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When it comes to customer acquisition and customer retention rates, it is worth the time to learn a few basic principles which may help the bottom line. Understanding the relationship between the cost of customer acquisition and customer retention rate is one key to running a financially sustainable business of any size! This article is a follow up to Find Your Niche: Cultivating Customers that Share Your Passion for Your Business , which discusses identifying a customer base to create adaptive products desired by a targeted customer base.
The Cost of Capturing a Customer
The next step is to think strategically about how to efficiently create a branding and marketing campaign to let targeted customers know how to find a product. The dollars it takes to create a new loyal customer, or "customer acquisition cost" (CAC), is often an invisible cost to a small business, and often a line item in the marketing budget of a large business. A general rule of thumb is that it costs a business five times more to acquire a new customer than it does to retain a current one. Consider the true cost of time and resources it takes to attract new customers versus what it takes to keep them. A simple way to determine your CAC is to calculate the total cost of advertising over a year (including time spent) and divide that by the number of new customers you acquired that year. Generally, the CAC should be paid back to the business via revenue from that targeted consumer within a year of acquiring the customer.
It Pays to Keep that Customer!
With the right tracking and some simple calculations, customer acquisition can become very much a science. On the other hand, customer retention can be a more difficult thing to calculate and track. Ideally, customers will patronize a business repeatedly because they love the product. Once a customer develops this loyalty to a business, the product itself is doing most of the work of bringing the customer back so the cost of attracting the customer decreases significantly. Tracking customer retention provides information about the overall loyalty of a customer base and can help a business strategize marketing and outreach. Put simply, customer retention rate is calculated by tracking the percentage of repeat customers over a certain period of time, out of all of the customers who visit a business.
By understanding the CAC and customer retention rate, the return on investment (ROI) can be calculated and tracked. The ROI is a simple and insightful way to shed light on the efficiency of marketing efforts. Once the ROI is understood for various marketing strategies, a business can make intentional marketing decisions that will maximize positive outcomes and keep customers coming back!