Should I Focus On Acquisition Or Retention?

“I wish I could clone myself into 2 so I can fully focus on both acquisition AND retention!” Well…what should you do?

This content was originally published in the No Best Practices newsletter on 08.01.2022.

Reader Question:

We are a low-mid 6 figure business. We sell fashion accessories with Facebook as our main acquisition channel. We’ve been impacted by IOS14 changes and our Facebook spend is just not as profitable and efficient.

While trying to find new channels, I’ve also been focusing on customer retention such as marketing activities and new product launches. The latter has been working great, our repeat customer rate has increased by 60% in the last 90 days, so we’re doing well and are in-fact more profitable (since it’s so much cheaper to retain customers) despite a significant drop in traffic due to scaling back Facebook spend.

It’s tempting to now put all my effort into customer retention vs acquisition. However, I think (not sure) I still have to work on acquiring new customers if I want to grow to a multi-million dollar profitable brand. I also think (not sure) I currently do not have a big enough customer base to get to my revenue & base profit goals, even if we do really well on retention.

I wish I could clone myself into 2 so I can fully focus on both acquisition AND retention!

So my question is, for a small business with limited time and money looking to scale: What are the key metrics that show us how much effort we should be focusing on customer retention vs acquisition?

No Best Practices Answer:

I’m so happy you asked this question, because it’s top of mind for many marketers and brand owners. The answer depends on your product category, your price point, and your ambitions for the business. I’m going to walk through each of these factors and then provide my POV specific to your brand and your situation.

Your Product Category

The biggest factor in your ability to retain customers is your product category and how consumers interact with it. At one end of this spectrum are high ticket, durable goods like cars, large appliances and homes. At the other end of the spectrum are low-ticket virtual goods like in-app purchases and virtual subscriptions.

If you’re selling cars, that’s a purchase most consumers will make once every three to ten years. No amount of marketing is going to shorten that average timeframe. If you want to increase purchase frequency, you have three options:

  1. Planned obsolescence/design the cars to break down faster. Doing this will send you straight to hell, but it’s been a cornerstone of the last five decades of economic growth.
  2. Go after a wealthier buyer who can afford to purchase multiple cars per year. They have a different relationship to the category.
  3. Expand into adjacent product categories with higher purchase frequencies.

You’ll notice that all three of these options require you to make changes to your product strategy. You have started to explore this route with new product launches and have seen how successful it can be.

The concept of leasing cars is a creative, ethical spin on option #1. Automakers use the lease to make an increase in purchase frequency more affordable to the average consumer. And then they create a secondary market for used cars, which is a creative spin on option #3.

Brands selling fashion, footwear, jewelry and handbags are typically closer to the cars end of the spectrum than the software end. For every 100 new customers you acquire, between 20-35 will ever come back for a second purchase. If your repeat rate is stronger than this, that is a great sign!

Tl;DR: no amount of marketing can overcome consumers’ default relationship to your category, or their level of disposable income. So retention strategies have their limits.

Your Price Point

Your price point influences your retention rate in two ways: it determines the relative wealth of your customer base, and it determines how much disposable income is available to your average buyer.

If your absolute price is low, and your price relative to other brands in the category is low, your average buyer can afford to purchase from you more frequently. This will improve your baseline retention rate. But there is a tradeoff. If you price low, you risk developing a brand perception that boxes you out of the high end of the market.

Think about it this way: stores like Dollar General and Five Below deliberately court the low end of the market, and they price their goods to enable a relatively high purchase frequency for those with household incomes under $35K. Stores like Macys and JC Penny try to appeal to everyone, but use discounts and promotions to capture the low end of the market. So they fail to compete at the low end, but alienate the high end.

If your absolute price is high, and your price relative to other brands in the category is high, your average customer is going to be casual. They can only afford to purchase from you “as a treat”. But if you can back up your pricing with the right marketing and product quality, you can attract a base of loyal, high income customers. Do this and your best customers can and will purchase from you very frequently.

This is why luxury brands aggressively court high net worth individuals with a demonstrated interest in fashion. It’s also why multi-brand luxury retailers report that 20-40% of total revenue comes from the top 2-10% of their customer base.

TL;DR: high prices mean lower purchase frequency…unless your prices are so high that you are able to appeal to high net worth enthusiasts in your product category.

Your Goals

How big do you want to get, and how quickly do you want to get there?

Every brand contains at least two businesses: your core customer business and your casual customer business. Your core customers have a deep relationship with your brand. Their path to purchase is generally longer. They take the time to learn about what you sell, why you sell it, and why you’re different. The all-in cost to acquire these customers is higher, but so is their lifetime value.

Your casual customers buy from you on impulse, or because your brand went on sale. They know less (sometimes nothing) about what you sell and why you’re different. And they’ll probably purchase from you once per year, or once in their lifetime.

The larger and faster you want to grow, the more you’ll need to lean on casual customers. And this will require you to focus on customer acquisition–not just perfecting your Facebook Ads strategy, but identifying multiple sources of profitable growth.

If you’re content to stay relatively small, acquisition is less important. Once you’ve proven product-market fit, you can invest acquisition resources in reaching out to high-potential customers profitably. This doesn’t have to mean Facebook ads, although there are strategies for reaching customers with high LTV potential on paid social.

TL;DR The bigger you want to be, the more you’ll need to focus on acquisition.

So Where Should You Focus?

Although your product category is broad, your target market is relatively niche. That’s probably why you’re seeing costs rise post-iOS14. The loss of data that resulted from Apple’s privacy measures made it harder to identify niche interests within the Facebook user base. I can see two potential paths forward for you:

Option 1:

Focus on better understanding your existing customer base and developing advocates within that base. This will eventually enable you to acquire new customers without relying too heavily on Facebook advertising.

This would involve surveying your existing customers and probably talking to some of them on the phone. You would want to learn how they found out about your brand and what other media or communities they are involved in related to your product’s niche.

You would also try to find out if there was something missing in your niche–maybe it’s a sense of community, or maybe it’s consolidated information on a specific topic. If your brand can help provide what is missing, that would drive word-of-mouth awareness and goodwill, two building blocks for a genuine community.

One example: brands like Instant Pot and Peloton have created Facebook communities for their products that have become almost as famous as the products themselves.

This approach requires a combination of time and legwork. But if you execute this successfully, you’ll build a strong association with your niche that will dramatically reduce your need for paid acquisition.

There is one opportunity to accelerate this process: TikTok is currently a huge source of organic awareness and the nature of the app is very niche-focused. So you could try building a list of 50-100 accounts who post about your niche and get an average of 25-50K views per video. Reach out to these posters for their mailing info, then send each one a gift with a personalized note.

The odds are strong that 5-10 of those accounts will post about your brand. This will drive some organic awareness (and hopefully some sales) your way, and start building the association between your brand and your niche.

Taylor Lagace posts really good Twitter threads about this type of influencer seeding.

Option 2:

Figure out a way to broaden your positioning so your Facebook ads appeal to more people, which will lower your cost of acquisition.

For the average consumer, your niche probably isn’t a selling point, but the aesthetic value of your products or the stories behind them might be. So you can try to mirror this broader approach in your ad creative.

What’s great about this approach is that you can run it as a test. If you see lower CPMs and better click through rates, this approach may have legs. But to fully realize the potential here, you may need to extend the broad creative and copy approach to your website.

Both of these options have their risks. If you take the first approach, you may see sales growth slow down in the near term because it will take some time to get the customer insights you need and put them into action. If you take the second approach, you may alienate your core customer base because many of them identify strongly with your core niche.

In the end, the choice is up to you. If you have a passion for your niche, option one is probably the better choice. If you feel a passion for running Facebook ads (some founders do!) then option two is the way to go.

Either way, most consumer businesses need to focus on customer acquisition just to tread water. Without consistent acquisition, your sales will slowly shrink over time. The exceptions to this rule are brands that cater to high net worth individuals, or to fervent hobbyists who spend most of their disposable income on the hobby.

I hope this was helpful!