The Cost of Keeping Your Customers

Acquiring customers is addictive. Launching a Facebook ad, sending a targeted email promotion, hosting a webinar, and then witnessing your customer count go up feels really good. There’s that quick dopamine burst validating the effort put into your marketing campaigns.

In short, focusing on retention is twice as impactful as focusing on acquisition. Your web-based business doesn’t make money when a customer buys once or when a customer subscribes to your service for the first month. You make money months down the road because that customer is coming back time and time again.

By investing in retaining customers, the money you spend to keep, rather than acquire, your customers turns out to be a key investment.

When your business model is subscription SaaS, e-commerce, or mobile app, the customer economics are similar. You’re spending cash up front in customer acquisition cost (CAC) — money which you theoretically make back over time through retention, repeat purchases, and continued engagement.

The amount of time it takes to recoup your initial CAC is known as its “payback period.” For example, when you first acquire a customer in January, let’s say you’re $500 in the hole, and then you don’t drive enough revenue to break even — ending the payback period — until June. After that, however, you’re making pure profit: more than $500 of it in December. And that’s just for one customer.

The problem is that most of the time, customer attention doesn’t stay constant for that long. Even if people are highly engaged upon first signing up for your app, they’ll lose interest very quickly if they aren’t getting value.

The shape of the engagement curve matches what you see across all kinds of tech businesses, including SaaS and e-commerce:

Most of your customers are leaving soon after you’ve just made a huge outlay in CAC spend to bring them in. That means it’s likely you lose your customer while they’re net-negative to you — before they’ve stayed around long enough to “pay back” their CAC.

This is where high acquisition costs come back to bite you hard. Overfocusing on adding customers can distract you from keeping them, so that when you look at your customer economics, you find that you’re spending money to lose money.

The remedy to poor retention is investing in customer success, especially during the earliest stages of the lifecycle. When you bring on a new customer, your job’s not over yet. After expending acquisition costs and efforts, your next mission is to ensure that new customers get to see the value in your product.

Early investments in user onboarding don’t just improve your active customer count during that period. Early investments in user onboarding have a multiplying effect.

For instance, if we apply the above retention curve to a SaaS charging $100/month, they would see a 46% increase in revenue from this cohort alone. Effectively, from just a 15% increase in retention, there is almost 50% more money under the blue curve above than the red. Increase early retention more, increase revenue more:

The beauty here is that these increases in retention not only cascade through the year for this cohort, but for every single cohort. That is, with this improved retention, your MRR will grow at faster rate.

From a relatively small increase in day 1 retention, you gain a huge revenue boost. The upshot is that a small amount invested in early-stage onboarding can pay huge dividends. By increasing your spend here on the cost of keeping customers rather than your customer acquisition cost, you can improve long-term retention and drive growth.

You don’t win when you acquire a customer. You win when you keep customers around.

Keeping users delighted over the long-term is hard. It takes work to do it right — more work than it does to simply acquire a whole new batch of them. But if you do, you can build a business that lasts.

Are you focusing enough on customer retention?

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