Customer Retention vs. Customer Acquisition: The Ultimate Growth Showdown
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There’s a hearty debate in progress in the SaaS world right now, and it boils down to this: should founders focus more on customer acquisition or customer retention? The answer, as you might expect, is complex. Both elements are vital to success and come with their own costs, challenges, and rewards.
Let’s start by being honest: no one really knows the answer. And maybe there isn’t even an answer. The two are often hard to separate- after all, you can’t retain customers that you don’t have.
As Katelyn Bourgoin put it, “I think one of the common myths in the retention vs. acquisition debate is that acquisition is the *always* the best growth lever. Of course acquisition is a critical driver, especially in the early days, but studies show that referrals are still one of the best growth channels.”
One thing that’s for sure, though, is that founders often misunderstand the impact that churn can have on their bottom line.
Underestimating the scope of the issue has huge effects on every level of your business. Lower CLV’s results in lower monthly recurring revenue and difficulty predicting the financial state of your business moving forward.
A high churn rate also means that your acquisition costs need to be kept really, really low for your revenue to grow over time- a daunting prospect if your business relies heavily on digital marketing.
That said, your churn is also the key to understanding your customers, and building a solid retention plan will pay dividends over time.
Churn is compounding. Small losses add up over time, but the revenue that you save by retaining customers also grows at an astounding rate.
Don’t take my word for it, though. Let’s look at the stats.
- Between 70 and 95% of a subscription-based company’s revenue comes from renewals and upsells.
- On average, a repeat customer will spend 67% more than a new customer.
- Bringing in new customers is up to 25 times as expensive as retaining your existing base.
- Increasing your customer retention rate by as little as 5% can increase profits by 25% to 95%.
With all that said, my point is probably pretty clear. While acquisition is obviously important, retention is the bread and butter of SaaS businesses. You aren’t simply making a sale once that you can forget about after- you’re making a sale that you’ll continue to make monthly for the entire lifecycle of the customer.
To put it another way: the defining feature of SaaS business is recurring revenue, and harnessing the power of retention is the key to success.
So that begs the question...
Why are We Still Getting it Wrong?
44% of companies focus more closely on acquisition, while only 18% cited retention as a higher concern.
Acquisition is winning out right now.
Let’s take a look at a few of the reasons that churn tends to get pushed down the priority list.
Customer retention is hard to track
According to Gary McGrath, Success Operations Manager at Paddle: “More often than not, when [customer] success delivers, it's normally attributed to the product delivering, as all the work behind the scenes to expand the customer does not show on metrics.”
In a nutshell, retention is often a thankless job. ¯\_(ツ)_/¯Unlike obtaining a new customer, there aren't many quantitative measures on customer retention. Sure, there's NPS and surveys, but it's not always a clean cut answer.
Getting visibility into the issue can be difficult, with the ultimate effect that, again in the words of Gary, "you never know what you have until you've lost it."
No one owns it
Here’s the thing about customer retention: every single part of your business is involved on some level, but most SaaS businesses don’t have any specific leadership on retention.
Gary from Paddle explains: “More often than not, a business will just assume the responsibility of retention falls onto the success team… Customer success is there to champion the customer journey, however making a customer successful is on everyone.”
Ever heard of the tragedy of the commons? It’s a term mainly used in environmental science and economics to describe the use of a resource that is collectively shared without any specific ownership.
The end result, according to the theory, is that every individual will act in his or her own self interest and the resource will eventually be depleted or run down.
In a SaaS business, everyone (theoretically) has ownership of churn, but so often, no one is (specifically) in charge.
Customer success is there to champion the customer journey, however making a customer successful is on everyone.
It’s not a perfect metaphor, but think of it this way: if no one “owns” churn, everyone will do what is in their own best interest, which is taking care of their personal KPI’s.
Take a look at how the conversation went down on Twitter. Everyone has the right idea (i.e. “it’s everyone’s job”), yet no one can quite answer who the lead is.
Okay #SaaS community, I need you again. Help me answer this important question:
Who 'owns churn' at your company?CS? Marketing? PM? CFO? Founder? CEO? All of the above? None of the above? Company dog? New intern? 🤔 pic.twitter.com/SM3KCznJU2— Kristen DeCosta (@KristenDeCosta) March 7, 2019
In other words: if retention is everybody’s job, then it’s nobody’s job.
Retention isn’t sexy
Okay, well, I think retention is sexy, but maybe that’s just because I live and breathe it ;).
But, let’s not forget that there’s an emotional, psychological side to the ways that we look at retention.
Roy Olende, Customer Research at Buffer says: “Much like it’s more exciting to buy a new car than to maintain a current vehicle... it’s a lot easier to celebrate new customers than retain customers.”
Thing is, this psychology is also built into our organization structures and priorities.
Roy continues: “It feels like a company is making great progress when they add new users and the incentives associated new customers usually outweigh those associated with retained customers: a salesperson closing a deal tends to be more highly recognized and rewarded than a support rep solving a customer’s problem.”
Retention may be hard to monitor at the best of times, but we run the risk of making it altogether invisible when we don’t treat it as a behavior we work to incentivize internally.
Again: churn comes with compounding profits (or losses) and making the save in a customer success issue will often bring in as much or more revenue as making a sale.
“Acquisition has a head start over retention because 'How do I get customers?' is the original challenge for virtually every business in every industry.” -Alli Blum, SaaS Onboarding Optimization Specialist.
Put simply: a company just starting out needs to prioritize acquisition above just about anything else. You can’t put resources into maintaining customers that aren’t there, and focusing a significant portion on your resources on retaining the customers you do have just isn’t feasible for a lot of startups early on.
So which should you be focusing on?
According to Brad Batesole: "It depends where you are in the product/market life cycle, your funding status, and your key objective. There is no one-size fits all model here. Proving an MVP? Acquisition. Maturing as a company? Retention."
Churn is uncomfortable
Dealing with churn hurts, because it’s basically a mirror on your struggles, mistakes, and oversights as a company.
Responding can be expensive and time consuming.
At times, taking action on retention can result in huge changes to your business model. It’s a heavy investment in the short term that takes time to pay meaningful dividends.
As Alli Blum put it: “You might need to hire team members to produce more instructional material for new customers. You might discover that your marketing tech stack is full of broken filters or missing capabilities. You might even discover your business isn't suited to a subscription model.”
But you didn’t expect this business to be easy. Thing is, churn is a powerful tool for building out your product roadmap and better understanding your customers. No pain, no gain, right?
It’s Not that Simple, Though
Okay, so retention is important (and difficult), but we’re not trying to trick you into believing acquisition isn’t absolutely vital to the survival of your SaaS business. Wes Bush of Traffic is Currency made a really valid point when he said:
“Acquisition is the most important part. You aren't going to be able to retain customers that are a bad fit in the first place. Try selling video marketing software to someone that thinks you're a video marketing agency. Hint. You won't get very far.”
There will be times in the lifecycle of your business where you’ll need to lean hard into acquisition. That doesn’t mean that your retention efforts need to suffer, though.
As Wes said, even in your acquisitions you need to focus on retention- i.e. your marketing needs to pull in best-fit customers whose needs you know you can meet in the long run.
Edward Ford from Supermetrics continued on and explained the ways that a retention mindset should define your marketing from Day One: “Focusing on retention when seeking product-market fit is a big part of identifying your ideal customer profile. Once that’s working and you have a solid understanding of your customer, then acquisition becomes super powerful for your growth.”
Focusing on good-fit, ideal customers for acquisition as being focused on retention from the get-go.
So, I won’t undersell acquisitions as a driver for your business- but let’s also not forget that your acquisitions should fit into your overall retention platform.
With that in mind, I’ll close by digging into the ways that you can combine both efforts into a growth plan.
Finding a Balance
So I’ve concluded that in the long-term, retention will likely have a bigger effect on your SaaS business than a constant focus on acquisition. How do you balance the two, though?
First: retention needs to be a focus in every department, every step of the customer journey, and every piece of communications that you put out.
So often, this is the side that SaaS businesses forget.
As Melissa Macchiavelli put it: “Happy customers and positive experiences are less costly to maintain (if you’re doing it right) and more rewarding for all. Companies with broken products and unhappy customers tend not to flourish.”
There are a ton of ways to maintain both strong acquisitions and a great retention plan. Here are a few of my favorites:
- Systemize customer success.
- Align your entire team around retention.
- Decide who owns retention and make a big deal of their successes.
- Market with LTV in mind.
- Invest in your onboarding and educate your customers long after they finish
- Engage your customers consistently.
- Highlight your most successful customers.
- Repurpose content to bring in leads that are similar to your successful customers.
- Plug every leak you can, then use that revenue to invest in marketing.
- Get to know your existing customers to help you find new ones.
The debate is raging, but it doesn’t have to be. Retention and acquisition are two sides of the same coin, and to neglect one is to undercut your efforts with the other.
That said, retention is the long-term growth lever that your business needs for success. It’s in the numbers.
The revenue from a strong retention plan can fuel your acquisitions, but in the long run, fighting churn is about so much more than revenue.
It’s the difference between a company with an army of ex-customers and a company that grows leads into long-term fans of the brand. Let me leave you with this: before you push hard to bring in as many new customers as possible, ask yourself if you’ve built up the foundation to retain them.
Your sales could be paying dividends over a much longer period of time. Make each one count.