If you’re someone who has experience with trying to grow a business, you’re no stranger to the challenges of acquiring new customers and the pain caused by the loss of the customers you had on board.
In the early and intermediate stages, businesses are bound to grapple with resource constraints, necessitating a prioritization of which areas to invest in. The careful selection of where to allocate financial resources can mean the difference between achieving rapid expansion or the demise of your business. And we definitely don’t want that!
What should you focus your time, energy, and capital on – acquiring new customers or retaining existing ones?
Are you wondering which offers your business a better return on investment (ROI), particularly when you can’t pour resources into both? We’ve got all the bases covered.
In this article, we’ll empower you to make the right decision by discussing all things customer acquisition and retention. Which metrics should you be tracking against either, and what do they mean for your business growth? Stay tuned to learn which is a better focus in turbulent times.
Aren’t Both Customer Acquisition and Customer Retention Important?
Absolutely! This isn’t a question of which is useful to your business and which isn’t. Both are critical to the long-term success of your enterprise.
A low customer acquisition score indicates that your business is stagnant or shrinking. Whereas, a poor retention score signals that all your sales and marketing efforts are being wasted, making scaling up your business an impossibility. Having said that, if you find yourself in the rocky boat of having to allocate resources to one over the other, weighing their pros and cons separately becomes an important consideration.
Let’s start at the beginning, by defining both these aspects clearly and listing all the relevant KPIs associated with either of them.
What is Customer Acquisition?
Customer acquisition refers to the process of getting new customers onboard and entering a transactional relationship with your business. This responsibility is managed, primarily, by the marketing and sales departments that make sure your target audience is informed, engaged, and convinced about the value of the product/service you offer.
What is Customer Retention?
Customer retention refers to every effort that goes into ensuring your existing users are happy, properly serviced, and convinced to maintain a relationship with your business. Customer success and support departments are tasked to ensure this active relationship stage of the subscription journey is smooth and pleasurable.
Now that we’ve cleared the fundamentals of what we’re dealing with, let’s get into some key KPIs associated with customer acquisition and retention.
Key Metrics to Track for Customer Acquisition
The following KPIs are typically tracked by SaaS companies, including SMEs and large enterprises, to quantify customer acquisition.
Customer Acquisition Cost (CAC)
The CAC metric measures the cost associated with acquiring a new customer.
It is calculated by dividing the total cost of your marketing efforts, in a specific period of time, by the number of new customers acquired relative to that time frame.
The customer count KPI refers to the number of unique customers that onboard with your business within a specific period of time.
Tracking this metric allows you to monitor changes in the size of your customer base over time. This is a key indicator of how successful your customer acquisition and retention efforts have been.
The close rate KPI refers to the percentage of sales interactions with potential leads that are successfully converted into a sale.
Simply put, this is the success rate of your sales interactions with potential customers who booked a demo or signed up for a free trial.
The conversion rate metric, sometimes confused with close rate, measures the percentage of website visitors or leads that convert into customers.
It is calculated by dividing the number of deals you close by the total number of website visitors or potential leads.
As the name implies, the time-to-conversion metric measures the length of time it takes for a lead to become a paying customer.
Return On Investment (ROI)
The ROI metric measures the return on the investment made in marketing efforts, compared with the revenue generated as a result.
Key Metrics to Track for Customer Retention
The following are some key metrics that are typically tracked to quantify customer retention:
Retention rate is a metric that measures the percentage of customers who continue to use a company’s product or service over a specific period of time, which may be a month or a year.
The retention rate is calculated by dividing the number of customers at the end of the period, by the number of customers at the beginning of the same period, and then multiplying by 100 to get a percentage value.
To illustrate, if a company had 2000 customers at the beginning of the year and only 1500 at the end of the year, the retention rate would be 75% ((1500/2000) x 100).
Churn rate is a metric that measures the number of customers that stop using a company’s product or service over a specific period of time.
The churn rate is usually calculated as the percentage of customers who have discontinued their subscriptions, or canceled their accounts during a particular time period, which may be a month or a year, depending on your business’s unique needs.
Customer Lifetime Value (LTV)
The customer LTV metric measures the total value that a customer is expected to bring to your business over the course of their relationship with your company.
To illustrate, you might have heavy onboarding traffic, but if a lot of these customers fail to renew their subscriptions, the LTV of your customer base is low. Implying that the heavy intake of customers is not being translated into revenue for your business. A big no-no!
Darryl Hicks and Karen Webster, both CEOs in the payment space, performed a benchmarking study on recovering failed payments and the LTV of your customers. In this study, they found a lack of focus on and standardization of this key metric. They found that only 58% of the companies under study were actually tracking it, and there was a correlation between its tracking and revenue growth.
Together they proposed a standard formula to calculate net LTV, at the SubscriptionShow 2022, which is as follows:
Net LTV = (billing cycles × order value – cost of goods sold) – acquisition cost
Customer Acquisition vs Customer Retention
Let’s let the two battle it out for supremacy by exploring the two scenarios, where one is prioritized over the other:
Scenario #1: When Customer Acquisition is Prioritized over Customer Retention
Prioritizing customer acquisition by investing a lion’s share in your sales and marketing efforts can easily jack up your customer count. This is a great indicator of business growth that may easily lure venture capitalists and enable lucrative referrals and partnerships to further boost growth.
The number of people willing to pay for your product/service growing in a big way– sounds like a no-brainer win!
But there’s a catch: this strategy works best for businesses utilizing up-front payment-based models. A decreasing number of businesses nowadays generate the bulk of their revenue from one-off payments. In recent years, the subscription economy has snowballed in popularity, with no sign of slowing down.
Let’s explore what lopsided prioritization of customer acquisition could look like for a business utilizing this model.
Without paying due attention to customer retention, it might as well be all for nothing. Your subscriber will utilize a free trial, maybe stick around for one billing cycle and then discontinue using your product/service. In this scenario, your Customer Acquisition Cost (CAC) is high as you funnel capital into marketing and sales, but your customer leaves before you can breakeven the costs – let alone make a profit.
In a nutshell, without good retention, a high CAC means you’re burning resources that have a very low ROI. For startups and SMEs, it is vital to not lose sight of this drawback to a lopsided focus on customer acquisition. After all, growth for the sake of growth, that’s the mentality of a cancer cell! Sustainability is key!
Scenario #2: When Customer Retention is Prioritized over Customer Acquisition
The subscription economy is expected to reach a market value of $904.2 billion by 2026, with more and more businesses transitioning their sales operation into the subscription-based model.
In the past, customers bought software up-front and your business’s bottom line was unaffected by whether they used it or not. With the emergence of the SaaS industry, your software hub’s bottom line heavily depends on your subscriber’s continued use of your product.
When you invest in a smooth customer subscription journey and product growth, your customer LTV goes up. A high customer LTV makes it possible to reduce your business’s churn rate, and prevent the loss of precious revenue. The explosive growth of the subscription model has, therefore, highlighted the importance of tracking the customer LTV metric.
A low churn directly translates into a good ROI when it comes to investment in sales and marketing. Furthermore, customers sticking around means an expansion in your revenue. This is due to the simple fact that retaining customers is easier and less expensive than customer acquisition. A 5% improvement in retention translates into a 25% increase in profits.
To take it another step forward, loyal customer referrals and word-of-mouth advocacy are sure to actually assist customer acquisition in the long run as well.
According to a study, 92% of global consumers trust the referral source over any form of corporate advertising, and the former also costs you nothing. This means we’re looking at a win-win situation on both fronts by focusing on customer retention over acquisition, particularly in the early stages.
In a nutshell, this means prioritizing customer retention creates slower growth initially, but that of a highly sustainable nature, enabling exponential growth after a certain period of time has elapsed.
How to Improve Customer Retention?
This is a loaded question, but there are definitely some actionable steps you can take to improve the LTV of your customers. Here’s a handy list:
- Developing your product through data-driven insights and machine learning, so your customers don’t switch to competitors due to technical limitations.
- Providing excellent customer support through the incorporation of AI to increase customer loyalty.
- Offering personalized promotions and incentives, such as programming artificial serendipity into their subscription journey. 80% of consumers are more likely to purchase when businesses provide a personalized experience!
- Implementing loyalty programs that reward your customer base who sticks around.
- Upselling and cross-selling can facilitate revenue expansion from existing customers, without entailing the expense of bringing in new clientele.
- Soliciting and acting on customer feedback to address their pain points and prevent churn.
The right choice of pricing plan may help too, as offering a freemium can help you onboard customers who already know what they stand to gain from upgrading to a premium. This is a customer that is more likely to stick around than one who disappears at the end of a free trial. Freemiums do, however, come with their own complications, so tread with care.
The Bottom Line
To summarize a complex discussion, your business will always need both acquisition and retention to bloom into its full potential. However, neglecting customer retention is a mistake many businesses end up making, which causes heavy and expensive complications, impeding the growth of your business.
When choosing which to focus on between customer acquisition and retention, the former is a riskier priority to have, especially for a subscription enterprise such as a SaaS business.
The growth achieved through a heavy focus on acquisition is fast but hard to scale, and much more expensive, implying a low ROI.
Alternatively, a focus on customer retention enables slow but sustainable growth, with a high ROI. So much so, that an improved customer LTV itself boosts customer acquisition in the long run through word-of-mouth referrals. The inverse, however, is not necessarily true.
Now that you know everything you need to know about customer acquisition and retention, you can pick a strategy that works best for your business niche.