September 16, 2016
Customer Retention: Acquisition’s New Best Friend
If you’re reading this, chances are your compass points way North. Admit it: You obsess over AARRR metrics (AKA pirate metrics) like CAC (customer acquisition cost), AR (activation rate), and MRR (monthly recurring revenue). You spend your days running a/b tests and other experiments, iterating and reiterating, again and again—all in an attempt to find the best landing page conversion tactics. And in your free time, you scour the web for the next legendary acquisition hack. As a growth-driven marketer, it’s your job to help new users get to that _Aha! _moment—fast. But the truth is, that’s just the beginning of your relationship with the customer. Dave Gerhardt, Director of Marketing at Drift, explains: “Successful marketing is no longer only about the top of the funnel and acquiring customers – it’s about acquiring customers that are going to stick around. Growth without retention isn’t growth after all.”
What is customer retention?
Customer retention is the act of minimizing the number of customers who defect, in order to maximize the number of customers your company retains. That’s right: Your actions either help customers stay committed to your company—or drive them away.
What actions lead to customer retention?
To retain your customers, prioritize these two key actions:
1. Facilitate undeniable customer impact
“Customer retention hinges on the company’s ability to sell the value proposition to end users and develop a process to scalably change their behavior through training and support,” says Venture Capitalist and Redpoint Partner Tom Tunguz. In this statement, Tom is referring to customer impact, which—according to Gallup—is “the single greatest driver in generating growth for B2B companies”. That sounds great. But what exactly is impact? Customer impact refers to the act of facilitating a profound change in your customer’s organization. I’m not talking about having a preference for one platform over another. I’m talking about _transforming the customer’s reality_—and making your product indispensable as a result. In doing so, you will get your customers to use your product in such a way that it becomes habitual.
2. Deliver an unparalleled customer experience
Connectivity is at an all-time high and the number of subscription-based businesses has skyrocketed—causing customer expectations to rise dramatically. As a result, 89% of companies now expect to compete primarily on customer experience, claims Gartner. In this context, satisfying your customers isn’t good enough. To boost retention in 2016, you must outperform your competitors by delivering an unparalleled customer experience.
How does customer retention lead to growth?
Growing your customer base happens in one of two ways: You can either add at least 2 new customers for every 1 customer that you lose (lots of work), or you can regularly add 1 new customer, while maintaining your existing customer base (much less work). Which would you prefer? The truth is, the longer you can keep customers around, the more valuable they are to your business. In fact, even small improvements in your customer retention rate lead to large increases in Customer Lifetime Value (CLV)—causing your overall revenue to skyrocket. “Achieving higher customer lifetime value makes your business a much stronger prospect for the future,” confirms Christopher Ratcliff, former Deputy Editor at Econsultancy. Consider this example: Your customers pay you an average of $52 per month, and most of them stick around for about 12 months. That means their lifetime value is $624. If you could extend their stay by 3 months, you would earn an extra $156 per customer. That may not seem like a lot, but if you have 5,000 customers it’s a $780,000 increase in revenue.
Customer retention facts: True or false?
Do you know the value of customer retention? Test your knowledge below.
Increasing your customer retention rate boosts profits
Increasing customer retention just 5% boosts overall profit by 25%, according to Fred Reichheld, Fellow at Bain & Company and creator of the Net Promoter Score® method. In fact, 80% of your profits come from just 20% of your customer base, according to researchers from the Rotterdam School of Management.
Returning customers are easier to sell to
Customers who have made 2 purchases in the past are 9x more likely to convert than a new customer, according to Adobe.
Customer retention costs more than acquisition
Acquiring a new customer costs 6-7x more than retaining an existing customer, according to a GetSatisfaction infographic. Bestselling Author Seth Godin agrees: “Invest money in customer retention, because it’s a small fraction of the cost of customer acquisition.” “Retention costs far less than acquisition,” confirms Christopher Ratcliff, former Deputy Editor, Econsultancy.
Increasing your customer retention rate boosts referrals
Happy customers are more likely to spread positive word of mouth. And returning customers feel more comfortable giving referrals. These are just two reasons why increasing your customer retention rate will boost the number of referrals you receive. Something you definitely want, because such advocacy can lead to a 10% increase in market share over 2 years, according to McKinsey.
Returning customers spend more than new customers
When making a second purchase, customers spend 3x the original purchase amount, according to Adobe. Over time, this number continues to increase. In fact, on average, 1 returning customer delivers the same revenue as 5 new customers. “Return customers tend to buy more from a company over time,” confirms Fred Reichheld, Fellow at Bain & Company and creator of the Net Promoter Score® method.
Increasing your customer retention rate reduces acquisition costs
A 2% increase in customer retention is equal to a 10% decrease in acquisition costs, according to an article published in the Journal of Relationship Marketing.
You should dedicate your entire budget to customer retention
Investing in customer retention has incredible growth potential—leading some to believe they should spend their entire budget on keeping their current customers happy. This is a mistake. The truth is, some churn is inevitable. That’s why you’ll need to spend some cash on acquiring new customers, too. How much? Only about 14%, according to one Harvard Business Review article. That’s right: The remaining 86% of your budget should be reserved for your customer retention efforts. “Maximum customer profitability occurs when $10 is spent on acquisition and $60 on retention per customer,” the article reports. What customer retention efforts have helped you grow your business? Share your experiences in the comments.