When Is Customer Acquisition A Better Bet Than Retention?

Russ Chadinha

It’s much easier to sell to your existing customers than to new prospects, and attracting a new customer could cost five times as much as you’d spend to retain one. Make new friends, but keep the old.

Even so, there must be some situations in which customer acquisition is a better investment than retaining an existing one. While losing your existing customers isn’t a promising sign, there is an argument to be made for the strategic choice to lose certain less-profitable accounts in order to reinvest your money and time into acquiring new customers.

Before you decide to let a customer go, it has to make sense in terms of your profitability and business goals. Perhaps a customer makes unreasonable demands, or is unwilling to develop a partner relationship that would be viable for both parties. Or perhaps you have a large customer for whom the cost to serve now exceeds the profitability.

Here are five situations in which customer acquisition could be a better investment than customer retention:

1) You’re losing money on existing customers: Make sure you have a clear picture of the cost to serve for each of your customers. Those with a high cost have a significant impact on your profit and loss, so examine those accounts to see if there are justifications, such as reciprocity or concessions on volume.

If you’re not making money on a certain customer, but need to retain the relationship, you might want to invest some of those retention dollars into acquiring new accounts. However, if your data indicates that you don’t need the relationship, consider eliminating them from your portfolio to free up dollars to replace the customer.

2) You’re not getting a large share of wallet: Sometimes your portfolio of customers includes some that don’t want you to gain a greater share of their business; they want to retain a dual-supplier relationship. The 80/20 rule always applies in this situation, so it might make sense to eliminate some of those 80 percent of customers who aren’t willing to partner with you.

3) You need to reduce risk in your customer portfolio: If too much of your revenue depends on one or two customers, that consolidation puts your revenue at risk. To reduce that risk, you need to diversify your portfolio by investing in customer acquisition.

4) Your success depends on building market share: With some products, your business strategy is to get the new product in front of as many customers as fast as possible, building a critical mass in terms of market share. If you’re selling security software or try-and-buy software, for example, you would probably focus on acquisition activity and strategy over retention.

5) You’re releasing new, adjacent products: Acquisition doesn’t have to mean brand-new prospects — you could also gain new accounts within existing customers. With large organizations, for instance, you may currently be selling into one business unit. When releasing an adjacent product, you now have to sell into a different business unit with different decision-makers and use cases. Treat these opportunities as an acquisition activity, and bring in your sales organization to make that new offer.

Any time you’re considering the benefit of parting ways with an existing customer, take a close look at the business impact, and treat acquisition as a current delivery and a long-term view. It’s easy to get caught up in hitting your quarterly numbers and only take actions necessary to meet those goals, but that approach ultimately leads to expensive future quarters. By balancing investment and acquisition activity, you help ensure future success.

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