Do you know the lifetime value of your average customer? Has your organization determined their cost to acquire a new customer? I can’t think of a time anyone challenged the business strategy of spending money to get new customers. I challenge you to play the flip side of that argument and use the information and calculators provided in this article to come up with an estimated cost of what your organization spends on acquiring new customers each year and what they are worth. When you take into account the total lifetime value of a customer plus the total cost of new customer acquisition -- you may consider divesting some of your sales and marketing portfolio into strategies to improve levels of employee engagement and client engagement that result in improved customer retention rates. The statistics and return on investment that accompany employee engagement and customer retention strategies are well documented and overwhelming positive. Using employee and client engagement programs and strategies can help you reap the benefits of this research so you won’t become one of the bad statistics.
15 Statistics That Should Change the Business World – But Haven't [Yet]1
- Price is not the main reason for customer churn, it is actually due to the overall poor quality of customer service. – Accenture global customer satisfaction report 2008
- A customer is 4 times more likely to defect to a competitor if the problem is service-related than price- or product-related. – Bain & Company
- The probability of selling to an existing customer is 60 – 70%. The probability of selling to a new prospect is 5-20%. – Marketing Metrics
- For every customer complaint, there are 26 other unhappy customers who have remained silent. – Lee Resource
- A 2% increase in customer retention has the same effect as decreasing costs by 10%. – Leading on the Edge of Chaos, Emmet Murphy & Mark Murphy
- 96% of unhappy customers don’t complain, however 91% of those will simply leave and never come back. – 1Financial Training services
- A dissatisfied customer will tell between 9-15 people about their experience. Around 13% of dissatisfied customers tell more than 20 people. – White House Office of Consumer Affairs
- Happy customers who get their issue resolved tell about 4-6 people about their experience. – White House Office of Consumer Affairs
- 70% of buying experiences are based on how the customer feels they are being treated. – McKinsey
- 55% of customers would pay extra to guarantee a better service. – Defaqto research
- Customers who rate you 5 on a scale from 1 to 5 are six times more likely to buy from you again, compared to ‘only’ giving you a score of 4.8. – TeleFaction data research
- It takes 12 positive experiences to make up for one unresolved negative experience. – “Understanding Customers” by Ruby Newell-Legner
- A 5% reduction in the customer defection rate can increase profits by 5 – 95%. – Bain & Company
- It costs 6–7 times more to acquire a new customer than retain an existing one. – Bain & Company
- eCommerce spending for new customers is on average $24.50, compared to $52.50 for repeat customers. – McKinsey
Customer Retention Increases Profits & Saves Money2
If you invest in sales and marketing – then you should invest in customer retention.
- According to Bain and Co., a 5% increase in customer retention can increase a company’s profitability by 75%.
- Gartner Group statistics tell us that 80% of your company’s future revenue will come from just 20% of your existing customers.
- According to Lee Resource Inc., attracting new customers will cost your company 5 times more than keeping an existing customer.
Defining Your Cost to Acquire New Customers (CAC)
The Cost to Acquire Customers (CAC), also known as customer acquisition cost, measures the cost of landing a customer. In simple terms, add up the cost of marketing and sales - including salaries and overhead - and divide by the number of customers you land during a specific time frame. Spend $100 and acquire 10 customers and your CAC is $10.3
Most businesses put all their marketing effort into getting new customers, yet it costs between seven and twenty times more to sell to a new customer than it does to sell to an existing customer.4
Have you considered adding Customer Lifetime Value (CLV) to your CAC?
Customer lifetime value is the dollar value of a customer relationship based on the present value of the projected future cash flows from the relationship. 76% of companies see customer lifetime value (CLV) as an important concept for their company.5
- Only 40% of companies are able to measure customer lifetime value accurately.
- Only 40% of companies and 30% of ad agencies have an equal value on customer acquisition and retention.
How to Calculate Your Customer Lifetime Value (CLV)
In marketing, customer lifetime value (CLV), lifetime customer value (LCV), or life-time value (LTV) is a prediction of the net profit attributed to the entire future relationship with a customer. Customer lifetime value can also be defined as the dollar value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship. Customer lifetime value is an important concept in that it encourages firms to shift their focus from quarterly profits to the long-term health of their customer relationships. Customer lifetime value is an important number because it represents an upper limit on spending to acquire new customers. For this reason, it is an important element in calculating payback of advertising spent in marketing mix modeling.6
Additional information resources and calculators:
- Brad Sugars, Contributor, Entrepreneur Magazine, http://www.entrepreneur.com/article/224153
- Kismetrics, https://blog.kissmetrics.com/how-to-calculate-lifetime-value/
- CLV Calculator: http://www.clv-calculator.com/customer-lifetime-value-formulas/simple-clv-formula/
What’s left in your wallet?
Depending on which study you believe, and what industry you’re in, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one. It makes sense: You don’t have to spend time and resources going out and finding a new client — you just have to keep the one you have happy. If you’re not convinced that retaining customers is so valuable, consider research done by Frederick Reichheld of Bain & Company (the inventor of the net promoter score) that shows increasing customer retention rates by 5% increases profits by 25% to 95%.7
Customer Retention: Where do I start?
1 Source: Colin Shaw, CEO, Beyond Philosophy, 15 Statistics That Should Change The Business World – But Haven't, Featured in: Customer Experience, June 4, 2013, https://www.linkedin.com/pulse/20130604134550-284615-15-statistics-that-should-change-the-business-world-but-haven-t
2 Source: Alex Lawrence, Contributor, Five Customer Retention Tips for Entrepreneurs, Forbes Magazine, November 1, 2012., http://www.forbes.com/sites/alexlawrence/2012/11/01/five-customer-retention-tips-for-entrepreneurs/#3d871c8317b0
3 Source: Jeff Hayden, 4 Business Metrics You Can't Afford to Ignore, Inc. Magazine, http://www.inc.com/jeff-haden/4-business-metrics-you-cant-afford-to-ignore.html
4 Source: Ian Kingwill, Sharing an App & System to Grow Your Business & Increase Your Profits through Relationship Building! And The UK Chartered Institute of Marketing 2010, https://www.linkedin.com/pulse/what-cost-customer-acquisition-vs-retention-ian-kingwill
5 Source: Khalid Saleh Khalid Saleh, CEO and co-founder of Invesp, Customer Acquisition Vs. Retention Costs – Statistics And Trends, http://www.invespcro.com/blog/customer-acquisition-retention/
6 Source: Wikipedia, https://en.wikipedia.org/wiki/Customer_lifetime_value
7 Source: Amy Gallo, contributing editor, The Value of Keeping the Right Customers, Harvard Business Review, October 29, 2014, and Fred Reichheld, fellow, Bain, & Company, Loyalty Rules! How Today’s Leaders Build Lasting Relationships, Harvard Business School Publishing, September 2001.