More on Acquisition vs Retention

In the last post, we discussed how it may be a myth that customers cost less to attract than they do to maintain. If true, then the idea that customer retention is x times more valuable than attracting new customers may not be true. Even though we know this, we still use the idea regularly on this website.

That's because the reality is that customer profitability is the most important part of maintaining a good business. You need to develop the best ROI possible for anything your business does. Customer profitability is a complex concept, but for most non-mass purchase companies, it's based a great deal on how long a customer stays with your company.

Or, to put it another way, while yacht dealers probably don't worry too much about repeat business, a lot of businesses profit the more a customer returns. Imagine it costs you only $20 to attract a customer, and $100 to retain them (assuming one time changes to your company – for the purposes of this article), with the company getting $21 back on the first purchase and only $1 on all subsequent purchases. After the first purchase, the company has earned $1 (-20 + 21).

It can stop there with a profit, or it can invest $100 to retain them. If it does, it would be $99 in the hole and only making back $1.00 at a time. This doesn't seem like a good value, because it's not.

In this scenario, it may seem better to just attract new customers. But what if you found out that the $100 investment would have the customer come back 200 times, earning you a net profit of $101 dollars – far more than the $1.00 your company would have profited had it not invested in retention? Suddenly it would seem like a much better idea.

Essentially, the idea is that customer profitability is more important than anything. But for most non-mass purchase companies, profitability is based largely on the ROI of recurring customers, not first purchases. So it's easier to state that retention is more important than customer attraction, because for most businesses it will be.

This may be an oddly convoluted way of explaining this thought. But to summarize – retention isn't necessarily more valuable or more important than customer attraction. A great deal of it depends on what industry you're in, how you price your products, and which customers are coming back.

Certainly any company that operates at a loss for any of its recurring customers could be losing more money on retaining customers than attracting them. But for most businesses, retaining customers is one of the most important factors of customer profitability, and so it makes more sense to keep using the old marketing belief for the purposes of sharing our thoughts on business strategies.