Customer Acquisition, Retention and Loyalty
Acquisition
The funnel runs awareness → interest → consideration → purchase → onboarding. Customer acquisition cost (CAC) = total acquisition spend ÷ new customers won. Include salaries, ad spend and agency fees in the numerator, not just media cost. Qualify leads so sales time is not wasted on poor-fit prospects.
Retention and churn
Churn rate = customers lost during the period ÷ customers at the start × 100. Retention rate = 100 − churn rate (where growth comes only from existing customers). Retention is widely estimated to cost far less than acquisition - the common rule of thumb is five to seven times cheaper - so exams favour retention economics, but always show the arithmetic.
Loyalty
Loyalty ladder: suspect → prospect → first-time buyer → repeat buyer → advocate. Distinguish behavioural loyalty (repeat purchase) from attitudinal loyalty (preference and willingness to recommend). RFM analysis ranks customers by recency, frequency and monetary value. Loyalty programmes work when the reward is relevant and simple; discount-only schemes train customers to wait for the next discount.
Worked example
A store starts the year with 2,000 customers and ends with 1,800, having acquired 300 new ones. Retained = 1,800 − 300 = 1,500. Retention rate = 1,500 ÷ 2,000 = 75%; churn = 25%. If average annual spend is ₹4,000, the 500 lost customers represent ₹20,00,000 of annual revenue at risk.
Traps
- Counting new customers as retained customers.
- Treating satisfaction scores as proof of loyalty.
- Quoting churn without stating the period (monthly versus annual).