The Power of Customer Retention Over Acquisition

Most marketers focus primairly on acquiring new customers. They are often less concerned about the ‘quality’ of the customers brought in. This is nuts, because research has shown that a 5% increase in customer retention can increase profits by 25% to 95%. The same study found that it costs 6 to 7 times more money to acquire a new customer than to retain an existing one. So if you want to grow faster as a company, your marketers should focus mainly on getting users to return (retention).

For most (online) marketers, bringing in customers is the goal, but this is only the beginning.

Why do satisfied customers accelerate growth?

Well, there are three reasons why satisfied customers deliver more (besides being more fun to work with):

  • Satisfied customers tell their friends about your product
  • Satisfied customers give more constructive feedback
  • And most importantly: satisfied customers stay with your product, they are loyal

Why is the latter so important? If your customers use your product longer, you can earn more from each customer.

Why does retention increase customer value?

Customer Lifetime Value (CLTV) is the total revenue you receive from a customer over the entire period he or she remains a customer. The effect of retention on CLTV is huge. For a company like Netflix, it is easy to see that retention increases the CLTV. The longer you use Netflix, the more you pay in monthly subscription fees. But for companies like Facebook and Dropbox, this reasoning is the same.

The longer you use Facebook, the more ads they show you.

The longer you use Dropbox’s free features, the more likely you are to switch to premium at some point.

The rule of retention applies to almost every business. Satisfied customers stick around longer and people who stick around longer can sell you more (duh…).

This is obvious, but there is more!

Why does retention cause exponential growth?

We know that retention has a direct effect on CLTV, but what makes the effect of retention huge are the indirect effects. Returning customers are the main reason and are thus the direct effect of retention. These direct effects cause a positive effect on what we call the indirect effects. So what are the indirect effects?

  • The higher the CLTV, the more money for better acquisition channels
    We have already talked about this direct effect of retention, but let’s go one step further. If your customers have a higher CLTV, it means you can spend more to acquire them (a higher CAC). So if you couldn’t afford that expensive TV commercial or sales agents before, now you can. You can now take advantage of these new (more expensive) acquisition channels, which bring in even higher-quality customers. These customers have a higher CLTV and the cycle is complete (and exponential).
  • The longer friends of customers stay on board, the more likely they are to invite their friends too
    Satisfied customers are naturally the best ambassadors of your product and will tell their friends about it. But the fact that customers’ friends also stay on board longer only increases this chance. Indeed, the friends of customers who come on board will be even more likely to tell their friends about it afterwards. This is how you create viral growth.
  • Better retention mechanisms reduce payback time
    If you have built higher retention in your business, it also means you can offer more cross-sells and up-sells. This shortens the payback period of your acquisition costs. You are able to put that money back into new channels and bring in customers faster.

How do you increase retention?

There are many ways to increase retention most of them boil down to one simple life lesson: try to make people happy!

Furthermore, increasing onboarding is by far the biggest factor for increasing retention. If you get onboarding right, it has a huge impact on retention. Onboarding is actually a whole set of ideas designed to get your users hooked on your product or service as easily as possible. Most drop-outs happen at the beginning. When it takes too much effort to get to know your product, people quickly leave.

Working to increase retention rates is a great way to increase your growth, something many marketers forget. To be clear, working on retention is also one of those areas where growth clearly differs from growth hacking and traditional (online) marketing. More on that in this blog post.

Key insights

  • Satisfied users are worth much more than users who are okay with your product
  • Retention (keeping customers for a longer time) is the key to success for high-growth companies
    • It increases customer CLTV and customers give more extensive feedback
  • Retention increases virality and allows you to spend more on marketing
    • More money for marketing often also means a shorter payback period, which equals more growth
  • The best way to increase retention is to improve your onboarding
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