Customer Acquisition vs. Retention: Where to Focus for Growth in 2023

In 2023, businesses face a challenging economic landscape. Costs are rising, budgets are tightening, and the specter of a recession looms large. Against this backdrop, growth-focused companies must make tough choices about where to allocate their limited time and resources.

Nowhere is this tradeoff more apparent than in the age-old balancing act between customer acquisition and retention. Gaining new customers while keeping existing ones happy is a challenge even in the best of times. But when uncertainty reigns and every dollar counts, the stakes are higher than ever.

So where should you focus in 2023 to maximize growth and minimize risk? Should you double down on acquiring new buyers, or concentrate on retaining and growing your existing customer base? Let‘s dive in.

Defining Acquisition vs. Retention

First, let‘s clarify what we mean by customer acquisition vs. retention:

• Customer acquisition refers to the process of gaining new customers for your business. It‘s about expanding your customer base and market share by convincing new buyers to choose your product or service. Acquisition strategies span the gamut from digital marketing and advertising to sales outreach and product-led growth.

• Customer retention, on the other hand, is about keeping the customers you already have. It focuses on delivering value, fostering loyalty, and maximizing the lifetime revenue potential of each customer relationship. Retention initiatives often include onboarding, customer success, cross-selling and upselling, loyalty programs, and referral marketing.

Both acquisition and retention are critical for sustainable business growth. Acquiring new customers fuels your top-of-funnel and allows you to scale, while retaining customers protects your revenue base and transforms one-time sales into profitable long-term relationships.

The key is striking the right balance between the two based on your business model, market conditions, and growth objectives. But lately, the scales have been tipping in favor of retention.

The Case for Prioritizing Retention

In 2023, the smart money is on customer retention. While acquisition remains important, the current economic climate and the undeniable math of retention make it the clear priority for most businesses this year. Here‘s why:

Lock in revenue and reduce churn

Fears of a recession are top of mind for business leaders in 2023. In a downturn, consumers and companies alike tighten their belts and become more discerning about where they spend. Discretionary purchases get cut, and even "essential" products and services face increased scrutiny.

In this environment, bird-in-hand revenue from existing customers becomes far more valuable and dependable than the promise of new sales. By focusing on retention, you can lock in a predictable recurring revenue base and insulate your business from the ebbs and flows of new customer acquisition.

This predictable revenue base is especially valuable for companies with usage- or consumption-based business models. A recent study by Productiv found that churn rates for such companies reached 27% in 2022, compared to 13% for companies with traditional subscription models.

By implementing tactics like proactive risk monitoring, high-touch customer success, and targeted "win-back" campaigns, companies can identify and address potential churn risks before they balloon into lost revenue.

Boost ROI and profitability

The math of retention is simple but powerful. Numerous studies have shown that it costs 5-25X more to acquire a new customer than to retain an existing one. At the same time, a 5% increase in retention can boost profits by 25-95%.

Why such dramatic ROI gains? Retained customers tend to buy more over time, are more receptive to upsells and cross-sells, cost less to serve, and act as brand advocates, referring new business. All of these factors contribute to significantly higher customer lifetime value (CLV) and overall profitability.

Increasing retention rates has concrete top- and bottom-line impact. A recent analysis by Profitwell found that a mere 1% improvement in retention can drive a 7% boost in revenue. And companies that excel at retention can see staggering results:

• Apple, long renowned for its loyal customer base, has achieved an incredible 92% retention rate for the iPhone. This sticky product combined with a powerful ecosystem of complementary offerings drove Apple to a record-shattering $394B in revenue in 2022.

• Enterprise software giant Salesforce has made customer success a core pillar of its growth strategy, investing in high-touch support and proactive risk management. The result? Salesforce boasts an industry-leading retention rate of 93% and a jaw-dropping 125% net revenue retention (NRR).

With smart investments in the customer experience, companies can transform retention from a defensive hedge against churn into an offensive lever for profitable growth.

Fuel sustainable growth

While new customer acquisition is essential for growth, it‘s not always efficient or sustainable, especially in a downturn. CAC (customer acquisition cost) can quickly balloon as companies vie for a shrinking pool of buyers with aggressive sales and marketing tactics.

Moreover, new customers take time to reach profitability. Depending on your business model and pricing structure, it may take months or even years to recoup your CAC and start generating positive ROI from a new account.

Retention, in contrast, is the gift that keeps on giving. Happy, successful customers not only stick around longer and spend more over time, but also act as an extension of your sales and marketing engine by referring new business and spreading positive word-of-mouth.

These referrals are often your best leads – they close faster, have a higher lifetime value, and churn at lower rates than non-referred customers. A landmark study by the Wharton School of Business found that referred customers have a 16% higher lifetime value and an 18% lower churn rate than other customers.

Investing in retention initiatives like customer education, community-building, and loyalty programs can create a virtuous cycle of growth, turning satisfied customers into a self-perpetuating acquisition channel. It‘s no wonder that retention-obsessed companies tend to outperform their peers:

• Employee engagement platform Culture Amp has made customer success a core company value, investing heavily in proactive support and ongoing education for users. Thanks to this focus, Culture Amp increased its NRR to 125%+ and now generates over 40% of new business from customer referrals.

• Ecommerce helpdesk Gorgias has built its growth engine around customer centricity, with a mission to "deliver a support experience shoppers love." By helping customers get maximum value from its platform, Gorgias has achieved a best-in-class net retention rate of 140% and a stunning 4.8/5 rating on the Shopify App Store.

In 2023‘s challenging climate, sustainable growth will come not from a leaky bucket of one-time sales, but from a well-tended base of happy, loyal customers.

When to Prioritize Acquisition

This is not to say that customer acquisition should fall by the wayside in 2023. There are still compelling reasons and situations where an acquisition-heavy strategy may be warranted:

Launching a new product or entering a new market

If you‘re bringing a brand new offering to market or expanding into a new vertical or geography, customer acquisition is mission-critical. You‘ll need to build awareness, establish credibility, and rapidly acquire lighthouse customers to gain traction and prove product-market fit.

Even retention-focused companies must invest in acquisition when launching into new markets. Streaming giant Netflix, for example, invested $1.7B in marketing in 2022 as it expanded into the Asia-Pacific region, adding 6.3M new subscribers in APAC alone.

Leveraging a competitor‘s weakness

In times of economic uncertainty, not all companies will be able to weather the storm. Some of your competitors may be forced to cut back on sales and marketing, raise prices, or sunset products, creating a window of opportunity to acquire their customers.

By doubling down on acquisition tactics like targeted advertising, competitive displacement campaigns, and aggressive pricing promotions, you can capitalize on a weakened competitor‘s vulnerability and quickly gain market share.

Supporting new business models

As the economic landscape shifts, many companies are pivoting to new revenue models like usage-based pricing, product-led growth, or freemium offerings. These models require a strong top-of-funnel acquisition motion to bring in new users and convert them to paid customers over time.

Acquisition is the lifeblood of a product-led growth engine. By removing barriers to entry and optimizing the user journey, companies can efficiently acquire new users and then nurture them to conversion with a stellar product experience. SaaS standouts like Slack, Dropbox, and Zoom have all leveraged this strategy to achieve massive scale and market dominance.

Preparing for an exit or fundraise

If your company is gearing up for a big liquidity event like an IPO or acquisition, or seeking a new round of funding, demonstrating strong customer growth and market momentum is key. Investors and acquirers will look for leading indicators like new customer wins, market share gains, and quick revenue growth.

In these cases, a concerted push on customer acquisition can help you hit your growth targets and maximize valuation. Just be sure that your unit economics are sound and that you have a plan to retain all those new customers after the round closes or the deal is done.

Balancing Acquisition and Retention in 2023

Clearly, both acquisition and retention have important roles to play in 2023 and beyond. The ideal balance between the two will vary based on your specific business context, but a few key principles can help guide your strategy:

Align tactics with business model and market conditions

Your go-to-market model should dictate your acquisition/retention mix:

• Usage-based or low ACV companies may need to lean more heavily on acquisition to feed the funnel and then focus on successful onboarding and activation.
• Higher-priced offerings with long sales cycles should double down on retention to protect hard-won customer relationships and secure recurring revenue.
• Volatile or competitive markets reward a retention-heavy approach to mitigate churn risk, while untapped markets with greenfield opportunity may merit more aggressive acquisition spend.

Focus on profitable acquisition

Not all newly acquired customers are created equal. In 2023, it‘s not just about quantity but quality of new accounts. Look for acquisition channels and tactics that bring in high-potential customers with strong product fit, healthy unit economics, and future expansion possibilities.

Tactics to try:

• Optimize your ideal customer profile and use intent data to target high-value accounts
• Leverage product-qualified leads and free trials to bring in customers with high activation potential
• Double down on organic acquisition levers like content marketing, community-building, and customer referrals

Invest in onboarding and time-to-value

Whether your primary focus is acquisition or retention, getting customers to experience meaningful value quickly is paramount. A great end-to-end onboarding experience sets new customers up for long-term success and protects your acquisition investments.

Best practices to implement:

• Personalize the onboarding flow based on user persona, use case, and behavior
• Proactively guide users to key activation milestones and "aha moments"
• Measure and optimize vital time-to-value metrics like signup-to-first-value and trial-to-paid conversion

Build a customer-centric culture

Truly standout retention doesn‘t come from one-off initiatives, but from a deeply ingrained culture of customer obsession. By aligning your entire organization around customer happiness and success, you can create a differentiated experience that keeps users coming back and evangelizing your brand.

Cultural must-haves:

• Executive sponsorship and cross-functional alignment around customer metrics like NRR, churn rate, and CSAT
• A proactive, high-touch customer success function empowered to drive retention and growth
• Closed-loop systems for collecting, routing, and acting on customer feedback and insights

Plan for the long game

Acquisition and retention aren‘t sprints, but marathon efforts that require sustained focus and investment. While short-term wins are energizing, the real power comes from those compounding gains over months and years.

Strategies for the long haul:

• Lock in recurring revenue with annual contracts and upfront payments
• Build your brand through thought leadership, community engagement, and customer advocacy
• Treat your product as a growth engine, using insights and analytics to continuously improve the user experience
• Balance in-period metrics with leading indicators that predict future growth and retention

In 2023, growth-focused companies will need to place smart, strategic bets to navigate choppy economic waters. By striking the right balance between acquisition and retention – and executing both with customer-centricity, efficiency, and a long-term mindset – they can position themselves not just to survive but to thrive in the coming years.

Key Takeaways:

• Retention is the most efficient growth lever in 2023‘s uncertain economy, delivering 5-25X ROI vs acquisition
• Acquisition remains critical for new market entry, competitor displacement, and business model pivots
• The ideal acquisition/retention mix depends on your business model, market conditions, and growth objectives
• Profitable acquisition, smooth onboarding, a customer-centric culture, and a long-term focus are keys to success