Exploring Customer Acquisition Cost vs Retention Costs
By Bojan Lipovic - April 17, 2019
Amidst the hustle and bustle of steaming ahead to reach sales targets and onboarding new clients, many companies often overlook the low hanging fruit of existing customers. Although getting fresh clients is of paramount importance to any business, keeping existing clients satisfied and subscribed is critical.
Calculating customer acquisition (CAC) and retention (CRC) costs
Both customer acquisition cost and customer retention costs are based on calculable equations that, when applied, will give you figures that might be critical for your future business growth.
CAC = amount of money spent on sales and marketing ÷ number of customers acquired over a given time period.
The amount of money spent should include things such as marketing staff salaries, salespeople commissions and adverting costs. The derivative obtained from the calculation is useful when determining how to best calibrate your investment and make the necessary growth decisions.
CRC = total purchases ÷ period mitigated by retention expenditures, churn, acquisition costs and general overheads.
Calculating retention costs is not easy as a general formula is not commonly accepted by all. The predictable component of the equation is that customer retention directly affects customer lifetime value. High retention costs lower margins and profits since each subsequent purchase is actually worth less overall.
Balancing CAC and CRC
Juggling the CAC and CRC balls can often appear daunting. But, keeping these costs in balance is a must for any business. Also, tracking the ROI for both of these costs is essential when justifying the expenditure and effort directed towards each of these. Poor ratios in either area could indicate that additional research needs to be conducted both internally, within the company, and on a market level.
Three ways of minimising the cost of acquiring
If you are pulling your hair out, unsure how to minimise the cost of acquiring new customers, then these three handy suggestions could be of use to you:
1. Boost your website conversions
There are many methods that you can apply here. From displaying error-free website copy to having all your landing pages optimised, using compelling calls-to-action and making your site format-flexible across all the platforms. Don’t shy away from A/B testing various webpages, to determine which approach works best for them.
2. Modify and enhance your customer acquisition strategy
Look at various approaches here and determine which method is costing more and which less. Since specific channel costs increase over time, sleuthing out new, cheaper channels will lead to lower CAC, as well as keep you up-to-date with the most contemporary marketing trends.
3. Enhance the value of your existing customers
Get your customers excited about investing in new releases and product upgrades. Also, by getting these existing customers to become product or service evangelists for your company, will cause your user value to catapult.
Why is it worth your while to be selling to an existing customer base?
No business can survive in the long run without new customers, although its most predictable revenue source remains current customers. Here are some reasons why you should maintain a focus on these:
As discussed above, it costs up to seven times more to attract a new customer than to keep an existing one.
Room for improvement
Feedback from existing customers is most valuable, especially when you can use it to improve your offering and overall performance.
Better conversion rates
Existing customers are repeat customers and they will likely buy from you again. Your current relationship with them allows you to be familiar with their needs.
Existing customer sales are less price focused. And, since you have established trust with your current customers, it’s much easier to upsell and cross-sell to them.
With current customers, there’s no need to push aggressive marketing at them, since they already know you and the nature of your products or services. This will ultimately reduce your cost of marketing.
Acquisition or retention?
Although being two different costs and approaches, all companies need to pursue both acquisition and retention simultaneously. It is therefore important to quantify what percentage of time and effort is being directed towards acquiring new clients vs retaining existing ones.
Ultimately, in no way should one look at either of these strategies as being more important than the other. They both are critical for business sustainability and careful consideration should be applied regarding when the timing is right for either. The key question is - when will the effort to implement either one of these be the least, to garner the highest return out of it? Getting this right will guarantee long-term continuity and success for your business.