There are two metrics that every marketer loves to track: customer acquisition cost and customer retention. But does the focus on these metrics help with profitability?
Actually, in many cases, it does not. Let us see why.
First, we need to consider diminishing returns. Once your share of the market grows, it becomes more and more expensive to attract new customers. In the same vein, when you are able to retain customers for a long time already, additional investments into retention might actually cost more than the upside that they generate.
Second, let us consider different types of customers:
- Easy to acquire and to retain.
- Easy to acquire, hard to retain.
- Hard to acquire, easy to retain.
- Hard to acquire, hard to retain.
Each of these groups will have customers that are actually profitable, as well as customers that are not. For example, large customers for my business, Charlotte Fractional CMOs, are hard to acquire and fairly easy to retain. The same is true for many small businesses: it is hard to get a big client, but once you get them, retention is less of a challenge.
Finally, acquisition and retention should not be viewed as independent activities. When we focus on just acquisition and retention, it is easy to spend all resources on working with the first group (easy to retain and acquire) and miss out on more profitable opportunities elsewhere. It may result in wasting money on keeping loyal unprofitable customers. Even worse, there might be no resources left to spend to attract customers that are going to be profitable in the long term.
For a more detailed discussion of this topic, check out this HBR article.