Customer acquisition and customer retention are two terms that are used mainly to help determine the effectiveness of an organisations marketing efforts. However, both terms have different meanings, customer acquisition is all about gaining new customers and introducing more people to your brand, whereas customer retention is about preventing your existing customers from slipping through your fingers.
There is a significant difference in the costs associated with the two terms, and each one is important to track since they can show shifts in the market or problems with your current marketing plan.
Let’s have a look at the costs associated with each and how you can go about calculating them…
Customer Acquisition
Customer acquisition involves looking at how much it costs to acquire a new customer. In order to work out this cost, you need to divide all expenses dedicated to acquisition by the number of new customers acquired over the same time period. Having high customer acquisition costs can be a sign of a demographic shift or ineffective marketing.
But what are the costs involved in customer acquisition? They can include things like marketing promotions such as discounts, labour and any advertising targeted at non-existing customers.
Customer Retention
Customer retention costs are those that are involved in keeping your existing customers coming back to shop with you again and again and preventing them from slipping through your fingers.
Calculating retention costs isn’t quite as easy as it is with acquisition, but they can be calculated by dividing the total costs involved in your retention marketing efforts by the number of retained customers. High retention costs will lead to lower margins and reduced profits since each subsequent purchase will actually be worth less overall.
So, What’s the Cost Difference?
Well, it actually costs anywhere from 5 to 25 time more to acquire new customers than it does to retain your existing ones. Therefore, the first rule of any business is to retain customers and build a loyal relationship with them and therefore avoid having to spend so much on customer acquisition.
However, all businesses need to balance the two. Customer acquisition is important to draw in new consumers and expand the base. Retention is far less costly and brings benefits such as good customer lifetime value and brand loyalty. It’s important to calculate both retention and acquisition costs as poor ratios in either area are strong indicators that more research is necessary to see what is changing in the market or what is happening within the business.
Not only that, customer retention actually has the potential to bring in more profit than acquisition. In fact, research has shown that a 5% increase in customer retention can lead to an increase in profits of between 25% and 95%. There is also a higher chance that your customer retention efforts will prove successful since your customers already have a demonstrated interest in your products or services. Studies have proven this by showing that the probability of converting existing customers is 60-70%, whereas the likelihood of converting a new prospect is only 5-20%.
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Propello provides a suite of reward-based marketing tools designed to increase your customer retention and acquisition in a cost-effective way. If you’re interested in finding out more about how Propello can benefit your business, contact us at sales@propellocloud.com or call 0333 202 88 33.
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