You’ve probably heard the phrase, “It costs more to acquire new customers than it does to retain current customers.”
Seems reasonable enough.
But this phrase is incredibly DANGEROUS especially for startups.
When you want to grow your business you have two options.
First, you ask current customers to buy more of something or to buy something new.
Second, you get a new customer to buy what you already sell.
There is a third option – getting a new customer to buy a new product – but for the context of this post that’s the same as the second option.
The Cheaper Current Customer Flaw
Yes. It does’t cost much to call up a current customer to ask them if they’re interested in one of your new products. You’ve already established a trusting relationship. You’ve done business with them for a while so they’re loyal. They’re usually happy to jump on board.
But you can only go to that well so many times. Established businesses might have tons of customers that they can do this to, but even they run out after while. Startups have it much worse. They have few customers so the well runs dry very quick.
It might be cheaper to sell to current customers, but only if you’re looking at it on the surface.
What About Customer Retention?
No business will succeed if they don’t have a product that people want.
Loyalty and retention are not a sales proposition. They’re part of the quality of the product you offer. Before you start any kind of business you need a product with a certain level of quality.
At GBW, our product is a blog post, but it also includes our brand. Our brand includes how we present ourselves. It’s the reputation we build through our actions. It’s also how we communicate with our customers. That all goes into building the product we sell.
If that product suffers, we lose customers. If we create systems that keep our product good and improving then we’ll retain customers.
So saying that it’s cheaper to retain a customer than it is to acquire a new customer is nonsensical. Retention is a product factor, not sales.
Acquiring New Customers
Here is a new way to look at the cost of acquiring new customers.
Let’s say you spend $100 on advertising and get one customer. That customer pays you $150. If you have a 50% profit margin that new customer would have been worth -$25.
That’s not good business.
But remember, if you have a good customer it’s not about the first sale. It’s about the lifetime value of that customer.
It’s different for every business, but let’s say in our example that this customer buys another product again in 6 months. This time it didn’t take any advertising or marketing. So the cost was $0.
That’s $150 more in revenue and $75 profit. For both sales you’re at $50 profit ($300 – $150 – $100 = $50).
Most businesses would take that to the bank all day long especially if they know that their ideal customer purchases an average of 5 times in the first 2 years of becoming a customer.
Think beyond the first sale of your new customer. Yes, it’s expensive to acquire new customers, but you’ll never grow without new customers. You can only go to the well so many times. You’re leaving money on the table if you focus more on retaining your existing customers than on acquiring new customers.
Retention is part of your product. Obviously a business will focus on having a good product. Without one there is no business.
Take Action
- Find your customers lifetime profit value
- Identify acquisition channels
- Identify the channels that pay back the most and get to work