Last editedDec 20222 min read
Customer retention vs new customer acquisition: it’s a common conundrum in the sales and marketing sector. If your business has a limited marketing budget, where should you focus your efforts? Here’s a closer look at the pros and cons of customer acquisition vs retention to help you create a more effective – and profitable – strategy.
What is the difference between customer retention vs acquisition?
Customer acquisition refers to the process of attracting new customers and guiding them to an eventual sale. Customer retention refers to the process of keeping those customers over time and encouraging them to make additional purchases.
What is the cost of customer acquisition vs retention?
Both customer acquisition and retention cost money, but which process requires more resources? On paper, acquisition is more expensive. A commonly held belief in business is that it costs five times more to acquire new customers than retain existing ones. The exact figure will depend on your industry and how intensive your lead generation process is. New customers require more enticing than existing ones, however, all of which leads to more money spent on advertising and outreach.
Furthermore, customer retention tends to have a better return on investment than customer acquisition. Although it takes time to build a strong relationship with your customers, this pays off in the form of increased profits. One research study found that increasing retention rates by 5% eventually led to a profit increase of up to 95% in the years to come.
Benefits of customer retention vs new customer acquisition
Customer retention is more cost effective in the long-term, but does it offer any additional benefits? Yes, in the form of free word-of-mouth marketing, positive reviews, and improved engagement. A strong retention strategy will increase a customer’s lifetime value through repeat purchases.
However, don’t discount the value of customer acquisition as well. A business needs new customers to sustain growth. When you’re just starting out, you can’t afford to sit back and rely on your first few customers. You need to get out there and attract new ones across a variety of demographics. Customer acquisition also produces the type of metrics that attract investment. A high volume of new customers is reflected in website visitors, active daily users, and other metrics that show your business is on the rise. In the short term, it’s easier to see results from your sales and marketing outreach.
Customer retention vs new customer acquisition: which is better?
It’s clear that there are benefits to both customer retention and acquisition. No business can thrive without focusing on both areas. You might find in the early days of a start-up, it’s more advantageous to focus on new customer acquisition to spark growth. As your business grows, you’ll want to focus more attention on customer retention to maintain strong relationships with your core base. A business’s needs will change over time.
Your business type and industry will also impact areas of importance. SaaS businesses and subscription models are more retention-focused, while big-box retailers might focus more on acquisition.
How to improve customer retention and reduce churn
The bottom line is that both customer acquisition and customer retention are important. Yet customer retention has a slight edge when it comes to value for money, as it costs more to acquire new customers who might generate less profit.
If you want to take control of customer retention, you need to reduce churn. This means performing a customer retention analysis, asking for consistent feedback, and always finding new ways to improve the customer journey.
Some customer churn is due to technical issues, such as failed payments. These are perhaps the easiest to correct and reduce churn accordingly. GoCardless offers multiple ways to improve customer retention and reduce churn. We offer a Direct Debit solution that only requires customers to input their payment details the first time. Our Success+ intelligent retries tool cuts down on involuntary churn by reducing failed payments. All this stacks up to greater customer satisfaction for both new and existing customers.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.
Improve customer retention by reducing the involuntary churn your business suffers - by setting up automated bank payments, you’ll never lose a customer to lost card details again.