In the world of startups, there exists an age-old battle – customer acquisition vs customer retention. Not unlike the nature vs nurture debate, the question of which is the right way to go for business success (acquisition or retention) has historically posed a great dilemma for startups. On the one hand, there are acquisitionists, who believe that the key to success is to constantly bring in new customers, and on the other, there are retentionists, who believe that the best way to grow a business is by focussing on existing customers – keeping them happy and turning them into high-value customers. However, the growth of a startup, especially in the early stages, is determined by both strategies – acquisition and retention. This complementary relationship catalyses a startup’s journey to success. In short, if acquisition is queen, then retention is king.
In today’s volatile market, where nine out of 10 startups fall apart, often due to a lack of resources combined with suboptimal marketing, focusing on retaining customers and building strong relationships with them becomes a must for startups to survive and build resilience. While acquisition is essential for growth in the initial stages of a startup’s journey, retention becomes the key to greater cost efficiency, sustainable growth and ultimately, profitability in the long run.
Customer acquisition: a burden on pockets of early-stage startups
Acquiring new customers has always been more expensive, especially in competitive markets. A Harvard Business Review study suggests that acquiring a new customer costs five times more than retaining an existing one.
The burden on the pocket is more pronounced among early-stage startups, as most of them operate with limited budgets. The cost of customer acquisition becomes higher than expected and exceeds startups’ ability to monetise those customers, which often becomes a significant cause for a startup’s failure, resulting in round after round of wasteful fundraising. Though one can’t entirely negate the need for acquisition in the early stages of the business, it is here that retention assumes an important role. It drives their long-term sustainability and growth prospects. As soon as a startup commences its journey, its retention journey should begin with acquiring the very first customer, making both essential for growth and profitability..
Customer retention: one-stop-solution for success and why retention will always be king
The Pareto principle, or the famous 80/20 rule, states, “For many outcomes, roughly 80 percent of consequences come from 20 percent of causes or the vital few.” This principle, when applied here, suggests that 80 percent of a business’s revenues are generated directly from the top 20 percent of its customers. The directive is clear that businesses ought to pay more attention to retaining existing customers, enhance their value for them to become that top 20 percent customer cohort, and further enhance their revenues or profitability. There are a plethora of benefits to prioritising retention ahead of acquisition that go beyond revenue growth. It leads to greater customer satisfaction, brand loyalty, and customer lifetime value (CLV), ultimately contributing to a higher return on investment (ROI) for the business.
Moreover, existing customers are more likely to spend more money on the products or services of a particular brand, as compared to new customers, due to more familiarity with the business and sustained brand engagement over a period of time, which leads to more revenues. Loyal and satisfied customers have higher chances of recommending their products or services to others, doing so automatically garners new customers, without having to spend disproportionately on acquisition. Moreover, loyal customers will be more amenable to a brand’s upselling and cross-selling efforts as well. This creates exponential growth for startups, making retention the ultimate king.
In conclusion
The Indian startup ecosystem is going through a funding winter, and under such circumstances, startups that are resilient and focus on business fundamentals will continue to emerge gloriously. It is imperative to keep customer acquisition costs at a minimum and increase emphasis on customer retention to have a higher conversion percentage and survive through the situation. A Bain & Company study suggests that an increase in customer retention by five percent can lead to 25 percent growth in a company’s profits, which further validates our stance that a robust retention strategy is a must for startups to beat the competition in this cutthroat industry. However, this is not to suggest that one must entirely negate the other. There exists a complementary relationship between the two, where acquisition is necessary at the start, but retention must go hand in hand from the start!
Experience shows that startups that start their retention journey from day one will always be more successful in the long run. Startups taking the road of customer retention should focus on providing excellent customer service, offering loyalty programs and rewards, personalising their communications across channels, and making their interfaces user-friendly. Having a strong customer retention strategy will enable startups to ensure financial growth, strong customer relationships, and organisational resilience, ultimately making them enduring businesses.
Nitya Shah is the lead of WebEngage Startup Program