Should acquisition vs. retention really be a dilemma? Can’t there just be a balance between the two? Must one outweigh the other?
Companies have long been pouring disproportionate resources – human, time, effort, capital – into the top of the funnel, on attracting and acquiring new customers, while retention efforts have gotten little more than loyalty programs and discount offers.
The answer to the dilemma of focusing on the Buy stages of the lifecycle versus the Own stages can easily be found in this series of statistics that convey a very strong point: retention trumps acquisition, both for the business and for the customer.
- A 5% reduction in the customer defection rate can increase profits by 25-95%. -Bain & Co/HBR
- A 2% increase in customer retention has the same effect as decreasing costs by 10%. -Emmet and Mark Murphy
- The probability of selling to an existing customer is 60-70%. The probability of selling to a new prospect is 5-20%. -Marketing Metrics
- Customer profitability tends to increase over the life of a retained customer. -Emmet and Mark Murphy
- 55% of current marketing budget is spent is on new customer acquisition and only 12% on customer retention. -McKinsey
- It is 6 to 7 times more expensive to acquire new customers than it is to keep a current one. -White House Office of Consumer Affairs
- A 10% increase in customer retention levels result in a 30% increase in the value of the company. -Bain & Co
- Most important marketing objectives? 29.9% think it should be customer acquisition, and 26.6% think it is customer retention; however, 62.2% admit that they concentrate on customer acquisition, with only 20.6% focusing on customer retention. –eMarketer
- 80% of your future profits will come from just 20% of your existing customers. -Gartner
- A 10% increase in customer retention yields a 30% increase in the value of the company. -Bain & Co
- Repeat customers spend 33% more compared to new customers. -Laura Lake
Why it’s a dilemma: why marketers focus on acquisition
Make no mistake. Both acquisition and retention are important – and both are enterprise-wide efforts. Marketing is the focal area here because acquisition is a marketing function, supported by the rest of the organization. Oftentimes, retention dollars – in the form of loyalty programs and customer experience improvement initiatives, etc. – also come from the marketing budget.
In a study by Sitecore and Forbes Insights, the top marketing priority for 58% of respondents was attracting new customers; only 40% cited their top priority as turning current customers into customers for life. In other research published recently, the balance is roughly the same.
Why does this dilemma or imbalance exist? Why do marketers focus on acquisition over retention? First, it’s easy. It’s easier to acquire than to retain; retention is a lot of work. Second, and probably more importantly, growth. Why growth? Where does that reasoning come from? The old management adage that “companies are in business to maximize shareholder value” oftentimes drives this thinking.
Without a doubt, companies need to grow, but when that growth is driven by erroneous thinking, then it’s tainted. Clearly, in order to grow, companies must bring in new customers (that they’ll then need to retain going forward, right?). The fastest way to grow, and the quickest way to boost short-term revenue, is to win more customers. In addition, focusing on acquisition solves another “problem” that can be a little messier with retention: the ROI is fast and measurable, and CEOs love to report to their shareholders that the business is thriving because their customer base grew by X%.
The problem, though, is that acquisition costs get more expensive as retention numbers decline. Companies must acquire more customers to fill that leaky bucket. Without customers to retain, acquisition costs continue to increase. Brands can really only fix the retention problem by focusing on delivering the best customer experience. And when that happens, acquisition costs can go down because existing customers will help drive acquisition through word-of-mouth referrals.
How to overcome it? How to shift the focus?
It sounds like a no-brainer, but literally shifting the focus – or perhaps the balance – to be on the stages of the customer lifecycle most important to the customer will help to overcome some of the challenges companies are facing when it comes to customer retention. That re-balance begins with a couple of suggestions from Forrester.
In Forrester’s report titled The Perspective Problem in the Customer Life Cycle, they suggested two solutions:
- Demand alignment between strategy and lifecycle investments. In other words, what is the business goal? What is the company trying to achieve? The example they provide is: if the goal is profitability, but retention is less than 100%, stop investing in the Buy stages of the lifecycle; but if the goal is growth, invest more in Buy stages.
- Redraw the company’s customer lifecycle to reflect customer realities. Customize the lifecycle stages to reflect the impact of each stage on the business and on the customer. Indicate the weightiness of each stage, help employees understand this change, and advocate for using the updated diagram for prioritizing marketing and customer experience investments.
Beyond that, as marketers begin to attract new customers, the focus of their content and messaging ought to shift to building relationships and partnerships, i.e., shift toward relationships and away from transaction thinking and messaging. Sounds warm and fuzzy, right? But winning over the hearts and minds of new customers is not that different from developing personal relationships. It’s more fulfilling and rewarding to grow a relationship than to grow how many acquaintances are in the friend pool.
Critical to this shift is engaging customers at the right time, with the right messaging – contextually relevant to the customers’ needs at particular touchpoints or stages in their journeys. Take the time to understand prospects and new customers, develop personas, identify their needs and pain points along the entire journey, talk about how the company’s products and services can solve their problems, and move away from just acquiring and selling to developing long-term relationships.
What should marketers do?
Both acquisition and retention will always be important. Companies need to work on both. Without acquiring new customers, there will be no customers to retain. Without retaining existing customers, companies will suffer through the leaky bucket syndrome, and acquisition costs will be outrageous. So there needs to be a better balance between both, along with a strategy for how to do just that.
Take a look at the customer lifecycle again and identify – based on what is known about both potential and current customers – how much (and where) effort and how many resources should be expended along the journey. There’s clearly a disproportionate amount of effort allotted upfront, to the Buy stages. Consider how to redistribute some of those resources to the Own stages to maximize retention efforts and to customer lifetime value.
This post focused on the marketer’s side of the dilemma. I’ll talk about the impact on customers in next week’s post.
Time and balance are the two most difficult things to have control over, yet they are both the things that we do control. ~ Catherine Pulsifer