If you’ve started a business with the intention of turning it into a sustainable source of revenue, you need to think carefully about how you build and manage your client base. Assuming you have a good profitability model in place, you won’t have to worry about your margins or operating costs—instead, you’ll need to focus on ensuring you have enough work to sustain yourself.

One of the central questions you’ll need to consider in this pursuit is whether to focus on client retention or client acquisition.

Client Acquisition vs. Retention

Client acquisition requires you to expend resources to attract new clients, calling upon marketing, advertising, and sales strategies to recruit new buyers. Client retention requires you to invest more in your existing client base, making it more attractive for them to stay, and keeping them happy long-term.

There are a few advantages and disadvantages to consider here:

• Costs. On average, it costs about five times as much money to acquire a new customer than it does to retain an existing one. This makes customer retention naturally appealing, since you won’t have to expend as much; a gift basket and a handful of calls may be enough to keep a current client, while getting a new one may require a full-scale campaign.

• Effort. You also need to consider the effort required by each strategy. This is more of a variable, based on your business model. If you have a subscription service that’s hard to abandon, customer retention requires less effort than average. However, if most of your sales come from new customers, customer acquisition may be easier.

• Growth. Customer retention may be cheaper, on average, but it won’t secure you any measurable growth. If you want a chance to build your revenue stream over time, you’ll need a combination of cold calling and other sales strategies to attract new buyers.

• Long-term potential. Customer retention is a highly sustainable strategy, since you can always expend effort to keep your existing customer base happy. However, sales may have an inherent limit; eventually, you may need to invest in a new product, a new service, or a new demographic to find new opportunities to build customer interest.

Building a Stable Source of Revenue 

With those strengths and weaknesses in mind, you’ll need to consider the core elements of developing your business as a stable source of revenue:

• Consistency. If you’re counting on this as a primary source of income, you’ll need to ensure some degree of consistency; if your revenue is too volatile, you won’t be able to budget effectively. If consistency is a major concern, it’s a good idea to focus on customer retention—that way, you’ll minimize unexpected losses.

• Volume. You may also need to think about volume, especially if you plan on running this business for a long time. Ideally, you’ll be able to increase your monthly income from the business on a regular basis, gradually ratcheting up your profits and withdrawals. But to do that, customer retention alone won’t be enough. You’ll need an acquisition strategy to maintain your growth rate.

• Loss compensation. Losing a major client can disrupt any business, and it isn’t always preventable. To address this problem, you’ll need both customer acquisition and retention; you need customer retention to minimize the chances that you’ll lose one of your biggest clients, and customer acquisition to ensure that you’re able to replace any major customers you lose (sometimes through no fault of your own).

• Diversification. Diversifying your portfolio is a good idea in practically every application, and with customers, it’s no different. Having many different types of customers—including short-term, long-term, high-paying, and low-paying—is ideal. Again, you’ll need both acquisition and retention—retention to keep your portfolio balanced, and acquisition to add new types of customers.

• Cost mitigation. You also need to keep your costs in check, or that extra revenue won’t be of use. Even the most cost-efficient acquisition strategy is going to be expensive, so you’ll need to invest in customer retention to balance it out.

If you plan thoroughly, you should be able to convert your business into a stable, revenue-generating machine. There are many other variables to consider, including your profit margins, your plan for expansion, and your exit strategy, but these fundamentals should ensure you have a consistent source of income for as long as you’re invested in the business.

Categories: Investment