Introducing a whole new concept to the world of social business and social care: cost-per-retention. What exactly is it and why is it so important?

It has long been said (and shown through some pretty simple calculations) that it is far less expensive to keep existing clients than it is to acquire new clients. In fact, last year, Merchant Warehouse put together a great little infographic that showcases exactly that. This infographic showed that it is, on average, six times more expensive to acquire a new customer than it is to retain one, and that is due in large part to efforts such as loyalty programs.

But to say that acquiring a new customer is six times more expensive does not mean to imply that the cost of retaining a customer is minimal. While we often talk about the CPA or Cost Per Acquisition of a new customer, social media in particular gives us the ability to start placing more emphasis on CPR or Cost Per Retention (ironically, CPR is an appropriate term as companies often struggle to keep their customer base alive).

In order to understand your cost-per-retention, we need to start at the beginning and look at things like CPA and LTV (Life Time Value of a customer).

What Is CPA?

CPA, or Cost Per Acquisition, refers to the cost a brand incurs in order to acquire a new client. Now you can either look at that from the perspective of total average cost-per-acquisition, or you can break that down into cost-per-acquisition-per-initiative. The two are distinctly different and lead to differences in your operations efficiency.

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To start, let’s take a look at overall CPA. This is a pretty simple calculation. First, select a period; for argument’s sake, let’s take a month. Now look at how many new clients you have acquired in that month. Next, look at how much you invested in all of your marketing and advertising initiatives. This includes PPC campaigns on social media or Google AdWords, media buys in traditional media, specific campaigns or promotions, and anything else you did in an effort to sign new clients. Now divide that total investment (let’s not get into the more complex issue of factoring in overhead and operating expenses for this example) and divide it by the number of new clients you acquired. The result is your CPA. (For the sake of this discussion, we assume a direct correlation between the clients you acquired in the month and the expenditures you incurred in that same month.)

If you were to look at initiative-specific CPA, you would need to evaluate each of those customer acquisition campaigns individually, see what led to new customers, how much was invested, and conduct the same calculation (investment divided by the number of new signups) to determine your CPA on each initiative. Don’t be surprised if your CPA appears high. This is where the relationship between CPA and LTV starts to come into focus.

What Is LTV?

LTV, CLTV or Customer Lifetime Value, is the total value of a customer over the course of their relationship with your business. Let’s say, for example, that you run an enterprise SaaS organization. Each month, subscribers pay $500 to access your software and the average customer uses the software for five years. This would mean that your LTV is $30,000. Assuming a 3 to 1 ratio of LTV to CPA, this means that spending about $10,000 to acquire a new customer isn’t completely absurd.

Of course, the goal of any business should be to decrease CPA and increase LTV. That is why companies – particularly subscription-based companies – are constantly making changes and introducing new features in an effort to keep customers around a little bit longer. And therein lies the concept of cost-per-retention.

What is CPR, or Cost-Per-Retention?

The name alone seems more or less self-explanatory; cost-per-retention is the amount of money that your brand must invest in order to retain clients. As noted above, just because it is, according to some reports, six times more expensive to acquire a new client, that does not mean that it is ‘free’ or even all that inexpensive to retain clients.

Quite a bit of an investment has to be made in order to keep clients coming back. Attrition – the loss of clients – is going to happen in any industry. In some industries, particularly those where brand or product differentiation is minimal, it is going to happen at a much higher and faster rate than others. So, what kind of an investment needs to be made in order to retain clients?

Cost-per-retention is going to be an amalgam of a number of initiatives. There are superficial efforts, like loyalty clubs, specials and rewards programs that are clearly seen by the audience, and then there are those investments that are less visible. First, let’s look at the cost-per-retention of some of those externally visible initiatives.

Running a loyalty program or offering returning clients discounts, special pricing or freebies; those costs need to be calculated. In other words, what are the ‘lost revenues’ so to speak of offering these kinds of benefits? And how much greater is the LTV of the customers that participate in these initiatives? Determine those two figures and make the same calculations as we did for the CPA and original LTV, but limit it to each retention-specific initiative. Now, what about those internal costs?

Let’s take a look at an example such as social care. (If you’re not familiar with the concept of social care, you can read up on it here. Essentially, it is the practice of offering customer service on social media.) Social care can be a hugely cost-effective practice. Some of the benefits can include improved response time, higher volume of customer issues addressed, decreased customer service overhead, and much more. But there is still a cost to offering social care.

While it might be perceived as a differentiating value added that retains a greater number of clients, there is still a cost to operating a social care team (or customer service in the traditional sense). This is an area where that cost will have to be determined, then weighed against the ratio of client retention versus attrition. Determine how much more you are making from the extended LTV as a result of offering this service.

There are also other initiatives that might seem like your average marketing practice, but also contribute to cost-per-retention. Take your company newsletter, for example. Operating a newsletter or running email marketing initiatives is, in part, a way to drive conversions. But there are plenty of instances where a newsletter is designed to maintain interest in a product or retain a client’s subscription, or promote one of the aforementioned retention-based programs.

The same holds true for activities on social networks. Maintaining brand awareness and driving engagement from existing clients is crucial to brand differentiation. How can these kinds of initiatives be measured? The practice remains more or less constant. Determine which of these initiatives, or what ratio of these initiatives, rather, are designed to retain clients. Then associate the relative cost of the overall initiative to the retention-based ratio of initiatives. Determine retention rates from individual practices, and calculate whether or not your efforts are generating profits.

Conclusion

Superficially, retention might not seem quite as expensive as acquisition, and for the most part that is true. But the important thing to keep in mind is the fact that we need to determine if the cost-per-retention outweighs the extended lifetime value, or ELTV.

Let’s go back to the initial example, where the initial LTV was $30,000, and the cost per acquisition, for argument’s sake, was $10,000. If we are running a retention program that costs us $1,800 for each user retained, that might look pretty good. But if the average ELTV is three months, or $1,500, we’re actually losing money on that investment.

It’s important to take a step back and evaluate how your marketing, customer service and client retention programs are helping drive additional revenues, because those reviews and studies don’t always take these kinds of issues into account.

What have you found to be the most successful retention program for your business? Tell us in the comments below or on Twitter!