In my time as a business coach, I’ve observed (and weighed in on) many a debate around whether business owners should focus more on customer retention or customer acquisition as the best way to achieve business growth.
Fact is, both of these marketing activities are extremely important. It’s not hard to understand that it is just as vital to keep customers coming back to you as it is to bring new traffic in the door.
However, as a business mentor, I do feel that the pendulum has swung too far in the wrong direction; many experts seem to focus most heavily on retention strategies, which could be sending business owners down a growth-slowing garden path.
Even just considering the language for a moment – retention isn’t about growth, it’s about maintenance.
The only way to grow your business is by filling your sales funnel. How do you do that? By investing in marketing activities that bring new customers into your business.
How much should I spend on customer acquisition?
I’m seeing business owners spend as little as 10% of their marketing budget on new customer acquisition activities. While my business advice is clearly to increase that figure, you’ll need to be strategic about it.
To work out your how much to spend on bringing new customers into your business, you need to know:
- How much a new customer is worth to your business (on average) – often called the Lifetime Value of the Customer (LVC)
- How much it costs (in marketing spend) to bring them in – ie customer acquisition cost (or CAC)
If you like to work with ratios, a good rule of thumb is that your LVC to CAC ratio should be 3:1; a new customer should ideally spend three times as much money with your business as it cost to bring them in.
If your ratio is closer to 1:1 (even stevens) then obviously you are spending too much. If it is more like 5:1, then you may be missing an opportunity and should consider increasing your customer acquisition investment.
Make sure you are working with real CAC numbers
When working out how much it costs to bring a new customer into your business, you’ll first need to work out how many customers your marketing activities can take credit for. If you don’t do this your numbers could be way off.
Say, for example, you had 100 new customers in a single month and you spent $2,000 on your total marketing spend. It is tempting to work out your CAC like this:
$2,000 ÷ 100 = $20
But what if 80 of those customers came in through referrals, word of mouth etc – in other words they would have come into your business regardless of whether or not you had performed your marketing activities. If marketing is only responsible for 20 of your new customers, your final numbers are going to look a bit different:
$2000 ÷ 20 = $100
Now, that isn’t to say that you should stop investing in a marketing strategy. It all depends on the return you get for that spend. If, for example, you invest $100 on acquiring a new customer and they spend an average of $500 or more with your business, then it was a decent return on investment.
You’ll need to run the numbers to see how this stacks up in your business.
What customer acquisition strategies should I invest in?
The short answer to this question is: the ones that cost the least and bring in the most new customers.
(If only it were that simple.)
The truth is, you are going to have to try out a number of tactics that work for your industry and budget, then measure the return on investment (ROI) to determine which strategies are the most profitable for your business.
Tweak your existing tactics
Of course, you should always start by optimising the activities you are currently using to get new customers into your sales funnel. Luckily digital marketing makes gathering that information much easier. You can track sales and behavioural data on your website, open and click-through rates on your email marketing and engagement on socials etc to work out which activities are performing well and which could benefit from some attention.
Once you are happy that you have your existing marketing efforts working as hard as they can, you can turn your attention towards adding new tactics into the mix.
Some customer-magnet moves to round out your growth strategy
Depending on their individual strategy and budget, I mentor business owners to consider some of the following customer acquisition tactics:
Advertising – promoting your business through advertising comes in many forms. Yes, there are the traditional television and radio ads (requiring large budgets), as well as things like placing print advertisements in your local paper etc. These days business owners also have the opportunity to explore smaller budget options like Facebook ads – which incidentally also have the added benefit of being more targeted.
Google Ads – SEO, while still a solid strategy, is a long-term investment, often taking up to 6-12 months to see your Google listing move up the SERP. Google Ads is one way to buy your business a spot nearer the top of the search results for your chosen keywords. Although you have to pay to play, your costs only kick in when a potential customer clicks through from your ad to your website – an arrangement known as pay per click (PPC). See our blog for your Google Ads game plan.
Email marketing – cold emails, campaigns and even email-based content marketing are all options for directing new customers into your sales funnel. Check out our guide to email marketing for more info on how to get started.
Referral Programs – offering a discount (or other incentives) to encourage existing customers to spread the word and help you grow your customer base can be a very effective strategy and is easy to execute. The reason it works so well is that you are combining the power of positive reviews with a little ‘nudge’ in the form of an enticing call-to-action. It’s powerful stuff.
Networking – this is a particularly important strategy for business to business (B2B) companies. You can increase your networking opportunities either face-to-face (ie through trade shows or at in-person networking events), or even online using social media platforms – especially LinkedIn.
For a full list of business building tools (including customer acquisition tactics) see our marketing essentials series.
Check out your own numbers…
If your business growth has stalled, chances are that you will discover it mirrors a similar decline in the amount of new customers coming into your business. As a business coach, I’d always advise clients in this position to refocus on their customer acquisition efforts and consider increasing their marketing budget, or at least direct a little more of it into activities designed to fill up that sales funnel. Remember to measure and test your methods and adjust tactics accordingly and you really can’t go too far wrong.