Acquiring a new customer is anywhere from 5 to 25 times more expensive than retaining an existing one as per a research done by Frederick Reichheld of Bain & Company.
Why there is such a big difference between the two costs? It is so, because, the barrier to entry is much higher in the sales funnel. New customers don’t buy from you easily since they don’t trust you, yet. But, as a prospect flows through the funnel, that trust can strengthen. And once they become a customer, the trust will be the glue that can keep them as a customer, influencing their decision to buy, or not buy, from you again. Moreover, customers serve as vital social proof that can help create trust among new leads and prospects.
Mathematical calculation of acquisition cost
Acquiring new customers is important to business growth—but it has a high price tag. When you are working on new acquisition, you might engage in one or more of these tactics – outbound, or traditional, marketing (including advertisement, direct mail, cold calling, etc.); inbound marketing (blog content, SEO, social media); sales and business development; event marketing or something like that.
If you take your entire cost of sales and marketing over a given period and divide it by the number of customers that you acquired in that period, you get the average customer acquisition cost (CAC).
If your CAC adds up to a big number and if it exceeds the lifetime value of your customer, you have some trouble in hand.
Retention can help out
Retention, specifically low churn rates, and recurring revenue can increase the lifetime value of your customer and balance out the CAC. That’s why retention can dramatically impact profit. Studies by Bain & Company, along with Earl Sasser of the Harvard Business School, have measured that even a 5 percent increase in customer retention can lead to an increase in profits somewhere between 25 and 95 percent.
But, here are some more reasons why you need to give your attention to retention strategy:
- Existing customers will be more willing to try your new product when compared to new prospects.
- The probability of selling to an existing customer is 60 – 70%, while the probability of selling to a new prospect is just 5-20%.
- Customers will advocate for your company, shouting from the mountain tops about their trust in your products, which influences new prospects decisions.