Customer Acquisition vs. Retention Costs: Where Should Your Company Focus?
In the SaaS world, we all know that customer acquisition should be a priority, but what about customer retention? Often, growth through acquisition is front of mind, while we wait around for signs that we really need to focus on retention.
But when it costs five times as much to win a new customer than to keep an existing one, it’s clear that SaaS businesses need to be investing in strategies that create long-term, loyal customers too.
In this post, we’ll dive into the customer acquisition vs. retention debate, exploring the costs and benefits of each, and explain why they’re both vital to growing your business.
What Is Customer Acquisition, and What Are the Costs?
If you’re here, you already know that customer acquisition is the process of gaining new customers, from lead generation and nurturing to deal close or subscription.
Customer acquisition cost (CAC), which refers to how much you spend to win a new customer, aims to put this journey into specific dollar figures. CAC generally includes research, marketing, sales, and product costs. Knowing your CAC is vital for understanding the ROI of your acquisition channels and the real lifetime value (LTV) of your different customers and cohorts.
Calculating Customer Acquisitions Costs
To calculate your CAC, you divide all of your expenses involved in acquisitions within a certain period of time by the number of customers acquired over a given period. Let’s look at a quick example:
If a company spent $36,300 to acquire 200 new customers in one month, their current CAC would be $181.50 ($36,300 ÷ 200 = $181.50 per customer).
What Is Customer Retention, and What Are the Costs?
Next, let’s get into customer retention. Customer retention refers to a company’s ability to retain its customers. The higher your customer retention numbers, the better.
Like anything else related to business health, there will be costs associated with customer retention. However, calculating those costs isn’t as straightforward as calculating customer acquisition because there isn’t a commonly accepted formula. This is one reason why so many companies ultimately underinvest in customer retention.
Calculating Customer Retention Costs
That said, there are some guidelines you can follow to figure out your company’s customer retention cost (CRC). One option is to calculate the cost of your customer success or your support team members divided by the number of customers you have.
A simple example of this is if you pay one customer success manager (CSM) $60,000 per year, and that person is managing 100 accounts. The CRC would be $600. Of course, this can become complex when you have multiple employees working on customer retention, as well as on other areas of the business. Essentially, you have to figure out how to put a dollar amount on the work each of your team members does that’s directly impacting your retention.
Your CRC can also be analyzed alongside your customer retention rate (CRR), which measures the number of customers your company retains over a period of time. Luckily, determining your CRR does use a straightforward formula:
CRR = [(# of total customers at the end of a time period - # of new customers added within a time period) / # of existing customers at the start of a time period] x 100
Customer Acquisition Is Often More Costly Than Customer Retention
You may have done some quick math just now, plugging your company’s numbers into the formulas we shared above for customer acquisition and retention, and discovered that acquisition is more costly than retention.
Many studies have backed this up. One of the main reasons for this significant difference is because consumers will buy repeatedly from brands they trust, and recommend them to their friends and family. More than half of consumers have reported that they spend more on brands they’re loyal to, according to a study done in 2017 by Accenture.
Even more, customer retention has a network effect that paves the way for sustainable growth of a company.
Acquisition vs. Retention Teams: What Are Their Primary Goals?
Acquisition Generates Leads
The main goal of an acquisition team is to generate leads, the lifeblood of any company. These team members may come from sales, marketing, or other departments, and generally work on the top and middle of the buyer’s journey funnel. They grow awareness, build hype, educate potential customers, and more.
Acquisition Focuses on Nurturing Potential Customers
Acquisition team members focus heavily on nurturing potential customers. This process is vital to converting new customers, as well as creating lifelong fans of your brand.
The best way team members can nurture potential customers is by building solid customer relationships. One way they do this is by being intentional with communication, taking detailed notes to engage with each prospect in a unique, personalized way, sharing valuable resources, and asking for feedback. To help your team do all of this, create checkpoints during the customer lifecycle to purposefully engage in some way.
Acquisition Aims to Grow Your Customer Base and Close Sales
Creating repeat customers is the ultimate goal of customer acquisition teams. In order to get to that place, you need to focus on growing your customer base and closing sales.
As mentioned above, closing sales requires in-depth strategy that will be unique to your company, but these strategies typically include relying on content that’s targeted to your potential customers interests. This could include marketing strategy, blogs, email campaigns, and pay-per-click ads, as well as engaging demos and follow-up conversations. .
Retention Grows Customer LTV and Prevents Churn
Customer retention efforts are so impactful because they can keep customer churn at bay and improve your customer lifetime value (LTV). These metrics are usually at the center of customer success or retention team goals.
As a quick refresher, LTV refers to the average revenue that a customer will generate during their lifespan as a customer. And customer churn, simply put, is when customers leave. This can happen for a number of reasons and can be extremely difficult to predict, as well as tricky to fix. Read our blog post to learn how to prevent the top 7 reasons customers usually churn.
Retention Focuses On Customer Satisfaction and Loyalty
In addition, retention efforts rest a lot on customer loyalty and satisfaction after the sale. The phrase, “A happy customer is a loyal customer,” rings especially true here. Unsatisfied customers result in churn, potentially sharing bad reviews about their experience with your brand on the way out.
Satisfied customers, on the other hand, are more likely to make repeat purchases, try out new products, and spread the word to their family and friends about your product (potentially earning lucrative referrals). Additionally, repeat buyers were found to spend 67% more than new customers.
For retention-focused teams, a churn analysis is a go-to tool to diagnose issues at the source and see how different tactics boost satisfaction.
Retention Onboards Your Clients to Value Throughout Their Lifetime
Every company needs their customers to find value in their product, so retention is ultimately about the actions that customer success teams use to get them there. A metric that’s vital to the whole picture is time to value (TTV), or how long it takes your customers to experience value from your product (by their definition, not necessarily yours).
That said, you can define these points of value according to your own observations and customer feedback. For instance, maybe you’ve found that once a customer has built five templates, or added 10 users, they’re more likely to stick around past the one-year mark.
TTV greatly influences churn and retention, and can give your team concrete insights to optimize your onboarding experience. Learn more in our blog about measuring and analyzing TTV to improve onboarding, so your new customers have their “Aha!” moment faster.
Why Companies Often Invest In Customer Acquisition Over Retention
Customer Acquisition Is Often Easier to Calculate
As we touched on previously, it’s much easier to calculate the cost of a marketing campaign (versus the number of conversions it earned) than calculate the ROI of retention strategies and wins. The truth is that it’s tough to determine the value of requesting feedback via survey or the occasional wins you get from upselling a customer during a monthly call.
So naturally, teams may hesitate to invest in what they can’t quantify as easily. But just by reading so far, you’re probably seeing that these costs are worth it and balance out in the end.
Customer Retention Feels Like a Cost Center
Because one of the easier metrics to calculate when it comes to customer retention is the cost of your customer success team members, it can make customer retention seem a lot like a cost center — something you’re paying to have rather than a place where you’re seeing an increase in profits.
However, it’s important to think back to the data we cited earlier. Customer retention is always less expensive than finding new customers altogether. Additionally, paying for a staff of CS team members is also paying for something you can’t automate or find through a digital tool: authentic person-to-person relationships.
Results of Acquisition Efforts Are Often Seen Quicker
It isn’t just easier to see the numbers around acquisition efforts, it’s also faster in most cases. The length of your marketing or sales cycle is how long it takes to calculate the costs and value for acquisition teams. You can have data and insights quickly, especially if your sales cycle is relatively short compared to your long, high-touch onboarding process.
A pro tip to get faster insights about retention and satisfaction is to have a set of specific onboarding metrics you monitor.
Companies Should Be Invested in Both Acquisition and Retention
Balancing resources between your acquisition and retention teams is key to success.
After all, you can’t retain customers that aren’t appearing from sales and marketing efforts. And if you over-invest in acquisition, you’ll lose focus on actually keeping the customers that your sales and marketing teams are bringing in. You’ll lack a strong customer base that will stick with you through market changes and grow with your product or service.
Retention is the only way to grow a customer’s LTV.
Whatever it costs to generate a sale is final once that sale is complete, but retention by your customer success team can lead to a longer customer lifespan as well as upsales into premium memberships or services down the road.
The relationship between acquisition and retention is cyclical and dependent, which means, in order for both teams to be successful, they need to be operating effectively independently and together.
We’ve talked a lot about the differences between acquisition and retention, but it’s important to note that the actual channels both teams use will overlap in many situations. Some standouts include:
- Email marketing
- Social media marketing
- Paid search and ad retargeting
- Search Engine Optimization (SEO)
- Mobile, app, and web push notifications
For the best results, get these two teams sitting at the same table (metaphorical or physical) where they can collaborate, exchange insights, and come up with meaningful solutions. With these team members working together, the customer experience will constantly be improving.
Arrows Gives Customer Success Teams a Better Way to Onboard Customers
At Arrows, we’ve heard from and worked with CS teams for years, and we know customer retention starts with a great onboarding experience. It’s nonnegotiable. That’s why we’ve designed an onboarding platform that makes it easy for teams to personalize their customers’ onboarding plans so they reach value faster and stick around longer. Track your customer’s progress on the clean dashboard, send friendly reminders automatically, and keep your customers moving toward their top goals. Want to see what Arrows can do for your team? Schedule a quick demo now.