Customer Acquisition or Customer Retention: Where Should Startups Focus On?
The Startuplab 21st May 2020 86Category: Growth Stories.(0)

Customer Acquisition or Customer Retention: Where Should Startups Focus On?

Every startup understands that customers are the most valuable asset in a business. And if you don’t have customers, you don’t have a business.

But the question is where startups should focus on- an already retained customer (existing customer) or on the acquisition of a new customer.

Customer Acquisition or Customer Retention

Before answering this question, let’s just first talk about what is- customer acquisition, customer retention.

Customer Acquisition

Customer acquisition is just the process of attracting new customers or clients to your business.

It is an important part of any business as it helps to keep the business growing and other parties involved with it happy (employees, investors, etc.).

To acquire customers you have to create an acquisition strategy that is systematic and can develop with new business trends and changes.

A good customer acquisition strategy starts with creating awareness about your product or business, followed by generating interest that influences the prospect to make a decision and lets you acquire him.

This principle is named AIDA- Awareness, Interest, Decision and Action. 

To make the process simple to understand, just look at this customer acquisition funnel.

Customer Acquisition Funnel
Customer Acquisition Funnel

The acquisition funnel helps in visualising the whole sales process of converting a prospect to a buyer.

As a prospect moves through the acquisition funnel (i.e. from a prospect to a buyer), they

  • Get aware about your brand
  • Generate interest and add your product/service to their thinking list
  • Make a decision to buy your product

The customer acquisition process is quite heavy on the financial side as the methods required for creating awareness like advertising and marketing need capital. But by evaluating the customer acquisition cost, businesses can have a clear picture of how much money it requires to bring in x number of customers.

How To Calculate Customer Acquisition Cost

Customer Acquisition Cost (CAC) is the cost required to convert a prospect into a customer.

CAC is important because it shows the actual value of your marketing efforts which you can use to measure your ROI (Return On Investment).

And as Peter Drucker said,

“What gets measured gets managed.” – Peter Drucker

Formula To Calculate Customer Acquisition Cost

CAC = MAC / CA,

where: CAC is the customer acquisition cost

MAC is marketing and advertising costs

CA is customers acquired

For Example: If a company spends $100 on marketing and advertising and it acquires 50 customers, their CAC is $2.00.

Note: CAC is calculated in reference to a specific campaign or time period.

Customer Retention

It is the process of engaging existing customers to keep them consuming your products and services i.e. they continue buying your products and services.

Customer Retention comes into play as soon as you acquire a customer. To know the value of a retained customer, a term called customer retention rate is required.

Customer Retention Rate is the percentage of retained customers relative to the number of customers you had over a timer period.

Formula To Calculate Customer Retention Rate

To calculate the customer retention rate you have to first decide a time period (e.g 3 months, 6 months, 1 year). After that 3 aspects are required,

  1. Customers at the start of a period (S)
  2. Customers at the end of that period (E)
  3. New acquired customers over that period (N)

Customer Retention Rate = ((E-N)/S)*100

For Example: You start with a period of 3 months with 30,000 customers. And over that period you acquire 300 new customers and you have 24,000 customers at the end of the period.

In this case, Customer Retention Rate (CRR)=

(24000-300/30,000)*100= 70%

As you can see, both carry their significance, as every retained customer was once just a prospect. However, when your startup is operating on a low budget, prioritizing activities that bring in the most revenue should be your prime focus. And for that, customer retention is the best option.

Statistics showing why focusing on customer retention is a better option for startups.

  • Boost of just 5% in customer retention can increase your profit by 25%.
  • Existing customers are 60-70% likely to buy your new product whereas chances of the same with a new customer are 5-20%.
  • Existing customers are 50% more likely to try new products when compared to new customers.
  • Existing customers spend 31% more on your products when compared to new customers.

We from our business experience can tell you that it’s cheaper to retain than acquire a customer.

From the above statistics, it is quite clear that retaining existing clients brings in more profit and saves a lot of money too. So, now let’s check out how to retain existing customers.

Strategies to Retain Customers

  • Customers Come First
  • Provide Your Customers With An Excellent Service
  • Understand What Your Customers Need
  • Create Quality Content For Your Customers
  • Reward Your Loyal Customers
  • Ask For Feedback
How to retain customers
Customer Retention Strategies

1. Customers Come First

Have a ‘customers come first’ approach and customers should be your first priority if you want to win their trust and loyalty. Never let profit throw you off from doing the things that are favourable for the customers.

Building a good relationship takes time. So, don’t try to maximise short term profits where you can have a long and healthy relationship.

2. Provide Your Customers With An Excellent Service

There are 3 types of people in this world- you, your customers and those who are not your customers. But the common thing between all of them is that they all want to be treated nicely.

So, provide your customers with excellent service. Surely, the quality of the product is crucial but good customer service provides you with that edge.

And as per a statistic, 96% of customers consider customer service a significant facet in their choice of loyalty towards a  brand.

3. Understand What Your Customers Need

It’s hard to provide customers with what they need if you don’t understand them well.

And to understand your customers well, you have to be watchful at every touchpoint. Once customers recognise that you understand them well and provide them with what you promise, customers not only become your loyal customers but they also recommend your services to others.

And it is to be noted that customers acquired through referrals have a 37% higher retention rate.

4. Create Quality Content For Your Customers

Present age is the age of information where Content is the king. So, to retain your existing customers, tell them about your services by creating relevant content around it.

Educate them about your services, your USP and why they should prefer you over your adversaries.

5. Reward Your Loyal Customers

Everybody loves discounts and offers, but a discount as a reward for your loyalty is something special. So, rewarding your loyal customers is a good way of establishing a long term relationship with them.

6. Ask For Feedback

Ask your customers for feedback as this shows that you care about their opinions and needs. Ask them questions about your products, service, quality, their overall shopping experience with you, etc.

Make changes on the feedback received as this will show your customers that you value their opinion.

Conclusion: Both Customer Retention and Customer Acquisition are important for a business to run successfully. And it’s better to focus on both as ‘Every retained customer was once just a prospect’.

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