When you’re scaling a high-growth company, it’s easy to get excited about acquiring new customers. After all, new logos and expanded market presence are critical to demonstrating momentum and success.
However, a relentless focus on front-end sales can lead to problems if you neglect customer retention. Churn negates the hard work you’ve done on acquisition, putting your company’s long-term growth at risk.
New customers can be a problem if you’re:
- Prioritizing new customer acquisition over retention, and
- Targeting the wrong customers
Here are the steps you need to fix these pitfalls and calculators to run your numbers.
Prioritizing New Customer Acquisition Over Retention
Let’s be clear – you need net-new customers. Nobody is suggesting you stop selling. But selling to customers who won’t renew is an incredibly expensive problem for your company that needs to be fixed.
The problem boils down to the cost of acquiring any new customer vs the overall value of that customer to your company.
Here’s why this is a problem:
Acquiring new customers is expensive. It involves marketing and sales expenses, which are the costs of getting a customer in the door. The industry average for SaaS says companies earn back 92% of their sales and marketing costs by the end of Year 1.
That means if your company goes through the time, energy and expense of bringing on a new customer, and that customer churns at the end of year one, you’ve done all that work just to serve them at a loss.
But it’s more than that. When a B2B recurring revenue company closes a new customer, you often add an entirely new layer of costs associated with onboarding and implementation.
Even companies that charge a one-time implementation fee are generally in the red with a new customer until sometime in year two or even year three of their relationship.
Keeping your customer acquisition cost (CAC) down is one way to address the problem. Reasonably reducing costs is always beneficial. But delivering a great customer experience that’s designed for retention and loyalty is the better path to growth.
Sales without a great customer experience behind it is a recipe for disaster.
How to fix it:
The solution for this problem is twofold:
- Design and implement a customer experience that prioritizes retention. We’ll talk more about some specific steps in the coming days.
- Track and measure your customer acquisition cost (CAC) against the industry average and your own trendline.
Calculating Customer Acquisition Cost (CAC):
Traditionally, CAC is the cost of acquiring a new customer. Mathematically, it looks like this:
CAC = Total Sales & Marketing Costs / Number of New Customers Acquired
For example, if it costs you $10,000 to acquire 100 new customers, your CAC is $100 per customer.
And, again, note that traditional CAC tracks only the costs from sales and marketing. To understand the true cost of a churned customer evaluate any support and non-recouped implementation costs, as well. If sales & marketing costs alone put you in the red after a year, imagine how much you’re investing in customers when you include the costs to serve them. The amount you’re losing on a customer who churns after Year 1 is significant!
Customer Acquisition Cost (CAC) Calculator
Customer Acquisition Cost (CAC) determines the average cost of acquiring a new customer. It is calculated by dividing the total sales and marketing expenses associated with acquiring customers by the number of customers acquired during a specific period.
Instructions:
- Enter the total cost of acquiring customers during a specific period.
- Enter the number of customers acquired during the same period.
- Click on Calculate to see the Customer Acquisition Cost (CAC).
CAC:
$0
Targeting the Wrong Customers
Another Sales-related issue that leads to churn is selling to customers who are not a good fit for your company.
Targeting the wrong customers is another costly mistake that can lead to churn. Companies need to focus on acquiring customers who are a good fit for their product or service and who are likely to stick around for the long term. This starts with developing a clear Ideal Customer Profile (ICP). Without a clearly defined ICP companies can try to serve too many different kinds of customers.
Here’s why this is a problem:
Lack of clarity about who you’re serving can leave you with muddied marketing messages that won’t cut through the clutter because they’re trying to be all things to all people. You can end up selling to folks who buy for the wrong reasons and are less inclined to stay for the long-term. Not having a clear ICP can even impact your product, because without clearly knowing who you serve, you can try to make everyone happy by developing product features that are all over the place.
When you try to serve everyone, you end up serving no one.
Here’s How To Fix It:
Evaluate your existing customers to get clear about the profile for those who deliver your best path to growth. Here are some variables to consider:
- Identify your target market: What industries do you serve?
- Define your customer’s needs and pain points: What are the specific problems you solve for your customers? The more specific you can be, the better.
- Determine your customer’s demographics and firmographics: Consider a range of variables. Here are a few to consider:
- Company Size (revenue, number of employees, market capitalization)
- Location
- Growth Stage
- Tech stack
- Support needs
- Cultural fit
Now, based on what you’ve learned, identify your Ideal Customer Profile (ICP).
Next, evaluate prospects against your ICP criteria using a scoring model. Our ICP Fit Scoring Tool measures how well existing customers align with your company’s specific set of ideal customers. As you engage new prospects you can prioritize those who fit well with your product.
Focusing solely on front-end sales is a short-sighted approach that can hinder your growth and profitability. When you sell to the wrong customers, there are costs. (And yes, there is such a thing as bad revenue.)
You want customers who are a good fit, so they have the potential to grow into long-term, highly profitable customers.
Ideal Customer Profile (ICP) Fit Tool
This ICP Fit Tool provides you with a way to score existing and prospective customers against the criteria you deem most important for your company.
Follow the steps below to set up and calculate your ICP Fit Score:
Instructions:
- Enter up to 10 variables that are important to your business.
- For each variable, assign a priority from 1-100.
- Submit your variables and priorities.
- For each customer or prospect, rank the level of quality/alignment they deliver to your company from 1 to 10.
- Submit your ranks.
- Click on "Calculate" to see the ICP Fit Score.
Great work aligning your front-end to your post-sale experience!
Keep your audit going with Mistake #3: Overlooking How Chaotic Internal Processes Can Drive Customers Away
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Partner with Alignmint for expert guidance.
Let Alignmint do the work to evaluate your business and give you the answers that to stop customer churn before it starts with our Churn Slayer Audit.