Businesses invest heavily in customer acquisition and retention strategies to gain new customers and achieve stable financial growth.
However, which is more important: customer acquisition or customer retention? This question is unjustifiable, as both are equally important to the growth and viability of an enterprise.
Moreover, many companies spend more time and resources acquiring customers and are unaware of the importance of Retention. Retention provides a better ROI for specific businesses and is profitable.
What marketing features should companies focus on? Let's discuss them in detail.
What does customer acquisition mean?
Customer acquisition is how you promote your business and design conversion experiences to compel prospective customers to purchase a product/service or download an application.
This process can involve many steps, from a prospective customer being utterly unaware of your product to choosing your product over your competitors and deciding to buy.
What is the Purpose of Customer Acquisition?
The main objective of acquiring new customers for any business is to increase sales, which in turn enhances ROI.
What are the Three Parts of Customer Acquisition?
A successful customer acquisition strategy consists of the following three parts:
- Magnetize leads
- Nurture those leads until they become sales-oriented
- Convert nurtured leads into customers
SEMRush's general statistics show that online display advertising is the most effective platform for acquiring new customers, yet only 4% of marketing professionals use it for customer retention.
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What are the Advantages of Acquisition?
Businesses can expect the following benefits from customer acquisition services:
Grow your business: If your business gets new clients, it can develop fresh products based on their suggestions.
It is because they compare your product with competitors, and come up with important information that will reshape your business.
Expand your business: What will you do if you get multiple new clients at once?
You're growing your business, aren't you? That's one of the significant advantages of acquisition. Once the company grows, sales and profits will increase.
It helps maintain a business: Sometimes, companies don't retain their clients.
In such cases, they end up making profits and start seeing a downfall. To overcome these situations, businesses must begin seeking new clients and try to retain existing ones. That's going to keep them in the marketplace.
The major drawback of acquisition is its very short lifespan.
What are the Top Challenges to Great Customer Acquisition?
Marketers face the following challenges in creating a great acquisition campaign.
- Grabbing the customer's attention
- Creating the first impression with their customers
- Customer acquisition and GDPR
- The increasing cost of CAQ
Why is CAC Important?
CAC (Customer Acquisition Cost) is a key metric for evaluating the effectiveness of your marketing campaign or customer acquisition strategy.
It serves as a key metric for potential customers, helping them measure your business's growth.
However, you need to understand that focusing too much on reducing CPA can be dangerous, as Lifetime Value (LTV) also plays a significant role in increasing efficiency.
In short, CAC is the money a business invests to acquire new clients.
The formula for CAC is the total sales and marketing investment over a specific period divided by the number of new customers during that same period.
The total CAC involves numerous components:
- Your marketing costs
- The cost of your tools
- Your sales costs
- technical costs
- Inventory and creative costs
Reducing your customer acquisition cost indicates you earn enough from each transaction, enhancing both your profit margin and ROI.
Below are some simple strategies you can implement to lower your customer acquisition costs.
How to Optimize Customer Acquisition Cost (CAC)
- Prioritize niche/target audiences
- Retarget customers
- Increase customer retention
- Create compelling content to offer value-added information to customers
- A/B testing and optimizing landing pages
- Increase the sales funnel
What is Meant by Customer Lifetime Value (LTV)?
LTV is generally the revenue you generate from any given client over some period.
LTV can be challenging to understand in a young business without a large volume of historical data. Still, it is definitely a significant factor you can use to improve the effectiveness of your business decision-making.
How Do You Calculate Customer LTV?
There are several techniques to calculate LTV. It involves measuring how long an individual client is expected to remain with your business and how much revenue they will contribute over their subscription.
A straightforward method to calculate LTV is to multiply the average monthly or quarterly revenue a client generates by the average contract duration.
Once you have the CAC and LTV, you can easily calculate the ratio. To do this, divide the LTV by the CAC.
A 3:1 LTV/CAC ratio is a good target, which means you should make 3 times more than what you would invest in acquiring clients.
LTV/CAC ratio below 3 indicates high marketing expenses, and the focus should be on reducing costs.
How to Improve LTV/CAC Ratio?
You should remember the following points to improve LTV: CAC ratio:
- Concentrate on the appropriate channels
- Experiment with your pricing
- Set up the tight sales funnel
Why is there a Greater Emphasis on Acquisition than on Retention?
That's because, without any customers, it's difficult to imagine a company existing. To set up any business, it is necessary to get at least a few customers.
This continuous process helps organizations increase their customer base and get more business opportunities.
Companies spend a lot of money to acquire customers because they believe it is a powerful way to increase revenue.
What Does Customer Retention Mean?
Customer retention, or client retention, is an activity and action businesses take to minimize customer defections.
It is essential to understand that this process begins with a customer's initial contact with the company and continues throughout the entire relationship cycle.
What are the Major Benefits of Customer Retention?
Customer retention is a faster process and costs up to 6 times less than acquisition.
Selling your product to customers with whom you have a strong relationship is the best way to increase revenue, as it avoids the time and money required to attract, educate, and convert new customers.
It is a far better process because here, potential customers will gain more knowledge and the skills needed to improve the value they get from your product.
People who visit your website for the first time will also be in the awareness path of the marketing funnel.
They spend time visiting other websites, comparing prices, and reading reviews before making decisions.
Whereas your present customers are not required to go through all these stages, and know how perfect you are. In short, this activity will increase customer lifetime value (CLV).
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What are Some Customer Retention Strategies?
Feedback collection and customer listening: Survey to gather customer feedback on your brand.
Do you need to find out whether your product met their expectations? Was it expensive? Ask, listen, and improve.
Provide offers: You can customize offers for your customers only if you know them better. Understand their behaviors, interests, and purchase history.
Launch customer loyalty programs: Loyalty programs, including free upgrades, special offers, and access to unreleased samples, will help keep them with your brand.
Where Do You Need to Spend More Money: on Acquisition or Retention?
Almost all companies have limitations on what they spend on marketing. So, it's crucial to know which part leads to success – customer acquisition or customer retention.
Here are some common factors to keep in mind before making this decision:
The acquisition is expensive: Statistics vary by industry, but research shows that acquiring a customer is more costly than retaining one.
When it comes to getting new clients, you are starting from the beginning. They likely don't have any experience with your product and may be hesitant to trust your company.
It takes time and money to attract and convince them to buy your product.
With existing customers, you don't need to deal with such challenges.
Therefore, this is the best response to the question "Why is customer retention cheaper than customer acquisition?"
Retention yields better ROI: According to research, businesses can achieve a profit of up to 95% if Retention grows by 5%.
Increases word-of-mouth publicity: When you deliver quality service to your existing customers and they are satisfied, they can refer your company to others.
Thus, Retention nourishes your acquisition, and it doesn't require a single coin for such publicity.
What are the Similarities of Customer Retention and Acquisition
Customer acquisition and Retention primarily focus on different things, but they share similar working principles in what they aim to achieve.
The ultimate goal of both strategies is to create a powerful customer experience and generate revenue for companies.
Let's have a closer look at the significant similarities between the two strategies:
- A business cannot run without customer acquisition, whereas it becomes unstable without Retention. Acquisition ensures business growth by opening the door to opportunities and expanding the customer base, but Retention is responsible for generating predictable, recurring income.
- Customer retention is all about careful planning related to reaching out to prospects and converting them into hot leads. This requires a better understanding of the market, a unique selling proposition, and the ability to capitalize on solving customer problems. On the other hand, customer retention is about developing a strong strategy to understand customers, their concerns, and how long you can serve them better. This involves analyzing what led them to visit your site and what products you want to show them, etc.
- Customer acquisition yields better results when brands stay in touch with clients through their guarantees, services, and products, while brands can retain clients by living up to the promises they have made in the past.
Conclusion:
Coming back to the question: customer acquisition or customer retention? The key answer to this question depends entirely on the stage your business is in. If yours is a brand-new business, improving brand awareness through customer acquisition is obviously your highest priority. Whereas, if your business is well-established, the risk of losing valuable sales could be higher if you don't invest heavily in retention activities that help grow customer loyalty.
