All growth is not created equal. And growth, as you know, can eat cash. So what’s the most cost-effective and efficient way for your company to grow?
The two most obvious choices are 1) to acquire new customers, and 2) to encourage existing customers to spend more frequently. The challenge lies in determining the proper balance between the two.
Conventional wisdom holds that companies should spend a larger percentage of their marketing budgets on attracting new customers than on tending to existing ones, but I’m not convinced. Increasing the sheer number of customers doesn’t necessarily result in sustainable revenue growth. In many cases, customer acquisition is not the most cost-effective way to spend your budget. Let’s explore why.
Research from Forrester and Adobe shows that, on a dollar-for-dollar basis, the greatest impact to your business comes from existing customers who have already spent money with your company. Because they are familiar with your company and have completed the buying cycle at least once, the cost to get them to return is substantially lower than it is to draw in a new customer. The Pareto Principle, when applied to business, says that 80 percent of profits come from just 20 percent of customers. Real growth is not just about increasing the number of customers you have. It comes from cultivating deeper relationships with that critical 20 percent.
Say a business currently pays $10,000 to acquire 100 new customers each month, but it loses 75 customers to competitors in that same period of time. That’s a net of 25 new customers monthly.
If the same business redistributed its budget and spent $7,500 dollars on new customer acquisition and $2,500 on retaining their existing customers, what would the result be? Devoting less money to acquisition might bring in only 75 new customers each month, but the money spent on retention could reduce customer attrition. Maybe the business would now lose 25 customers per month. The end result would be a net of 50 new customers per month versus 25. It’s easy to see which is better for generating growth.
Think of your company like a garden. If you spend a lot of time and effort on a small plot of flowers, they grow bigger and brighter. A few healthy flowers spread, and soon enough you have a rich and vibrant garden. If you spend all of your time planting new flowers to expand the size of the garden, the older flowers will die because you’re not taking care of them properly. One happy customer is not only more likely to return, but when they express their positive experience with your company to their friends, they drive additional business back to you. By investing in your existing customers, your business as a whole grows.
It’s easy to get sucked into the allure of “new.” New things are shiny and exciting, but if you don’t give them attention, their shine quickly fades. It might be helpful to think of the familiar Girl Scouts song: “Make new friends, but keep the old. One is silver and the other’s gold.”