Online businesses that invest too much in either new or existing customers can suffer. Those that strike a balance thrive.
Tel Aviv-based Optimove, a customer retention automation platform, arrived at these findings after it examined data from millions of its online customers and more than 180 brands. The company released its research today.
“Companies are investing a lot of money on new customers,” Shauli Rozen, head of professional services at Optimove, told CMSWire. But those that invest too many resources — while they abandon existing customers — tend to see declining revenues, he said.
Optimove's message: invest in both new and existing customers.
New Customers: 'Zero Sum Game'
Specifically, Optimove found that online retailers with:
- A ratio of 90:10 new-to-existing customers are unhealthy, with a five-year compound annual growth rate (CAGR) lower than 2 percent and customer churn rates 100 percent higher than average
- A new-to-existing customer ratio between 70:30 and 40:60 are typically early-stage companies (less than 7 years old) and are growing fast, with a five-year CAGR more than 100 percent and churn rates 50 percent lower than the average
- New-to-existing customer ratios between 40:60 and 20:80 can be considered “healthy grownups,” as they’re typically more than 7-years-old and have a five-year CAGR between 20 percent and 60 percent, with the lowest churn rates of any companies in the study
- New-to-existing customer ratios of 10:90 or worse are practically dying, showing declining revenues over the last three to five years
Marketers today long for new customer acquisitions through techniques like personalization that target anonymous customers for conversions. In a blog post, Rozen called investment with new customers a "zero-sum game."
“The reality of most businesses,” he added, “is that investment in acquiring new customers comes at the expense of nurturing relationships with existing ones, and vice versa.”
4 Types of Online Retailers
Optimove analyzed companies more than five years old and with more than $10 million of annual revenue. It placed companies it examined into four categories:
Stagnated growth or declining revenues for the last three to five years, with a five-year CAGR lower than 2 percent and a customer revenue mix skewed dramatically toward new customers.
“When 90 percent of a company’s revenue comes from new customers,” Rozen wrote, “it is a signal that the company is not successful in turning those customers into active, valuable customers. … While continuously working hard on acquiring new customers, the companies in this group stand still in terms of growth and do not ramp up.”
Annual growth of more than 50 percent for the last five years and a five-year CAGR of more than 100 percent. They derive at least 30 percent of their annual revenues from existing customers, and 80 percent of them net about 50 percent of their revenues from existing customers.
“Startups that don’t shift their mix toward existing customers and improve churn rates don’t manage to become rockets, and remain at the Running-in-Place stage, experiencing low or negative growth after a short ramp-up period,” Rozen wrote.
Five-year CAGR between 20 percent and 60 percent that have been around for more than seven years. They usually net between 60 and 80 percent of their revenue from existing customers.
“These companies have also optimized their customer acquisition process and are bringing in the right kinds of customers, keeping ‘new-to-active’ conversions well above their industry averages,” Rozen wrote.
Old Cash Cows
Show stagnated growth or declining revenues over the past three to five years, with a five-year CAGR equal or lower than 2 percent. Typically, they derive 90 percent or more of revenue from existing customers.
“While on the surface this appears to indicate healthy, recurring revenue, the fact is that even the most loyal customers eventually churn or reduce their spend levels, and churn levels of these companies are usually lower than the sample average,” Rozen wrote. “An old customer base is therefore highly risky: even if these companies are still making a lot of money, sooner or later they get the reputation (true or not) of being non-innovative or outdated. And with a limited number of new customers joining, the road to declining revenue may be short.”
A Healthy Mix of Customers
Ultimately, businesses that derive 90 percent of revenue from new customers — or existing ones — could be in trouble.
“A new, growing company must remember to nurture its new customers, and bear in mind that driving 90 percent of revenue from new customers could be a red flag,” Rozen wrote.
“On the other hand, mature, solid companies should constantly refresh their customer base and keep in mind that an “old customer base” that is responsible for more than 90 percent of revenues may predict a business slowdown.”