I was talking to the founder of one of our marketplace startups recently. The company operates in a highly competitive market with several well-funded players. In light of this competition, we were debating the pros and cons of a growth strategy centered on new customer acquisition versus existing customer retention. Should we grow by getting more people who haven’t used our service to use it, or should we grow by making sure our existing users keep coming back to use our service, and ideally use it more frequently as time goes on?
There is no single right answer to this question The right strategy depends on factors like the stage of your company, the ratio of your service’s contribution margin to customer acquisition costs, and the competitive environment.
All else equal, startups that have achieved product market fit among their existing user base will benefit from scaling their growth by acquiring new users. If your product has proven that it delivers value to existing users, it’s likely to offer similar value to new users. However, if you haven’t achieved product market fit yet, it’s probably better to focus on tweaking your product and user experience to establish a more loyal user base. Otherwise, chances are that the incremental users that you attract won’t stick around.
The higher the ratio of your service’s contribution margin to customer acquisition costs, the lower the number of times you’ll need to serve a customer to justify their customer acquisition cost. So investing primarily in customer acquisition makes more sense if you’re operating in a market with a high ratio than a low one. If you have a low ratio, you’ll need to serve customers many times for them to be profitable and you’ll therefore need to focus on retention.
The competitive environment will also impact your growth strategy. If it’s a highly competitive market and you’re well funded, you may want to invest heavily in new customer acquisition. But if you have less funding than your competitors, keeping existing customers using your service and getting them to use it more often will likely be a cheaper source of growth. A side benefit of this strategy is that your focus on improving your current service level to keep your existing customers will make them more likely to recommend your service to their friends. These positive recommendations are a free customer acquisition channel.
These are just some of the factors you’ll want to consider when deciding what strategy is right for your company. There are likely other factors that you’ll want to evaluate given your specific context.
In the case of our startup, we decided to focus our resources primarily on retaining existing customers.