The Cost of Customer Retention vs. Customer Acquisition
Comparing the cost of customer retention vs. customer acquisition is an integral part of a successful business strategy. Customer retention costs (CRC) and customer acquisition costs (CAC) have key differences that are vital to understand when determining customer loyalty’s value. This article will explore the differences between CRC and CAC and the importance of learning how to reduce them to improve your profit.
New customer acquisition represents the expenses incurred to acquire a new customer within a specific period. Generally speaking, the average CAC is more expensive than retention. To calculate your average CAC, you will total all marketing and sales costs that go into your efforts to acquire new customers. CAC can be calculated for individual customers or the overall average. Marketing expenses include marketing campaigns, advertising, lead generation, and sales commissions, which, as we all know, can add up quickly. Depending on the industry, the CAC can be as low as $200 or as high as $1,000.
CAC=Total of all marketing expenses and sales costs for customer acquisition / Total number of customers acquired.
For example, The total expenses and costs over 12 months were $150,000, and 200 new customers were acquired. The CAC would be $150,000/200 = $750 / customer.
The cost required to retain customers over a specific period can be calculated per customer in that period or based on their average lifetime value. This will include customer service, marketing, sales, discounts, and loyalty programs. This formula considers the number of customers you had at the beginning of the period (B) and at the end (E). Calculating the average lifetime value of your customers requires additional data and is comparatively complex, but doing so will help you understand the revenue generated from each customer.
CRC= Total expenses / ((B +E) /2)).
For example, if total expenses were $100,000, the number of customers at the beginning was 750, and at the end of the year was 500, the CRC would be:
$100,000 / ((750+ 500)/2) = $160 / customer.
By calculating the cost of customer retention vs. customer acquisition, you can compare expenses and evaluate the effectiveness of your strategies. This financial insight will help you learn what business strategies need to be adjusted. If you are looking for solutions to decrease the cost of customer acquisition and retention, contact YCS® Group. We specialize in loyalty.
Visit ycsgroupllc.com to get started.