In marketing circles, we often face binary choices that can put us on one side or another of an issue. Customer acquisition (finding new customers) versus retention (keeping current ones around) is one of these heavily debated binary choices.
Studies and articles are released each year discussing the “right” focus marketers are currently prioritizing. Small business owners aren’t exempt from the debate either.
A recent BIA Kelsey study showed for the first time, small business owners are shifting their marketing focus from customer acquisition, which used to be their first choice by a landslide, to customer retention. But what should your business focus be?
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Let’s discuss the customer acquisition versus retention debate, and I’ll give you a framework for making the right choice for your business.
The Growth Equation
To fully analyze customer acquisition (acquiring brand new customers) versus retention (getting existing customers to come back), you need to break down your company’s revenue or growth driven by acquisition and retention.
I’ve used a form of this “growth equation” at marketing jobs I’ve held at Google, Facebook, and now Fivestars. While it’s an advanced framework, and it may not be possible to fill in the equation at every small business, it’s still very relevant and useful:
Monthly Revenue = (# of New Customers Acquired in the Month x Avg. Spend Per New Customer) + (# of Returning Customers in the Month x Avg. Spend Per Returning Customer) + (# of Resurrected Customers in the Month x Avg. Spend Per Resurrected Customer)
To simplify, this equation says your store’s monthly revenue is driven every month by new customers, returning customers, and won back (or resurrected) customers.
Here are definitions of each customer bucket:
- New customers are those who have visited your store for the very first time in the most recent month.
- Returning customers are those who have visited your store in most recent month, and the month prior.
- Won back customers are those who aren’t new, didn’t your store in the prior month, but did visit the most recent month, and have therefore been “won back.”
At Facebook, we used a similar equation to understand the composition of monthly active Facebook users. We also used the equation to understand our own revenue from small business advertisers, and to develop strategies for increasing it.
Understanding the growth equation and driving every part of the equation was one of the biggest reasons Facebook achieved crazy numbers like 1 billion active users.
3 Keys to Driving Growth
Now that you understand the basic growth equation, you can see driving revenue may not be as simple as choosing acquisition or retention.
At any given point in time, a small business owner needs to understand what the opportunity is for each part of the equation, then prioritize the area that has the most leverage.
Here are three keys for driving growth – They should hopefully help you to maximize revenue, while costing the least, which is your ultimate goal:
1. Retention is usually cheaper and it’s the lower hanging fruit.
For a lot of small business owners, budgets are tight, as is time. As a result, you need to prioritize the cheapest source of growth, and the one that requires the least amount of time to execute.
As a general rule, getting regular customers to return, and winning back lost customers is cheaper than acquiring new customers. Why? Marketing is often about targeting a certain set of customers with a message or offer and trying to get them to respond.
Inevitably, customers who are already familiar with your business, and presumably have a positive impression of you are easier to convert than new customers who don’t know you are.
Also, when it comes to marketing, you usually have to pay to reach potential customers with your message, and that often means paying someone or something (like an advertising or social network or publication) to access and target those people.
On the other hand, you usually have a current customer database (list of email addresses or phone numbers) you own, and continue to build up. This allows you to easily reach your target audience. The cost to reach this audience is also usually very low (with the use of customer loyalty programs, email marketing, social media marketing, etc.) relative to any advertising channel for new customers.
2. If you want to grow, you’ll have to acquire.
Even though it’s cheaper to retain and win back customers than it is to acquire new customers, you’ll have to get new customers to have customers to retain in the future. After all, the eligible population of customers to retain is simply the sum of customers you’ve acquired over time.
Moreover, the faster you want to grow, the more new customers you’ll have to acquire. Usually the fastest growing companies acquire a ton of customers. This is probably why so many new businesses focus on acquisition first.
3. Acquisition growth gets expensive without solid retention.
One major mistake businesses make is focusing on acquisition when retention isn’t solid. I made this mistake a few times in my career. You end up spend a lot of money on acquisition, but if most of those customers don’t stick around, you have to keep pouring more money into finding new customers.
Given these three keys and the growth equation, you see that acquisition and retention should not be considered binary choices. They are in fact synergistic, symbiotic, and mutually reinforcing parts of growth.
Without acquisition, you won’t have customers to retain, and your acquisition costs may spiral out of control. Without solid retention, you’ll probably waste money on acquisition and miss out on the lowest cost driver of growth.
So… Which One Should You Choose?
Despite everything I’ve written, I imagine you still want me to choose a side, right?
Inevitably one part of the growth equation will need to be prioritized in a world where time and resources are limited. When that’s the case, you have to return to your overall goals, and decide what’s the best choice at this point in time for your business.
There was a point in time at Facebook when I was trying to grow advertising revenue. We realized we couldn’t grow without fixing our retention problem, so we focused on that first. After we had solid retention, we knew our aggressive goals required investment in acquisition, so we turned back on the acquisition engine.
In order to build a great business, you’ll have to do both acquisition and retention well. Good luck! Care to share your own thoughts on acquisition vs. retention? What is your current business focus, and why?
Awesome Article ! I think the key to this argument is understanding both are needed. Focus should be placed on CLV and retention first in order to minimize cost and be hyper focussed during the acquisition period. Thanks!