Customer Retention vs. Customer Acquisition: Why Loyal Customers Pack More Value
I’ve lived through a few service experiences that made me say “see ya never!”. And I’ve heard this same mantra preached by so many. I’ve listened to relatives exclaim what airlines they’ll never fly with again. I’ve heard colleagues talk about the call center that put them on hold for one hour too long. And to this day, there’s still a pharmacy my fiance refuses to visit because of one (yes, one!) bad service interaction.
It’s easier than ever for your customers to jump to competitors when they aren’t happy with their experience. And it’s also more expensive.
Turns out, companies in the U.S. lose $1.6 trillion from poor customer service. With that amount of money, you could pocket 93% of all the cash circulating the U.S. Or, you could buy everyone in Chicago their own starter home, with money in your pocket left over to put a new Lamborghini in each person’s garage.
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We know that bad customer service costs companies business and hampers budgets. But, do we understand the flip side? Do we really know the impact of investing in customer service and doing more to keep customers?
Turns out, hanging on to loyal customers costs far less than acquiring new customers. And, the recurring revenue that comes from your existing, loyal customers is predictable. The more predictable your revenue, the more valuable it becomes.
When you have an expected stream of cash flowing into your business, you don’t have to scramble to cover the costs of doing business. Instead, you can amplify the value of your company by adding new customers on top of it.
To give you a clear view of the value of loyal customers, let’s run a cost analysis on the difference between customer retention vs. acquisition.
Comparing the Costs and Profits of Customer Acquisition vs. Retention
1. It’s anywhere from five to 25x cheaper to retain an existing customer than it is to acquire a new one. (Harvard Business Review)
Example:
If you spend $5,000 to snag a new customer, you’ll only spend between $200 – $1000 to keep a current one.
2. A 5% increase in customer retention increases company profits from 25 to 95%. (Bain & Company)
Example:
If you’re raking in company profits of $20 million and you improve churn by only 5%, your profits will jump to $25 – $39 million.
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3. Repeat customers convert at a 60 to 70% rate compared to new prospects, who fall in the 5 to 20% zone. (Marketing Metrics)
Example:
Out of a pool of 1000 current customers, 600 or 700 will buy from your company again. But, out of a pool of 1000 new customers, only 50 to 200 will buy from you again.
4. Your existing customers are 50% more likely to try new products and services your company releases, and they’re willing to spend 31% more compared to your new customers. (Invesp)
Example:
For every $500 your current customers spend on new products and services from your company, there’s half the chance that your new customers will spend just $345 on those same offerings.
5. It costs 16x more to nurture a new customer to the same level of revenue contribution as your existing, loyal customers. (Francis Buttle)
Example:
Let’s say every year you spend $300 per existing customer to keep your happiest customers coming back. To bring your new customers up to par with the same purchase power as those loyal customers, you’d spend $4,800 per new customer.
[Learn More] Help your customers faster (and better) with Sharpen to improve loyalty
6. Your average, repeat customer will spend 67% more during months 31-36 of their relationship with your company than a new customer will in their first six months. (Bain & Company)
Example:
A loyal customer is willing to spend $5,000 with your company. Comparatively, when you acquired that new customer, they were only willing to spend $1,650 in the first two quarters they spent with your company.
7. You can increase the value of your company by 30% with only a 10% increase in customer retention levels. (Salesforce)
Example:
Your company leaders work tirelessly for years with a goal to reach a $90 million valuation. Your friend Larry, the VP of Sales, chases deals day and night to make it happen. But you’re still sitting at a value of $70 million. You, being the leader keenly focused on customer service, jump in to help. You shift focus back to your customers and increase customer retention by 10%. Suddenly, that $70 million value jumps up 30 percent and you surpass your goal. Now, you’re sitting tall with a $91 million value.
Investing in customer acquisition is important, sure, but the impact of improved customer retention efforts proves even bigger to your bottom line.
[Download Now] Grow your bottom line with data-backed customer experience strategies that keep customers
We originally published this post on February 6, 2019, and we updated it for new insight on April 8, 2021.