Marketers Dilemma: Should You Acquire New Customers or Improve Loyalty?

One of the oldest and most asked questions by businesses, including our clients, is whether they should acquire new customers or try to maintain the relationship with the existing customers for longer. The most concise answer to this question is that it depends. A more extended and disturbing answer is that it's not up to you. The most common question after this answer is, what do you mean by that? Here, we'll try to answer it.

To make the point, two bellowed clients, Staar (DiscoverICL) and Freshpet, may represent two ends of the spectrum. DiscoverICL helps patients who want to get rid of their lenses and glasses and treat their nearsightedness with ICL lenses through a procedure. Freshpet offers a wide variety of human-grade selections for our fur friends. By nature, DiscoverICL solution is a one-and-done type product; however, a Freshpet customer may stick with the brand for a long, long time; there, it makes an intuitive sense for Staar to find "new patients", whereas Freshpet to nurture the relationship with the existing customers and find new ones in the meantime. Above the initial thoughts and gut feelings, though, we should always analyze our data to see if the intuitions match with reality. So, back to our question: how can we decide whether our business should go and find new customers or rely on maintaining the relationships while feeding the funnel with new customers?

One metric that can tell us whether our customers stick with us for a long time is "Customer Retention Rate". It can be calculated by dividing the "Retained Customer count" by the Total Customer Count when the measured period began. Another definition by Zendesk is "Customer Retention rate measures the number of customers a company retains over a given period of time. It's expressed as a percentage of a company's existing customers who remain loyal within that timeframe."

Let's say an example business, ACME, had 10.000 customers in 2022, and 2457 made at least one more purchase in 2023. Thus, for the 2022 New Customers group, we had a 24.57% Customer Retention Rate. If we extend the years, the data will start showing patterns; for example, the rate can be 22% for one year and 27% for another. Suppose you are/have a more established business. In that case, the rate will most likely be relatively consistent over the years because it is correlated with your business type rather than yearly strategic shifts.

After observing this trend, the natural follow-up question is, where do our rates sit? Is it good? Bad?

First of all, there is no good or bad. It is what it is. Personal preferences aside, being a fish is not better than being a bird. Or vice versa. They are just different. Once we accept the current reality of our business, we can then question the assumptions, find ways to "test", "improve", and, better yet, make critical decisions with clarity.

An example could be determining a marketing budget that may follow a simple logic, as in, if we want to grow our customer base by 10% this year, we can start with the "Customer Retention Rate". Continuing with the ACME example above, there is a high chance about 24% of the previous year's customers will stick with the brand. To achieve the 10% growth goal in the next year, ACME needs to acquire 8600 new customers (11.000-2400). ACME leaders can then calculate what portion of the customers can be acquired through paid channels. After that, knowing the previous year's blended CACs can give the marketing managers an estimate of how much they might need to bring new customers in the next year.

Another example might be evaluating a new "Loyalty Program" investment. Assumingly, another hypothetical brand called ACME 2 had a 16% Customer Retention Rate for the previous 3 years, and they have decided to invest in a Loyalty Program. By the end of the annual contract, they've decided to analyze the program's financial benefits. Imagine they've ended up with a 23% Customer Retention Rate. Again, for simplicity, we can assume all other variables were the same so that the increase in Customer Retention Rate can be attributed to the new program. Then, the question becomes whether increasing the Retention Rate covers the program's costs. If it does, ACME 2 can renew its annual contract with peace of mind.

Then, how do your Retention Rates guide your strategies? Although there are no definite cut-offs, the rates can be used directionally. Suppose less than a quarter of a store's customers make follow-up purchases in the following year. In that case, the store needs to find at least 3 times more new customers than the potential repurchasers to maintain the business at the same level as the previous year. Such stores provide an example of "Acquisition-dependent businesses."

Simply put, they need to find new customers at all times. Knowing this fact can change their tactics for the future. No one can say "selling to the existing customers is not lucrative"; the discussion above does not deny this, yet we can say that the business will shrink if such stores can't find new customers.

On the other side of the spectrum, if a business expects 50% or more of their previous year's customers will buy in the next year, they need to do the road to turn new customers into "loyal" customers as smoothly as possible. Thus, loyalty, investing in long-lasting communication, offers, positioning, and more can reflect this same outcome -acquiring new customers while focusing on turning them into loyal customers and maintaining a long-lasting relationship with the existing customers.

For businesses in between, knowing that most of the customers won't be around in the following year, yet having a more significant customer retention rate than the "Acquisition type businesses," this type of business can focus on both aspects of the acquisition-loyalty spectrum. They can try to understand what makes some customers stick but not others, how to make the churn-type customers stay longer, find new customers, and improve Average Order Values while strengthening Lifetime Values.

To wrap up, if your customers don't engage with your business for a long time, instead of trying to increase LTV over the years (not the same as short-term LTV -most of the follow-up purchases happen in the first 60 days), you can focus on increasing Average Order Value -AOV, try to improve on upsell and cross-sells, shortly concentrate on the short attention span of your customers. If they show signs of engagement, focus on purchase frequency, days between orders, the first product they purchase from you, LTV by products and categories, and improving ongoing customer relationships, get into your strategies.

Finally, the overall process can be listed as understanding what type of a business you have (Acquisition, Loyalty, In-between), planning and acting accordingly (focusing on short-term vs. long-term - frequency vs. AOV, etc.), and continuously challenging and optimizing your processes.