What is the True Value of Customer Retention?

Studies show that acquiring a new customer costs a business between four and 10 times more than it takes to retain a customer. This is caused by the amount of effort it takes to find, target and successfully sell a new consumer a product or service when compared to selling something to a customer who has already previously purchased something from a company. Econsultancy reports that 82% of companies they surveyed agreed that customer retention costs less to execute than customer acquisition. However, Econsultancy also found that companies were more focused on acquisition marketing. In addition, 63% of marketers surveyed by Kissmetrics stated that customer acquisition was the most important advertising goal for their company.

Acquiring customers will always be a vital aspect in the growth and continued profitability of any organization. But retaining customers has a major impact on the bottom line due to its relatively low cost, high return on investment and long-term benefits.

When evaluating your acquisition efforts, consider calculating customer acquisition cost (CAC), as detailed by Kissmetrics. This metric is determined by dividing all marketing expenses used to acquire new customers by the number of customers acquired during the period in which the money was spent. This can be used to create a measurable number concerning the acquisition of both new customers and the return business of retained customers in order to see the differences in marketing for your individual brand.

The Value of Retained Customers

Keeping a previously acquired customer has been shown to not only typically cost less in terms of marketing, but has also been shown to result in higher value purchases. According to Invespcro, increasing customer retention rates by 5% can increase profits by 25% to 95%. In addition, the average repeat buyer spends 33% more than a new customer. When combined with lowering the cost of marketing efforts, the higher spending of return customers can result in a greater ROI for a company in the long term.

Retained customers are also shown to gain value over time, as Annexcloud reports that the typical return customer will spend 67% more by their third year of buying from a business than in their first six months. This means that long-term customer retention, not simply enticing a second purchase, will yield results that increase in profitability over time.

As discussed by Optimove, the specific value of a retained customer can be determined by collecting data regarding total purchases, retention marketing expenses, customer acquisition costs and the general overhead of the efforts made to retain customers. Determining the price of your business’ customer retention efforts can help you optimize your retention marketing and balance your budget regarding both acquisition and retention efforts.

The Competition of Lost Customers

It is important to note that a previous customer who does not return for another purchase is most likely to have turned to another company within the industry. According to Kissmetrics, 61% of consumers will go to a competitor after ending a business relationship.

There are a variety of reasons why a consumer may be lost to a business; however, many studies find that poor customer service is a frequent reason. In addition, persuading a lost customer to return to a business is often very difficult. According to Accenture, 68% of customers will not return to a company once they have left out of dissatisfaction. As such, it is vital that companies make an effort to better understand what will encourage their customers to remain with them for future purchases in order to avoid losing them to the competition.

While traditional loyalty programs are having less effect on customer retention, Socialannex surveys show that 62% of customers believe that the brands to which they are most loyal are not doing enough to reward them for their loyalty. As such, brands must rethink what is a valuable reward for loyalty and what can make their audiences feel known and valued so that they give the competition less consideration when it comes time for another purchase.

Targeting Audiences for Retention and Acquisition

While both retaining and acquiring customers benefit a company in their own ways, the ability to provide both audiences with effective marketing is more crucial than ever. Today, technology allows for a greater understanding of individual consumers for targeted marketing and a single customer view. Whether an individual is a longtime customer looking for a new product or a potential customer looking for a company that will best suit their needs, being able to create a single customer view and market directly to the unique interests and demands of an audience member will play a crucial role in future acquisition and retention.

For strategies on how to encourage loyalty and successfully retain your customers, read “How to Build Customer Loyalty in the Digital Age.”