Acquiring and keeping customers is the yin and yang of any business. We need customers to win new ones. Yet, most businesses treat customer acquisition and retention as if they were contraries — like summer and winter.
Customer acquisition is seen like summer. Long glorious days that are relished and celebrated. Customer retention like winter, which must be dealt with in anticipation of sunnier days. That is because the focus, from Wall Street to Main Street, is predominantly on customer acquisition growth.
Yet acquisition and retention are two sides of the same coin. Acquisition is the expansion side — new net, add-on sales and renewal. Retention is the loss mitigation side — churn, abandonment and downgrades.
In times of economic volatility, companies turn their attention to bolstering retention. The organization pivots — more accurately, it scrambles — to understand the underlying reasons for churn, declining CSAT, NPS and engagement scores. Across 2020 and 2021, 30% of SaaS companies reported their churn rates increased year over year, according to 99Firms. "Companies recover less than one out of three lost customers," according to ProfitWell.
It’s time we revisit how we manage and measure revenue flows. And that starts with breaking the boundaries between customer acquisition and retention. Here are four steps to get started.
Balanced Portfolio Approach
The Pareto Principle, considered best practice, states that 80% of revenue should come from new customers and 20% from existing ones. Yet, according to the Customer Research Institute, 65% of a company's business actually comes from existing customers. An increase in customer retention by a few percentage points can have a dramatic and positive impact on profit.
A best practice is to manage customer acquisition and retention like balanced portfolios. Understanding how customer segments will change and impact product/market fit enables better-informed decisions about where to invest, how to set target returns for the coming 24-48 months and how much to invest in establishing (repeatable) paths to customer success.
Related Article: Customer Acquisition Really Stinks Sometimes. Here's Why
Actionable Customer Lifecycle Journeys
Managing a balanced customer portfolio and paths to success is only possible by knowing your target customers at a level of detail well beyond personas. It means seeing the world through their eyes and contextually understanding how customers see vendors fitting into the journey.
The pre-and post-purchase view of the customer journey is a paradigm unique to vendors. It's not how customers see it. For them, a purchase is a point along the way to achieving a desired outcome.
A sizable legal firm shared a story we've heard all too often. The customer and vendor sales executive developed a close working relationship during an in-depth product evaluation. After contract signing, those daily calls turned into silence. Hounding the salesperson was unproductive. Eventually, the customer was onboarded and found the support/service team's product knowledge left much to be desired. The customer began to panic; they had staked their careers championing this project and vendor. Talk began about how to get out of the contract.
When companies deliver the lifecycle journey customers value and expect, they enjoy greater stability of current revenue streams. The key is to understand each customer segment's lifecycle journey and expectations which become the blueprints for:
- Aligning organizational functions and data to customer micro-moments.
- Defining systems and process flows to mirror journeys.
- Identifying where automation can delight or detract.
- Measuring revenue influence and productivity by journey stages.
- Determining investment areas that support the balanced portfolio.
Related Article: Connected Customer, Connected Data, Connected Journeys
As with most transformations, company culture is the determinant of success. Peter Drucker infamously said, “culture eats strategy for breakfast."
Over the past decade, numerous methodologies have emerged — target account selling, MEDDIC, ABM — in an attempt to align the sales approach to the target customer. Again, reinforcing the emphasis on acquisition.
Culture must be customer-led and treat acquisition and retention as one lifecycle. Now is also the most opportune time to make the shift. With evolving work models, focus on employee experience and emerging AI technologies, companies have the tools and insight in hand to reshape their cultures. A few areas key to successful culture transformation is:
- Common cross-functional language with different definitions depending on the team.
- Rituals and routines that signal what matters to key stakeholders and leaders.
- Formal and informal organizational power structures.
- Control systems like finance, operations and reporting that measure what matters.
- Internal storytelling used to describe success and failure.
- Customer micro moment hand-off SLAs (and associated data) between teams.
No longer should all that customer insight knowledge acquired during the purchase process be lost to post-purchase experience. Business development, pre-sales, marketing, sales and customer success teams have the insights necessary to define a customer-led culture. They want a voice and vote in shaping and living an authentic culture that meets theirs and their customers’ expectations — so let them.
Correctly Calculate CAC, CRC and CLTV
A standard rule of thumb is that if CLTV (customer lifetime value) > CAC (customer acquisition cost), continue pursuing that market segment. CLTV is the average order value X average total purchase per year X average retention time. Though, the CLTV equation for your industry may vary.
A more realistic calculation of CLTV needs to include follow-on/add-on purchases, contract expansions and average CRC (customer retention cost). CRC and CAC equations should include not just direct but all associated costs. That means including fully loaded staffing costs, overhead G&A allocations, related marketing and technology costs.
The intent is not to divide all corporate costs between acquisition and retention but to assign costs more accurately to their purpose. A clearer picture of CLTV, CAC and CRC provides greater insight and better decision-making power to manage short-term and long-term investments in revenue sources.
Related Article: Are Your Customer Acquisition Tactics Annoying Your Existing Customers?
Pulling It All Together
Achieving a balanced approach to customer acquisition and retention is not as daunting as it may seem. For most companies, the foundations are already in place. With some tweaking of business practices, in-depth customer research and a holistic mindset, companies can achieve a balanced portfolio for growth through economic summers and winters.
Here are some final tips:
- Customer-led culture: Expand company culture to include a customer partnership mindset across all functions.
- Keep it simple: Don't over-engineer the customer acquisition or retention calculation; there is no benefit.
- Benchmark metrics: Trend lines are more actionable than absolute numbers. Trendlines by geography, product and customer segments will quickly tell you where to adjust.
- Customer-specific partnership plans: Ensure customer retention by developing annual plans together and jointly measuring success.
- Employee accountability: Define clear internal ownership of customer micro-moments and touchpoints. Provide training, coaching, tools and reporting needed to help them deliver on customer expectations.
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