultimately work hand in hand to attract customers to a brand, encourage the first purchase and then build a relationship that endures,” says Adam Simms, the co-founder of LoyPal, which uses data to drive value from brands’ existing customers.
Here’s how to decide whether (and when) to invest your time and money in retention or acquisition.
Why investing in acquisition is important
Acquiring new customers is the fastest way to grow your business - and it’s particularly important for brands that are just starting out or have a new product offering.
There are also certain times of the year that businesses may choose to concentrate on acquisition over retention. Black Friday, Cyber Monday and Christmas are specific periods when brands use compelling offers and discounts to attract new customers, for example.
“The challenge is the quality of that acquisition,” says Simms. “You may be bringing people into the brand purely on the basis of discounting.”
In other words, these customers may be less brand loyal, more price-sensitive - and difficult to engage with in the long term.
One solution? A strong lifecycle marketing strategy. To encourage customers to make a second or third purchase, brands need to keep customers engaged after that first sale by building a relationship that isn’t just transactional.
How to measure acquisition
For e-commerce businesses, measuring acquisition is as simple as checking your analytics. Google Analytics, for example, records whether users are visiting your website for the first time on their device or have visited before, and popular platforms like Shopify also provide reports on new versus returning customers. Brick-and-mortar stores can track shoppers by entering their details into a database, or via a loyalty program.
But while investing in acquisition is one thing, acquisition that is cost-effective and profitable is another.
There are lots of ways to assess the success or profitability of your customer acquisition strategy. Measuring the cost of customer acquisition (CAC) is one approach. If you’ve spent $100 in acquisition costs and brought in 20 new customers, your CAC is $5, for example.
Alternatively, you can look at return on investment (ROI) or cost of goods sold (COGS). This involves factoring in all the costs and expenses related to creating your products or services, as well as the acquisition costs, to reveal whether your margins are healthy.
Why investing in retention is important
Acquisition isn’t the only way to scale your business. Keeping existing customers happy and encouraging them to purchase again and again, is another way to drive growth.
“A customer’s relationship with a brand starts with acquisition, and finishes because of poor retention."
However, it's often overlooked. “A customer’s relationship with a brand starts with acquisition, and finishes because of poor retention,” says Simms.
“Brands often wait too long before putting a real focus on retention,” he explains, adding that many younger brands are more confident with paid social media tactics than customer retention and loyalty strategies.
The result? Brands that seem successful on the surface, and boast an impressive special media presence, but have a less-than-healthy customer return rate, behind the scenes.
“Many brands will have in excess of 70 per cent of customers only purchasing once,” says Simms.
The solution is to focus on retention strategies, which are generally agreed to be more cost-effective than acquisition. An oft-quoted statistic is that acquiring a new customer is five to 25 times more expensive than retaining an existing one, although the precise figure depends on a myriad of factors.
As Simms explains, “Acquisition gets increasingly expensive over time, and acquisition strategies need to become more and more sophisticated to remain cost-effective.”
"Acquisition gets increasingly expensive over time."
In addition, building an early connection with customers to stimulate a second purchase helps offset acquisition costs. “The second purchase helps build a deeper relationship with the brand and payback faster on the cost of acquisition.”
Retention marketing also offers greater financial security - after all, the bigger the pool of loyal customers, the easier it is to plan for the year ahead.
Retention is a longer-term strategy, however.
How to measure retention
Businesses generally measure the success of their retention strategies according to their customer retention rate (CRR).
A CRR is also a useful proxy for the overall health of your business; if customers are repeatedly purchasing your products or services, you’re obviously meeting their expectations.
Like acquisition metrics, your business’ customer retention rate can be viewed in the analytics sections of your e-commerce platforms.
Alternatively, software such as LoyPal not only tracks customer retention rates but allows brands to segment data and identify lapsed customers, too. Software such as Klayvio and Emarsys can then ensure these customers are targeted with personalised marketing – whether that’s discounts, perks or relevant content - to drive a repeat purchase.
Top acquisition strategies
Want to focus on acquisition? Try this:
Social media advertising
Use paid social media to target specific customer groups and serve them relevant content or ads.
Search engine marketing
Develop a paid keyword strategy to ensure that your business appears in customers’ search results.
Organic content marketing
Create a sophisticated content marketing program to establish your authority and credibility, and raise brand awareness via organic search or organic and shareable social media.
Top retention strategies
Want to focus on retention? Try this.
Email marketing
Regular emails are an excellent way to stay top of mind with customers or stimulate a repeat purchase. Communication should be as relevant and personalised as possible.
Offer customers rewards, in the form of discounts, previews and perks, for repeat purchasing.
Use data
Leverage analytics – through software or a customer relationship management tool – to identify remarketing opportunities within your existing customer base.
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