Where are your dollars best spent: on acquisition or retention?
Any company, no matter how big, has limits to what they can spend on their marketing budget. For that reason, it's important to know which area will yield the biggest "bang for the buck"--customer acquisition or customer retention. What are some factors that you should consider when making this decision?
Acquisition is more expensive
Statistics vary from industry to industry, but research indicates that customer acquisition is a far more expensive venture than retention. In fact, it may cost up to 5 times more to acquire a new customer than to keep an existing one.
Why such a huge difference? When it comes to new customers, remember that you are basically starting from scratch. They likely have no previous experience with your brand, and may not even trust your company. It takes time and money to interest them in your product, and even more time and money to convince them to buy from you. With current customers, you don't have to fight against as many barriers to the transaction.
Retention has a better ROI
In many cases, the upfront costs of customer acquisition make many business-customer relationships unprofitable in the beginning. It may only be several months or even years later, with strong retention processes in place, that these relationships generate significant returns. In fact, one study found that a 5% increase in retention rates may lead to a profit increase of up to 95%.
The point is that a customer becomes more valuable over time—and a robust retention strategy will enable you to keep your current customers for longer.
Happier customers boost word of mouth
Word of mouth (WOM) marketing is one of the most effective forms of advertising. For example, one study found that 92% of global consumers trust the referral of a friend, family member, or acquaintance over any form of corporate advertising.
When you retain current customers by delivering exceptional service and high quality results, they are more likely to be happy with the relationship; and when they are happy with the relationship, they are more likely to advocate for your company to others. In effect, your retention feeds into your acquisition--and you don't have to pay a dime for the positive publicity.