Cost of New Customer vs Retaining Customer
Customer retention and acquisition are two important aspects of relationship marketing that focus on making long term relationships with customers rather than focusing on shorter term goals. The key difference between cost of new customer and retaining customer is that the cost of new customer is the cost incurred to acquire a new customer through marketing strategies such as advertising whereas the cost of retaining customer is the cost incurred by companies to ensure that the customers continue to purchase company products in the long term by safeguarding them against competition. Acquiring, as well as retaining customers are important and both methods have their own costs and benefits.
CONTENTS
1. Overview and Key Difference
2. What is the Cost of New Customer
3. What is the Cost of Retaining Customer
4. Side by Side Comparison – Cost of New Customer vs Retaining Customer
5. Summary
What is the Cost of New Customer?
The cost of a new customer is the cost incurred to acquire a new customer through marketing strategies such as advertising. These are customers that have not used the company’s products before; thus increased efforts should be made to encourage them to purchase company’s products.
E.g. Research has found that it is 5 to 6 times more expensive to acquire a new customer than retaining existing customers.
It is very difficult and costly to acquire customers in highly competitive markets where many brands are available. In such markets, all the companies are attempting to acquire new customers and will be engaged in competitive advertising and price reductions.
Marketing is the main form of customer acquisition; businesses can use various marketing efforts such as direct marketing and telemarketing. Viral marketing (marketing strategy where consumers are encouraged to share information about a company’s goods or services via the Internet) has gained increased popularity during recent times.
Figure 01: Marketing helps businesses to attract new customers
To compute the cost to acquire a customer (CAC) the company should divide the entire cost of sales and marketing over a given period, including salaries and other headcount related expenses by the number of customers acquired in the specific period.
What is the Cost of Retaining Customer?
The cost of retaining customer is the cost incurred by companies to ensure that the customers continue to purchase company products in the long term by safeguarding them against the competition. Below are some of the main costs of retaining the customers.
Excellent Customer Service
Excellent customer service remains the most important aspect in customer retention and this amounts to one of the main contributors to costs. A major portion of this may amount to providing after sales services.
E.g. an average consumer interacts with customer service 65 times a year,
Loyalty Schemes
In order to ensure that the customers remain with the company in the long term, it is essential to engage them in enticing loyalty schemes. The longer the customer stays with the company, the more benefits they will expect in terms of price reduction and other forms of loyalty allowances.
Retaining Key Staff
For some companies, key staff plays a major role in retaining customers, thus if the company wishes to retain customers, they must ensure that their key staff is motivated and are willing to be engaged in the business long term. This may be costly since key staff has more bargaining power.
Turnover of customers which is referred to as ‘customer churn’ often results in indirect costs to companies as well. If the existing customers leave, the market share of the company will decrease drastically. This means that the customers start to purchase competitor products and in time will be loyal to them.
E.g. Research indicates that once a customer leaves, 4 out of 5 will never come back, and even if they do, 59% say they will be less loyal.
What is the difference between Cost of New Customer and Retaining Customer?
Cost of New Customer vs Retaining Customer |
|
| Cost of new customer is the cost incurred to acquire a new customer through marketing strategies such as advertising. | Cost of retaining customer is the cost incurred by companies to ensure that the customers continue to purchase company products in the long term by safeguarding them against the competition. |
| Cost Contributor | |
| Adverting is the main cost contributor for customer acquisition. | Companies have to incur costs in the form of customer service, loyalty schemes and efforts to retain key staff in order to retain the customers. |
| Statistics | |
| It is 5 to 6 times more expensive to acquire a new customer rather than retaining existing customers. | The average business loses around 20% of its customers annually by failing to retain them via customer relationships. |
Summary – Cost of New Customer vs Retaining Customer
The difference between cost of new customer and retaining customer depends on whether the subject costs are spent on acquiring the customer or retaining the customer. Acquiring new customers is significantly more expensive than retaining existing customers; thus businesses should be attempt to build long lasting relationships with existing customers. Further, satisfied customers are more likely to recommend the company’s brand to other potential customers via positive word of mouth. Thus, if the company provides an excellent service for existing customers, there is a possibility that they will be rewarded with new ones without additional marketing efforts. On the other hand, if the company is interested in expanding to new markets, acquiring new customers becomes important as a part of business strategy.
Reference:
1.Morris, Tricia. “It is 6 Times More Expensive to Win a New Customer than to Retain an Existing One.” Parature. N.p., 14 Mar. 2016. Web. 27 Apr. 2017.
2.Gallo, Amy. “The Value of Keeping the Right Customers.” Harvard Business Review. N.p., 05 Nov. 2014. Web. 27 Apr. 2017.
3.Safko, Lon. “How Much Did That New Customer Cost You?” Entrepreneur. N.p., 14 Jan. 2013. Web. 27 Apr. 2017.
4.Garst, Kim. “5 Reasons Why Relationship Marketing is Important in Business.” Kim Garst | Marketing Strategies that WORK. N.p., 24 Apr. 2017. Web. 27 Apr. 2017.
Image Courtesy:
1. “HSBC ad at Charles de Gaulle Airport” by Delphine Ménard (CC BY-SA 2.0) via Flickr