Haven’t you heard of acquiring customers is costlier than retaining customers yet? Then while considering customer acquisition cost (CAC) why miss out on customer retention cost (CRC)?
They both are of equal significance and when the matter is to retain your loyal customers to have repeat business with you, this metric needs a bit of attention as well. So let’s bring it!
About customer retention cost
It is the cost spent on retaining the existing customers to continue to make repeat purchases. And if you are wondering what are the costs associated with it? Here they are;
- Customer Marketing
- Professional Services
- Customer Engagement
- Customer Adoption
- Account Management
- Customer Training
- Customer Success Teams
It is the cost spent on the retention of customers by the total active customers.
Customer retention cost (CRC) = Annual cost on customer retention / No of active customers.
Suggested Read: GRR or NRR? Which metrics should you track?
The reason for calculating customer retention cost.
The most important reason is the fact that retaining customers is much easier than acquiring customers and in fact, the latter is most expensive and the former is cost-effective.
Eventually driving business, increasing profits, and reducing churn is the point of making business. When it is about SaaS business, surviving with customers for a long time can be most effective by retaining.
It defines the following significance of using that metric;
- The cost you invest in retaining the customers helps you decide on the pricing of the services, and discounts.
- In a comparison with the cost it takes to retain the customers vs the return of investment, it gives the true customer lifetime value.
- The higher the cost spent on retention of the customers, the lower are your profits and hence indicates the problem about the product fit in the market.
- Aids in understanding whether any feature of the product needs to be set to a higher price in the subscription to make the customers upgrade.
- And of most value, to know whether you are getting the return of investment that is sustainable.
For a fact that 20% of the customers who contribute to be loyal are the ones who bring 80% of the profits. If the numbers say so, then why not start retaining and working upon the existing customers to reduce churn?
That’s ultimately the reason why you need it!
What is customer acquisition cost (CAC)?
Customer Acquisition Cost is an expense for acquiring new customers in a given period.
CAC = Cumulative costs spent on research, marketing engagements, sales, and costs of the products. / Acquired number of customers.
Customer Retention Cost vs Customer Acquisition Cost (CAC)
Once you calculate both metrics, you realize it makes it easier to analyze the return of investment (ROI. This is important to understand why customer retention is much more reliable.
Customer retention’s main focus is to increase the customer lifetime value which indeed pushes the churn away.
It’s these customer success teams who work on making the customer loyal to your brand by giving them the best customer experience that makes the customers satisfied. In return, they are advocating your brand to many others.
The efforts of retention keep them onboarded to your product for a lifetime to stay intact with the value it yielded. It‘s this metric, “Time to value” which helps you measure how long it took to deliver value to the customer and to be on track to deliver it earlier.
Customer acquisition is generating leads to make a sale and working on the middle or on top of the funnel by teams like marketing and sales to bring awareness, and educate them to try your product.
That follows by nurturing the customers to know your brand. Of course that comes with building relationships, engaging with customers in unique ways, making resources available to them, and seeking feedback.
And finally to close the sales requires the implementation of strategy and targeting them with the right content to get them on demo and then to the sales.
In a study of the behavior of the customers, it is shown that “Loyal customers spend 67% more than new customers”. Loyal customers refer to the existing customers.
Also, 50% of the existing customers have an affinity to try out new products and spend around 31% more than the newly arrived customers.
And hence that draws a conclusion where 82% of companies have the same opinion that customer acquisition is costlier than retention.
Why is analyzing customer retention not easy?
For the reason that the customer acquisition is much easier to calculate than considering the reliable things contributing to the cost of customer retention, it has become a go-to option as the acquisition can be quantized.
Secondly, since customer retention cost takes into account the cost of customer success teams, it seems like an expensive choice. But that overlooks the fact that investment in CS increases the profits. And crucial when digital solutions can’t automate customer relationships.
Thirdly, the results expected from the acquisition are seen pretty faster than retention and can be pointed out that customer acquisition is more like periodic effort and customer retention is a lifetime effort.
But to conclude this debate, customer retention is just not easy to analyze for the reasons mentioned, but it is cheaper!
Should customer retention costs reduce over the lifetime?
The customers at this point are loyal and are aware of how trustworthy your product is for them and eventually the cost needed to retain customers would decrease but reducing it is equivalent to compromising on customer experience.
You’d never want to let that happen. Rather it is better to optimize the customer retention cost than reduce it. So that you continue to deliver an excellent customer experience throughout their lifetime, with constant updates in the product with new features.
So say no to decreasing customer retention cost and optimize it better!
Ways to optimize customer retention cost
The point is to retain customers and increase repeat purchases without losing any of them. Retaining the customer is like retaining the revenue and not just for a month but a lifetime of the customer with your product. To optimize customer retention cost, you need to focus on the Product, Experience, and Approach!
It has to improve with the needs of the customer and hence receiving feedback on the product and the service from customers is just the first way to optimize it.
Delivering early value in the onboarding process, making them available to training resources in unique ways possible – like playbooks, automating certain processes to be time-efficient can lay out a great experience but it all comes with a great customer success software or a tool to be best utilized by the customer success teams.
The product management and the customer success team together can collaborate to make a customer-centric product that engages the customer and which can make the retention process way easier!
Getting to the point!
There is no way without acquiring customers, a customer success team can retain customers. Similarly, if you keep investing in acquiring new customers, you lose attention on the existing ones. So, there must be a balance between both!
To increase the recurring revenue and expand, increasing lifetime value, retaining is the only way. To increase the customer experience, both teams are interdependent. And hence both the teams must collaborate to get to this point together!
To reduce onboarding by 50%, to get 130% MRR retention, and to drive the best customer experience, you’d need CustomerSuccessBox. Why not try us?!