Differences between customer acquisition vs. retention
By Laura Ojeda Melchor|5 min read|Updated Oct 21, 2024
Customer acquisition vs. customer retention: which is more important?
They’re both important, of course, but marketing experts tend to place more importance on retention. Customer retention has a higher return on investment (ROI), and customer retention management is generally seen as easier than customer acquisition.
A 2014 piece by the Harvard Business Review showed it’s five to 25 times more expensive to land a new customer than it is to keep an existing one happy. But you can’t retain customers you don’t have.
When it comes to customer acquisition vs. retention, one isn’t more important than the other. What is important is understanding both of these concepts and knowing when to focus on which one.
In this post, we’ll compare the costs of both and help you figure out how to balance these two core components of marketing.
What is customer acquisition?
Customer acquisition is the process of attracting and converting new customers to your business.
There are three main steps to this process:
Reach potential buyers: Use advertising, content marketing, social media campaigns, and SEO to reach your target audience.
Engage target audience with your brand: Nurture interest with more targeted efforts, like email marketing and personalized offers.
Encourage a first purchase: Convert leads into customers through strong calls-to-action (CTAs), great pricing, or strong value propositions—or all three!
The goal of customer acquisition is twofold. First, you want to increase your customer base. Second, you want to drive immediate revenue. Businesses can only run if they have paying customers, after all.
Customer acquisition is literally the bread and butter of startups. Without customers, businesses fail.
But it's still important for most businesses even after they've gained enough customers to stay profitable. Growth, even if it's slow and steady, is crucial if you want your business to enjoy a long and healthy life.
Why? Because the market is always evolving and changing. Think about how different buying and selling items is now vs. 20, 10, or even 5 years ago.
In 2011, only 35% of U.S. adults said they owned a smartphone, according to research conducted by Pew Research Center.
By 2014, the number rose to 58%. But most of us used dollar bills, credit cards, and even checks to pay for groceries, gas, and other essentials. Even though Apple Pay came out in 2014, iPhone users didn’t all sprint to checkout stands with their contactless payment method. Retailers in the U.S. really weren’t ready to take payments from a smartphone.
In 2023, Pew’s research reported that 90% of American adults own a smartphone. By 2024, most gas stations, home improvement stores, and grocery chains throughout the country supported contactless mobile payments.
That’s a lot of change in just over a decade. The only way to keep your business strong is to keep up with this evolution.
That said, customer acquisition does cost more than retention. You can measure how well your acquisition efforts are working through the customer acquisition cost (CAC) metric. To calculate CAC, just divide marketing, sales, and advertising costs by the number of new customers gained during a set period.
The resulting number is your CAC. A lower CAC indicates efficient acquisition efforts, while a high CAC might mean your business could use some strategy adjustments.
For a deep dive, check out our guide to customer acquisition.
What is customer retention?
Customer retention is all about nurturing long-term relationships with existing customers. It has three core goals: to keep customers happy, encourage them to make repeat purchases, and promote customer loyalty.
So what does it take to achieve these goals?
By forming a strategy that shows your customers how much you care about and value them. This could mean you:
Develop a mission statement centered on empathy and care for all customers (yes, empathy matters in business)
Deliver high-quality products and services that do what you say they do
Resolve customer complaints and bad reviews quickly, reliably, and respectfully—(good customer service is profitable)
Create a loyalty program that rewards customers for repeat purchases with points, discounts, or exclusive offers
Build a referral program to incentivize customers to spread the word about you to their friends and family
Regularly engage with customers on social media and other online communities
Create exclusive offers for repeat customers
Make efforts to guide longtime customers through any big company changes with as much help as possible
The long-term value of customer retention
Customer retention is worthwhile. It leads to higher customer lifetime value (CLV).
CLV is the total revenue you can expect from a single customer over the entire lifetime of your relationship with them.
Imagine you run a meal delivery subscription service. If a customer subscribes for five years, paying $50 per month, their CLV would be $3,000 ($50 x 60 months). This isn't just valuable in terms of revenue. It also means an increase in word-of-mouth referrals, brand advocacy, and upsells on additional products. But if a customer subscribes to your meal delivery service and then cancels after just six months, their CLV would be just $300.
That's a big difference. And there’s more.
When a customer cancels their subscription, the business loses the immediate revenue from that customer and takes on additional costs to replace them.
Acquiring a new customer involves marketing, sales, and advertising expenses. These are represented by your customer acquisition cost (CAC). If your CAC is $100 and a customer with a potential CLV of $3,000 cancels after six months, you lose the remaining CLV and the $100 spent to acquire them. This means you need to invest more time, money, and effort to replace them, which increases costs and reduces overall profitability.
When should you focus on acquisition vs. retention?
Both retention and acquisition are key to the health of your business, but knowing when to focus more on one or the other is important.
Even a highly successful business puts out ads and other marketing efforts.
But there are times when businesses should slow down customer acquisition efforts and ramp up customer retention. The best time for your business depends on a variety of factors, including:
Business stage: If you're a startup or in the early stages, you'll need to focus more on acquisition to grow your customer base. As your business matures, retention becomes more critical to maximize long-term profitability.
Customer churn rate: A high churn rate means customers are leaving quickly. In this case, ramping up retention efforts should be a priority. You may need to address any simmering dissatisfactions to maintain a stable customer base.
Cost of acquisition vs. retention: If your customer acquisition costs (CAC) are outpacing the revenue generated from new customers, it's a sign to shift your focus toward retaining existing customers. Remember, it's more cost-effective to keep customers than replace them.
Market saturation: In a saturated market, acquisition can be more challenging and expensive. This is when businesses should focus on keeping their current customers engaged and loyal.
Product lifecycle: If your product is in a growth or maturation phase, it’s time to focus on retention. Think of the growth phase as an opportunity to extend customer lifetime value (CLV) and encourage repeat purchases or upgrades.
Revenue model: Subscription-based or service businesses thrive on recurring revenue. Because of this, retention is vital to keeping customers subscribed and reducing churn. But if you're in a one-time purchase business, acquisition might take more precedence until you establish a loyal customer base.
There’s no hard-and-fast rule for when to switch from customer acquisition strategy to customer retention efforts.
And it’s always a good idea to keep one pot simmering on the back burner while the other is boiling. In other words, if you’re all-hands-on-deck for retention, keep acquisition simmering on the back burner. And vice versa.
Keeping both your retention and acquisition strategies current makes it easier to switch between the two when you need to.
Attract and retain customers with Tremendous
Tremendous supports customer acquisition and customer retention programs at scale. Chat with our team today to learn how our free incentives platform helps marketers send money and gift cards for customer demos, promos, referrals, and more.
Published October 18, 2024
Updated October 21, 2024
