Customer retention vs customer acquisition. Which is better for business?

They call it the 'Marketer’s Dilemma': should you focus your energies on acquiring new customers, or keeping the ones you've got? For the last 50 years, the vast amount of business resources, including time, capital and recruitment, have gone into the top of the funnel (i.e. attracting new business). Retention has traditionally been thought of as either a given, or a nice-to-have. Big mistake. Which is why there’s been a mental shift over the last 10 years or so, towards an experiential model, where loyal customers are treated as assets, rather than afterthoughts.

So why is the focus moving towards customer experience? And is it really true that keeping your existing customers is much cheaper than attracting new ones? Is there a way to balance the Marketer's Dilemma, and split your resources effectively?

58% of marketers listed their top priority as attracting new customers, compared to 40% who were focussed on customer loyalty and retention

In 2014, Forbes did some research and found that 58% of marketers listed their top priority as attracting new customers, compared to 40% who were focussed on customer loyalty and retention. These numbers have closed over the years, and many companies are now waking up to the benefits of retention marketing, but there’s still good reasons for the investment on acquisition. First, it’s the key to growth. You get bigger by growing your customer base. It’s obvious. Second, it’s fast and measurable. You can see the ROI – hold it in your hand. And customer growth, combined with short-term revenue, looks fantastic on a balance sheet.

The problem, as CX expert Annette Franz notes, is that "acquisition costs get more expensive as retention numbers decline. Companies must acquire more customers to fill that leaky bucket. Without customers to retain, acquisition costs continue to increase." This is the thing about acquisition: it has a ceiling. And it becomes less effective, and less profitable, the more you grow. Eventually you plateau and, if you’ve neglected customer experience for growth, start haemorrhaging users. It’s happening to Netflix right now.

So what’s the solution to this? For most companies, the answer is Customer Experience Design (or CX). It’s a discipline that overlaps with similar fields, like User Experience Design, Product Design and Service Design, but it ultimately boils down to: optimise and improve your customers' experience of the brand. When you do that, you improve retention and loyalty, and doing that actually brings down acquisition costs. When people really love a brand, not just a product, they become brand advocates, and companies benefit from free word-of-mouth.

Some of the most successful companies hardly do any marketing at all: billionaire Mark Cuban, for example, has been quite up-front about his revolutionary Cost Plus Drugs Company, which is currently disrupting the US healthcare model through cheap, generic pharmaceuticals. "Please help us spread the word," he tweeted in 2022, "we don’t spend a nickel on marketing." By ignoring acquisition costs altogether and understanding two truths – one, the current healthcare model sucks; and two, sick people talk to other sick people – Cost Plus Drugs has a huge commercial advantage over other pharmaceutical companies, which have to sink massive amounts of capital into acquisition and marketing.

Something else has changed over the last 10 years, and that’s simply that we know a lot more now about the cost/benefit ratio of acquisition vs retention. It’s not a hunch anymore. The studies have been done, the numbers have been crunched, and on almost any metric you look at, retention trumps acquisition hands down. Cost? It costs between four and 10 times more to attract a new customer than keep an old one. Profits? By boosting your retention by just 5%, you can increase profits by over 25%. In fact, authors Emmet and Mark Murphy discovered that profitability tends to increase over the life of a retained customer. User spend? Loyal customers spend, on average, 67% more than new ones. The probability of selling to an existing customer is between 60% and 70%. For new prospects, that number drops to between 5% and 20%.

"It sounds like a no-brainer," Franz says, "but literally shifting the focus – or perhaps the balance – to be on the stages of the customer lifecycle most important to the customer will help to overcome some of the challenges companies are facing when it comes to customer retention."

According to Forrester reports, the answer is, first of all, to know your goals. The balance between acquisition and retention will not be the same for all companies, because not all companies are at the same stage, or share the same success metrics. If you’re in a growth phase, and getting a critical user mass is your key objective, then it makes more sense to invest your time at the top of the funnel. If you’ve already built a healthy user base, and your goal is now profitability, it makes way more sense to switch gears and focus on customer experience and retention. That will give you the best bang for your buck, and increase your profit margins at the same time.

"Shift toward relationships and away from transaction thinking and messaging," Franz advises. "Sounds warm and fuzzy, right? But winning over the hearts and minds of new customers is not that different from developing personal relationships. It’s more fulfilling and rewarding to grow a relationship than to grow how many acquaintances are in the friend pool."

Interested in learning about Customer Experience Design? Check out our CX Design and Strategy courses.