There’s some prevailing wisdom that the cost of acquiring a new customer can be 4 to 8 times the cost of retaining one. I say prevailing wisdom because I see that statistic often shared but never actually find a resource to go with it. I’m not doubting that keeping a customer is less expensive for an organization, but there are exceptions. In the agency business, for instance, you can often trade up – a client who leaves is replaced by a more profitable one. In this case, keeping a customer could cost your business money over time.
Regardless, most of the calculations are out of date because of the impact of customers on our marketing efforts. Social media, online testimonials, review sites, and search engines provide incredible referral vehicles for new customers. When the companies you are working with are satisfied, they often share that with their network or on other sites. This means that poor retention nowadays will negatively impacting your acquisition strategy!
Acquisition versus Retention Formulae (Annual)
- Customer Attrition Rate = ( Number of Customers that Leave Each Year ) / ( Total Number of Customers )
- Customer Retention Rate = ( Total Number of Customers – Number of Customers that Leave Each Year ) / ( Total Number of Customers )
- Customer Lifetime Value (CLV) = (Total Profits) / ( Customer Attrition Rate )
- Customer Acquisition Cost (CAC) = ( Total Marketing and Sales Budget Including Salaries ) / (Number of Customers Acquired)
- Cost of Attrition = (Customer Lifetime Value) * (Number of Annual Customers Lost)
For folks who have never done these calculations before, let’s look at the impact. Your company has 5,000 customers, loses 500 of them each year, and each pays $99 per month for your service with a profit margin of 15%.
- Customer Attrition Rate = 500 / 5000 = 10%
- Customer Retention Rate = (5000 – 500) / 5000 = 90%
- Customer Lifetime Value = ($99 * 12 * 15% ) / 10% = $1,782.00
If your CAC is $20 per client, that’s a solid return on marketing investment, spending $10k to replace the 500 customers that left. But what if you could increase retention 1% by spending another $5 per customer? That would be $25,000 spent on a retention program. That would increase your CLV from $1,782 to $1,980. Over the lifetime of your 5,000 customers, you’ve just increased your bottom line by almost a million dollars.
In fact, a 5% increase in customer retention rate increases profits by 25% to 95% Tweet This!
Unfortunately, according to the data captured on this infographic from Invesp, 44% of companies have a greater focus on acquisition while only 18% focus on retention Tweet This!. Businesses need to recognize that content and social strategies often provide more value in the way of retention than they do with acquisition.