Customer acquisition and retention: Which should you focus on?
Learn more about what the most effective acquisition and retention tactics are today, how you can measure your efforts, and where your time and dollars are best allocated given current market conditions.
While our relationships with the brands we do business with may not be the most sentimental connections in our lives, the fact is they have a major impact on how we spend our money, how we allocate our time, and the safety of our personal information.
Marketers and Product Managers at consumer brands, who at all times are tasked with leveraging a limited budget to drive growth, face a challenge: Do you invest more in creating better relationships with your existing customers or on expanding your customer base by acquiring new customers? Maintaining strong customer relationships is critical, as your existing customers need to be able to trust your brand, but failing to make prospective customers aware of your brand may limit results. Growth teams have been asking this question for a long time (since long before they were called “growth” teams), but the answer has continued to change as regulations and customer preferences have evolved.
In this article, we’ll review what customer acquisition and customer retention look like in 2020, providing effective tactics for each, and then return to the question at hand: Where is your time and money best spent today?
What is customer acquisition?
Customer acquisition is the act of promoting your brand and designing onboarding/conversion experiences in a way that leads prospective customers to make their first conversion. Depending on your business, this initial conversion could be a purchase, subscription, app download, order, etc. The process of acquiring a new customer may take several steps as the prospective customer moves from being blissfully unaware of your brand, to considering your product against other options, to making a decision to buy.
How is customer acquisition measured?
The most common metric used to measure customer acquisition efficiency is Customer Acquisition Costs, commonly referred to as CAC. Typically CAC is calculated by dividing the marketing and sales costs for a particular initiative or time period by the number of new customers that it generated.
The formula that can be used to find CAC is:
CAC = Marketing & Sales costs / Customers acquired
CAC can be used to calculate the effectiveness of a specific campaign, such as a TV ad placement, or of general performance over a given period of time (quarter, fiscal year, etc.). It’s a powerful metric because it reflects both the number of customers acquired as well as the efficiency in which they were acquired.
What are the most effective customer acquisition strategies today?
There are a number of customer acquisition strategies that you can use. Which are right for you will depend on your goals, budget, and the skillset of your team.
Reaching prospective customers through paid ads is an oft-used acquisition strategy. For consumer brands, there are many campaign options available across Facebook & Instagram, Twitter, and TikTok, as well as display ads through programmatic advertising systems. Depending on your strategy, you may be able to use a combination of these channels to reach different audiences, or to market to prospective customers at different points in their buying journey. Using paid media for acquisition often requires leveraging 3rd-party data for targeting, accessed either through the purchase of 3rd-party data or through the proprietary audience of each media system.
Although acquiring users through paid media is a reliable strategy, it can be costly. If your campaign audiences are not optimized, or if you fail to iterate on your messaging, your Cost Per Click (CPC) can skyrocket, ultimately increasing CAC. Furthermore, it’s possible for costs to be impacted by factors outside of your control. For example, if Facebook decides to make a major product update or raise their advertising prices (as they did in 2018), it will have a big impact on your CAC.
Similar to paid media across social platforms and programmatic display, paid search is another great way to acquire new users. Google reports that search ads can boost brand awareness by as much as 80%, making consumers more likely to remember your brand and interact. One of the reasons that paid search is so effective at driving leads to conversion is because it allows you to position your brand in front of prospective customers when they are searching for a specific solution. As your prospective customer moves through the buying journey stages (blissfully unaware, considering, ready to purchase), they’ll often use different search language depending on their stage. By matching your ad messaging to the prospective customer’s journey stage, you’re able to increase the relevancy of your campaigns. Just as with paid media, however, it’s important to constantly monitor your paid search campaigns–certain keywords can become more expensive over time.
If you’re limited on budget, or if you’d like to expand beyond the limitations of paid systems, creating valuable content is an excellent way to acquire customers. Content can come in the form of videos, blogs articles, etc, and can be discovered through Google/Youtube or posted across Twitter, Facebook, and Instagram. Content marketing does not require a significant investment of budget and often produces the highest quality customers–studies have shown that conversion rates are nearly 6x higher for content marketing adopters than non-adopters. That said, creating valuable content takes time. There’s lots of stuff out there on the internet, and creating something that stands out, let alone getting it to rank on page 1 of Google, is challenging. Furthermore, you may not see new customers overnight–content assets often take time to build awareness and deliver results. That said, as you rank for more search keywords and establish authority in your market, the results will begin to compound.
What is customer retention?
While customer acquisition is the act of gaining new customers, customer retention is focused on developing better relationships with your existing customers with the goal of increasing loyalty and driving repeat purchases. Successful customer retention depends on secure data management and delivering contextual messaging that is inline with each customers’ preferences and interests.
How is customer retention measured?
For consumer-facing brands, there are several key metrics that can be used to measure customer retention and loyalty. First, to get a sense of continued engagement, you can track Customer Retention Rate (CRR) and/or Customer Churn Rate (CCR). CRR reveals the percentage of customers that have continued to engage over a specific period of time, and is calculated using the formula:
CRR = [(Customers at end of period - New customers during period) / Customers at the beginning of the period)] x 100
Customer Churn Rate, on the flip side, reveals the percentage of customers that have ceased engaging with your brand in a given period of time. It can be calculated using the formula:
CCR = (Customers lost during a given period / Customers at the beginning of the period) x 100
Measuring customer retention and churn rate is important to assess loyalty. But to truly understand effectiveness, you need to track how customer purchases change over time. Calculating Customer Lifetime Value (CLV) reveals the amount of money that your customers are spending on your products or services throughout their respective customer lifecycles. There are a number of angles you can approach this metric from, but a traditional formula for calculating CLV is:
CLV = Gross margin per customer lifespan x [Customer retention rate over period / (1+ Discount rate over period - Customer retention rate over period)]
What are the most effective customer retention strategies today?
There are a number of prominent retention strategies. The ones that work for you will depend on your digital capabilities, access the customer data, and the dynamics of your business.
Remarketing to your customers across networks such as Facebook, Twitter, and Google Ads can be an excellent way to keep customers engaged. As customers continue to interact with your brand, their engagement data tells the story of their product interests and preferences. Using this data to inform the targeting of your remarketing campaigns allows you to strategically reengage customers with increased efficiency, driving lifetime value. For an example, check out this story on how eCommerce brand GOAT designed a Facebook remarketing program that drove an increase in CLTV.
Email marketing to your customer base in the form of newsletters, exclusive offers, and recommendations is an effective and cost-efficient way to increase customer retention. A 2020 study conducted by McKinsey found that email marketing is up to 40 times more effective at engaging customers than social media. Leveraging customer data to personalize product recommendations, customize email send times, and fill in dynamic fields is a great way to increase the relevancy of your emails. If your brand has a mobile app, leveraging push notifications is another way to share personalized offers and updates.
The best time to re-engage your customers is when they are already using your product or app. Strategically designing 1:1 in-app recommendations based on customer product interests is a seamless way to drive upsells and increased activity. Using advanced Customer Engagement Platforms such as Braze allow you to design visually seamless messages that integrate with the rest of your product experience.
Although a large share of the discussion on retention strategies focuses on marketing activity, assisting your customers when they have a question, concern, or technical issue is equally important. A negative support experience can easily lead a customer to consider your competitors, while a positive support experience can increase the trust that a customer has in your brand. If you have the infrastructure in place to connect customer engagement data with your support system, you can strategically personalize the support experience and win-back at-risk customers.
Should you be focusing more on customer acquisition or retention?
In today’s market, it’s more important to invest in customer retention than acquisition for a couple of reasons.
Restrictions in 3rd-party targeting
Paid advertising for acquisition has become more regulated and less cost-efficient in recent years. With the introduction of GDPR, and CCPA, which both prohibit brands from using a consumer’s data to market to them without consent, cookie-based advertising has become more restricted. This has limited the promise of many paid acquisition channels and has made 3rd-party advertising more expensive. Furthermore, the legislations generally have increased awareness of data privacy amongst consumers, who may now look negatively toward a brand they do not know that is advertising to them. Additionally, walled garden media systems, particularly Facebook, have increased their advertising pricing in recent years, making paid social acquisition a less financially-viable strategy for consumer brands. Given these shifts, studies have shown that acquiring a new customer can now cost five times more than retaining an existing customer.
Customer experience matters
The average consumer’s expectations for the customer experience are higher than ever before. If you don’t focus on retention, you may be at risk of losing your existing customers faster than you can acquire new ones. For consumer brands, this means that it’s important to invest in the tooling required to deliver relevant messaging and keep your customer data secure. If, based on the experiences they receive, a customer feels that they can trust your brand, research suggests 60%-70% more likely to engage with the products that are offered to them. Furthermore, when customers have had a positive experience with your brand, it’s never been easier for them to share your brand with their network. Organic referrals, a secondary benefit of investing in customer retention, can generate new customers at a significantly lower cost than paid acquisition channels.
Where do you start?
Great customer experiences are built with high quality customer data. To deliver relevant messaging to each customer while ensuring your engagements are compliant with each customers’ consent choices, you need access to a scalable, real-time customer data infrastructure.
Customer Data Platforms enable you to collect customer engagement data from across channels (iOS, android, web, OTT, and more), validate the quality and consistency of that data, and make it available across all of the tools and systems you’re using to drive growth. By streamlining your data infrastructure with a CDP, you’re able to gain a better understanding of each user's engagement and activate that information across channels to deliver contextual experiences that increase loyalty and drive CLTV.
To learn more about what a Customer Data Platform is and which type of CDP is right for your team, you can read our Complete Guide to Customer Data Platforms here.