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Why it Costs More to Attract New Customers Than to Retain Existing Ones

Why it Costs More to Attract New Customers Than to Retain Existing Ones

Nearly every business starts their ventures without any customers or clients at first.

After developing an attractive product or service, any business's greatest challenge is developing effective marketing materials and promotions to attract that very first group of people willing to buy.

Attracting and converting people into new customers, Customer Acquisition, is a multi-stage process that requires a considerable amount of planning and expense.

However, the value it brings should be far greater than the cost, both of which are useful metrics when designing your own Customer Acquisition process.

It's typically broken down into three stages:

Awareness – Where the goal is to broadly generate awareness for your good or service amongst your target audience. For example, a social media campaign from a new burger restaurant advertising their new line of plant-based burgers. At the end of this stage, customers know you exist.

Consideration – Where members of the target audience have identified themselves as potential customers by showing engaged responses to the awareness campaign. For example, a customer following the social media page of the burger restaurant after being exposed to the campaign. Now the customer knows about you and considers buying from you.

Purchase – Where incentives are offered to the potential customer to encourage them to commit to a purchase. For example, the burger restaurant sending an exclusive 15% discount code for all plant-based burgers to those who followed their social media page after being exposed to the campaign. This stage ends when the first purchase is made.

Each stage of the Customer Acquisition process has an attached cost. Firstly, you have to invest in the design and placement of the advertising campaign. Then, you have to create systems or hire agencies that capture and interpret the analytical data resulting from the campaign. Finally, you must sacrifice a small percentage of your profit margin in offering a discount.

Despite its cost, this approach is a necessary and effective component of any successful business.

However, it's weak point as a strategy is often exposed over the medium-to-long term. Continually running Customer Acquisition campaigns involves the same cost-burden each time because it is only seeking new potential customers.

So, broadly targeted awareness campaigns must be run to target people that don't know about you yet. Campaigns such as this are almost always less 'lean' than targeted ones. The cost is higher, and the likeliness of encouraging meaningful engagement is lower.

A more effective, alternate approach focuses a business's efforts into keeping existing customers rather than gaining new ones, a concept known in business terms as 'Customer Retention'.

Research suggests that Customer Acquisition strategies cost, on average, five times more than Customer Retention. This is not only due to marketing and advertising-related costs but also because of consumer psychology related to repeat purchases from a brand.

The probability of selling to existing customers is somewhere between 60 and 70%. In contrast, for new customers, it is somewhere between 5 and 20%. The perceived risk of purchase is lower for existing customers, as they have already completed a successful exchange and experienced the value resulting from your product or service.

Not only are existing customers significantly easier to sell to, but they are also statistically more likely to try new products and spend more money on subsequent purchases for the same reason.

Put this way; it's clear that the reason that existing customers make more money for your business than new customers is primarily down to an increased profit margin. This larger margin is created from lower advertising costs and increased likeliness of existing customers to spend more money on each purchase, and purchase more frequently.

A useful measurement tool for assessing a long-term customer's value is Customer Lifetime Value (CLV). We have wrote about this subject earlier, which you can read here.

While Customer Retention seems to be the more profitable strategy over Acquisition, a good business will invest in a balance of both strategies. You need to maximise the size of your consumer-base and subsequently, the CLV of each customer.

The question remains then, how do you go about maximising CLV?

Customer Loyalty

We're all about Customer Loyalty at the OMG network. We've seen time and time again the powerful effects on profitability and CLV that customer loyalty initiatives have on commerce businesses.

Take our earlier burger restaurant as an example.

Let's say that, to increase the CLV of existing customers created from the launch campaign, they implemented several loyalty initiatives (which you can read about in more detail in our previous article on the topic).

First, they establish a Loyalty Programme. Loyalty Programmes are a marketing strategy that encourages customers to continue exchanging with a business by offering tiered, personalised financial incentives or rewards. In this business, that could mean that every burger purchase can earn the customer 5 'points', and 20 points earn you a free burger.

Customers will then be motivated to choose the burger restaurant for their lunch spot repeatedly. Eventually, their loyalty will be rewarded with free food. And from the restaurant's perspective, you do 'lose' money in the fulfilment of the reward (one burger), however you gain more in the three additional burger purchases leading up to that point. And a customer that keeps coming back is more likely to convert and bring more new customers with them without any additional cost to your business.

A win-win!

Their next move to increase CLV is to launch a discount campaign. They do this in the form of a Cashback Scheme. These are networks of affiliated businesses where customers can earn cash (in the form of a percentage of their purchase) by spending within the network.

There are certain best practices to perform this correctly; however in this example let's say that the burger restaurant joins a cashback network. When deciding where to eat lunch, the customer now has a powerful incentive to choose the burger restaurant. Spending there will be effectively cheaper than going to a competing restaurant with no cashback scheme. Their purchase now has the power to 'earn' them money to spend elsewhere.

It is essentially a discount strategy in disguise, but it offers a sense of power and control to the customer.

With two powerful strategies, the restaurant has created an army of loyal customers who are far more likely to choose their establishment over the competition's. More so, because they focused most of their strategy on Customer Retention, their investment profitability is far greater, as they were able to spend less on each customer to get more purchases and purchases of higher revenue.

How to set up your own loyalty schemes

We know what you're thinking – 'That's all well and good, but setting up loyalty programmes and cashback schemes sounds expensive and complicated'.

And it can be.

That's why we at the OMG network have been working non-stop on our digital loyalty solutions, making it easier than ever before to create perfectly calibrated loyalty programs, cashback schemes, and discount campaigns that you can access in one simple to use place.

Plus, with an established network of discount-hungry consumers, we can provide a buzzing space to try out your newest campaigns and strategies.

Sounds interesting? We hope so. To find out more, visit our partners page, sign up and we'll be in touch as soon as possible to get you started.

Maria Vasilikou

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