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Loyalty, Retention vs Acquisition – The Changing Face of Consumer Marketing
CloudCherry | Featured | March 21, 2016
Focusing mainly on customer acquisition may help your business survive, but if you truly want to thrive, then you need to prioritize customer retention and loyalty.
We live in the era of the Experience Economy, as B. Joseph Pine II and James H. Gilmore dubbed it in an article by the same name published in 1998, where the focus should be placed on creating positive memorable experiences for customer so as to generate loyalty and increase retention rates. Despite this fact, we still see a lot of businesses putting a significant amount of their marketing budgets into customer acquisition.
A study from Invesp Consulting found that only 40% of the companies interviewed had an equal focus on customer acquisition and customer retention, while a mere 18% were more focused on retention than acquisition. That still leaves a lot of companies focused on customer acquisition.
Traditionally, once a company acquired a customer, that was all they needed to do. The digital age has changed things and consumers now have many more options and a lot more information, which means companies need to be proactive to retain their customers.
Consumers have changed significantly over the past decade, mainly thanks to the lightning-speed advancements in technology. This has made it much harder to sell to prospects nowadays. It’s a well-known fact that prospects will rarely make a purchase on their first interaction with your business, especially since they have access to so many other options.
It takes at least 7 visits to your website for a prospect to convert into a customer, and oftentimes that number can be a lot higher. However, a customer who knows your business – someone you’ve already built a relationship with – is much more likely to make that purchase without the need for multiple visits.
According to Invesp Consulting, 60 – 70% of existing customers are likely to make a purchase, compared to 5 – 20% of new customers. Furthermore, the same study shows that an existing customer is 50% more likely to try a new product, by comparison to a new customer, and the former will also spend 31% more.
So, these figures show us that while you might continue investing the same dollars into marketing and advertising, you will be making more money from your existing customers than from new customers.
It’s also cheaper to retain existing customers. There are a finite number of relevant customers available in a market and as your business grows, you will find it more and more difficult to acquire new customers, which will mean investing an increasing amount of money in marketing and advertising, leading to a higher cost per customer for acquisition.
According to Garter and eConsultancy, the cost of retaining an existing customer is between 10% and 20% of the cost of acquiring a new one. While some might disagree with these figures, it’s hard to refute them in the world of digital marketing where costs can be easily tracked. For example, marketing to an existing customer is usually done via email, whereas tools such as PPC are used to attract new customers. And an email is a fraction of the cost of PPC.
The cost for customer recruitment also grows due to conversion rates. As showed earlier, you are only going to be converting between 5 and 20 customers per hundred, which automatically increases the cost per sale. Conversely, with existing customers, you are spending less money to reach them, while converting between 60 and 70 customers per 100. Furthermore, they’ll be spending 31% more money!
So, if you want to see a massive improvement in your bottom line, you need to look at retaining as many of your existing customers as possible.
The figures cited above might lead you to think that you should stop trying to acquire new customers completely, which is a mistake. Yes, existing customers do spend more money and are cheaper to sell to, but unless you have some magical way of making those customers stick with you for the rest of their lives and beyond, you need to constantly look to acquire new customers as well.
First of all, the worst situation you can end up in is relying solely on your existing customers only to have half of them, or even more, abandon you for some reason or other. If you haven’t invested in customer acquisition at all for years, you’ll find yourself scrambling to put together a campaign, which can take time to generate results. On top of that, it will take time to build relationships with your new customers, time which you won’t have because your income has plummeted and no new customers filled the void because you were focused solely on retention.
Furthermore, there is no way to grow your business without expanding your customer base. Yes, existing customers spend more money, but they have finite resources and their expenditure will grow only to a certain point. If you want your business to expand, you need to grow your customer base, while also focusing on retention.
So, what we’re saying is you need focus equally on customer acquisition and retention. We’re not saying you should necessarily allocate the same level of resources to both areas since it might not be necessary, but you definitely need to place the same level of importance on both areas.
You might be wondering why we’re separating customer loyalty from customer retention. Isn’t loyalty the same thing as retention? Some people think it is. In fact, there’s quite a bit of confusion in this area, with many people believing that customer loyalty is pretty much the same thing as customer retention. After all, if someone buys from you repeatedly, that means they are loyal to your business, no?
Not necessarily. Consider a supermarket. You will have some customers who buy from you repeatedly for many reasons, none of which have anything to do with loyalty. For example, your supermarket might be the only one within a10-mile radius of where those customers live. Or your supermarket might be the only one to carry the products they want within a certain distance of their office or home. Or maybe your supermarket is the only one where they can find a parking space. Or maybe you’re the cheapest within walking distance from their home. Clearly, these are all good reasons for someone to shop at your store, but it doesn’t mean they are loyal customers.
They are temporarily loyal to your supermarket because it meets their needs. But if another supermarket were to open up that met those same needs, and did better than your supermarket along the lines of customer experience and customer service, there’s a good chance they would move on.
And this is where the importance of true customer loyalty comes in. A truly loyal customer isn’t just one who does business with you repeatedly. It’s someone who has an emotional connection with your brand and wouldn’t switch to another brand, regardless of the reason.
A good example of a company that generates true loyalty is Apple. Many of their products, like the MacBook, are twice as costly as their Android or Windows-based counterparts, sometimes more, yet their customers would never switch, no matter what. They will provide a list of reasons – such as stability and quality – yet many of these people haven’t even tried another product. So, it’s clear that they have an emotional connection with the brand that transcends price and convenience and many of the other factors that would entice other customers to switch to a different brand. That is true loyalty.
And the importance of generating such loyalty is clear. Sticking to our Apple example, the moment Apple launches a new product, their loyal customers go out and buy it. The moment Apple makes a mistake, their loyal customers find excuses for them. Even when Apple launches new products that aren’t quite as powerful as others on the market, their loyal customers will still stick with them and find a million reasons, real or perceived, for which that product is actually better than anything else. These are people that will always spend their money with Apple.
If you want to achieve similar results, it’s imperative to build real loyalty in your customers and that means to establish an emotional connection that far outweighs other, more practical considerations. And yes, it is much harder to do nowadays, seeing as consumers are much more demanding and much less loyal. However, it can be done, as Apple proves repeatedly.
Once upon a time, most businesses were focused solely on customer acquisition, with customer retention not even a blip on anyone’s radar. After all, they were already customers so why bother spending money on marketing to them and retaining them as customers? But the customer has changed and the economy has changed, which means businesses need to change too if they want to survive.
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