You’ve heard it a million times before: it’s far more expensive to make a new customer than to keep an existing one. Depending on your industry, your customers, and which articles you read, it’s somewhere between five and 25 times more expensive to sign a new customer than it is to keep a customer you already have.
But as important as it is to emphasize customer retention, you’ll have to emphasize customer acquisition too. A company simply can’t survive in the long term on the same customer base year after year. So how do you strike a balance between the two?
Churn and Negative Churn
The first thing to keep in mind is churn. Churn is a measure of how much business you lose from existing customers that don’t come back. For some businesses, like retail, a customer might make a single purchase and never return. For subscription-based businesses, churn is usually lower, since inertia keeps people signed up.
Usually, churn is a positive number — if you have 100 customers at the beginning of the month and 95 at the end, you have a monthly churn rate of 5 percent. It’s possible, however, for churn to be negative.
See, churn doesn’t just measure the number of customers you have, it measures how much revenue they’re bringing in. Let’s use another example.
In January, you have 1000 customers who are each spending $10 a month on your Basic package for a total revenue of $10,000 per month. By the end of the year, only 900 of those customers are still signed on, so 100 of them (10 percent) have churned. However, another 200 of them have signed up for your Premium package at $20 per month.
Now, you have 700 customers paying $10 per month for a total of $7000, plus another 200 paying $20 a month for a total of $4000. Your customer base has shrunk, but your total revenue has grown to $11,000 per month, an increase of 10 percent. That’s negative churn.
How Important Is Churn?
What the previous example shows us is that there are two ways to get more revenue and grow your company: add new customers or get more money out of your existing ones. Which approach you prioritize depends on your business.
According to Lincoln Murphy, an acceptable churn rate is somewhere in the range of 5 to 7 percent per year, which translates to around half a percent per month. That means a successful company is losing roughly one in 200 customers’ worth of revenue every month.
Keeping Your Priorities In Order
If your churn rate is low, it might not be worth the effort to try to focus your efforts on that one-in-200 customer who might churn. A small amount of churn is inevitable — things change, circumstances change — any number of other factors that could lead to them canceling their relationship with you.
The fact is, you can’t keep every customer forever. What you can do is focus on the areas that are within your control — the experience that your current customers have. Over time, you should be able to pick up on trends when it comes to customer churn that will help you predict and prevent it in the future.
These trends could be anything, and they’ll vary depending on your business. Maybe customers who only make small purchases aren’t likely to come back for more. Maybe customers who install your software on multiple machines are the most likely to renew their subscriptions, so you can pay special attention to the ones who don’t. Maybe the fact that they follow you on social media is a good indicator. Use what you know about the habits of your past customers to predict the behavior of your future customers, then plan accordingly.
Use Your Existing Customers to Create New Ones
As we mentioned before, it can be expensive to acquire new customers. Luckily, there are two silver linings to that cloud. The first is that since you can keep your existing customers happy for relatively little cost, you can put the rest of your marketing budget toward attracting new customers.
The second silver lining is that your existing customers can actually help with finding new ones. Everyone has connections — co-workers, people they meet at conferences, people in the same industry, even friends and family. Moreover, they trust those connections. According to Mintel, the vast majority of shoppers seek out the opinions of others online before making a purchase decision.
Keeping your existing customers happy will make them want to spread their opinions to their peers, but you can help the process along. Solicit testimonials or reviews from your customers — they’ll appreciate having their opinions heard, and you’ll gain valuable insights and information to use when appealing to new customers.
Inbound Marketing — a Better Way To Gain Customers
Gaining new customers through your existing ones is a great strategy, but it’s not going to be enough all by itself. You’re going to have to market directly to new prospects the good old-fashioned way — sort of.
The problem with the old-fashioned way was that it was extremely imprecise. Interruptive or outbound marketing is sloppy and involves putting your message in front of as many people as possible, without focusing too much on who those people actually are. TV ads, magazine ads, billboards, and so on are examples.
Of course, there’s some degree of targeting — the people watching Monday Night Football probably aren’t all the same people as the ones watching Extreme Home Makeover — but beyond broad strokes it’s impossible to tell who’s watching, who’s interested, and who’s actually converting from those channels.
Inbound marketing is a much more efficient, precise, targeted approach to marketing — and therefore a much better use of your budget. Inbound is based on the principle that no one buys much of anything these days without researching it first. They learn about products and segments, figure out what meets their needs, and make purchasing decisions by looking things up online, talking to their friends, and consulting social media.
As inbound marketers, our goal is to be where they’re looking. We optimize messaging on every channel to be the first thing people find when they’re looking for relevant, informative, timely content. By keeping our focus much narrower and more targeted than the old ways, we can ensure that the only people who find our content are the ones who actually want to see it, thus reducing bounce rate and increasing conversions.
All of which brings us back to the original question: which is more important, keeping existing customers or creating new ones? The unsatisfying answer is that both are important in their own ways, so it’s not an either-or proposition. The good news is that with inbound marketing, you can have the best of both worlds.