For a small business owner, there’s no better feeling than acquiring a new customer.
There’s a little bit of the thrill of the chase like catching a large fish or achieving a personal goal. You represent your service in the best possible way. You believe in it. And you’re able to sell that service in such a way that attracts a great new customer – a true win-win partnership, if you will.
But finding new customers is different than finding new customers who are profitable.
Offering something for free, for instance, may help you acquire a customer, but will those customers stick around and pay full price later or spend money on your other services? Unfortunately, the statistics say this isn’t likely. Customers lured by these deals typically switch to another better deal when it comes along.
Acquiring a new customer the right way takes work … and dollars.
Frederick Reichheld of Bain & Co. on Business Fast4ward, claims it is six to seven times more costly to acquire a new customer than it is to retain an existing one. His research also points out that by boosting customer retention rates just 5 percent, a company can realize 5 percent to 95 percent more profit.
Acquisition and retention
Yet most companies focus on customer acquisition more than customer retention. In fact, 63 percent of marketers feel new customer acquisition is the most important advertising goal, eMarketer research says.
Focusing on improving current client relationships can also help improve customer lifetime value, or the amount of net profit you receive from each customer. As a general rule, the average customer lifetime value needs to be three to five times the average cost to acquire a customer, says Grant Stanley at Contemporary Analysis.
“Improving customer lifetime value will help you have a sustainable and profitable business,” he says. “To stay in business, the net profit from each customer has to be more than the cost to acquire each customer.”
How impactful can working on retaining customers be overall? In Inc. magazine, Karl Stark and Bill Stewart analyzed one of their business clients that allocates more than 90 percent of its resources – people, marketing budget, etc. – to creating millions of new customers each year. They found the average customer stays for an average of 2.5 years. Because their customer acquisition cost is lower than their expected customer lifetime revenue, they reach a break-even point in less than two years. “So it’s a great business, as long as they keep generating new customers, right? Wrong,” Stark and Stewart say. “The problem is that as the management team’s growth expectations increase, it gets increasingly harder to acquire more customers. As a result, customer acquisition costs go up and the quality of customers, in terms of how long they stick around, goes down.”
The longer the better
In fact, they found that if the business can retain all of its customers by just one additional month on average, they can achieve an additional 3 percent of annual growth. “If they can retain their customer base for four additional months, they can create double-digit growth without adding a single customer,” they add. “Simple math.”
It’s the 80/20 Rule, otherwise known as the Pareto Principle. You can get a stronger return on your marketing dollars and better sales by focusing on 20 percent of your top-tier clients.
In a Forbes survey, answers given by 300 marketing leaders of large companies show the importance of existing loyal customers to the success of a company. Approximately 70 percent say engaged customers make repeat purchases, roughly 68 percent say engaged customers become brand advocates who market on their behalf, 50 percent of engaged customers are willing to pay a premium, and nearly 40 percent of engaged customers are resistant to competitive products and services.
Even more interesting is that if current customers are left unattended over a five-year period, customer attrition rates can quickly rise to 50 percent, reports Ernan Roman Direct Marketing Corp. When acquiring just one new customer can sometimes be a daunting and expensive task, imagine having to replace 50 percent of your customers just to get back to where you were.
It’s best simplified using the old adage, “Make new friends but keep the old.” Not much can replace the investment of time, energy, knowledge and relationships built with current customers.
“In a perfect world, it’s both and everything in between,” says Carde Johnson with Forrester Research. “In the real world, the general marketing rule is that retention is a lot more cost-effective than acquisition.”
Nicole Wisniewski is a 15-year green industry veteran and award-winning journalism and marketing professional. She is currently a senior project manager in The Davey Tree Expert Co.’s marketing/corporate communications department. Visit her blog at http://www.mybiggreenpen.com or reach her at [email protected].