Spending more than 30% of your marketing budget on new client acquisition? You're doing it wrong.
Updated: Oct 17, 2020
In some cases, for very small companies who have only a handful of clients, acquisition is everything and they should (rightfully so) spend every marketing dollar on new client acquisition. But funny things happen when SaaS companies grow. For instance, a Chief Revenue/Growth/Client officer is hired to lead Sales and unfailingly, the first thing he/she asks for is a marketing department. "We need new leads!" Then a marketing department is built reporting into Sales and their entire existence is focused on lead generation. Next, marketing budgets are built with a focus on new client acquisition as the primary lever for ARR growth, again around lead/demand generation and 'events'. Over the next few years, huge budget dollars are spent (sales & marketing salaries, marketing budgets focused on content and websites targeted at new clients, travel, events, etc) intended to drive new client Sales. During all of this, it's quite likely that not a single dollar can be attributed to Client Retention and it wouldn't be unreasonable to see that the dollars churned are significant during this time as well.
So if you're big enough to have a marketing department and the budget is >30% focused on new client acquisition, we need to have a conversation.
Here's an example of something I heard about in the early days of COVID19: The company had a solution that all of their clients needed during the pandemic but it would cost $1000 to implement per customer because of the internal work effort. The decision was made to charge for it. A few clients (maybe 2 or 3) bought it but most were concerned about asking for a PO when the pandemic was still so new. It's probably easy to armchair quarterback this one but it seems that this would have been an awesome use of marketing dollars (or Client Success dollars) for current clients that likely would have generated a GREAT press release, delighted clients, and created tons of industry good will. Imagine the messaging without mentioning 'free' and instead, 'look how our technology partner helped us solve this problem during the pandemic!'. Unfortunately, spending REAL dollars (marketing or not) on existing clients is the last thing this and most small SaaS companies think of, or are willing to do.
Using your favorite search engine, search for "acquisition and retention costs" and you'll be presented with volumes of data indicating that it costs between 5 and 10x as much to acquire a new client as it does to retain an existing client. But likely, your Chief Revenue/Growth/Client Officer is focusing on growing ARR through the new client acquisition lever which is frankly, not a data supported position for most established SaaS businesses experiencing any volume of churn at all. It would be interesting to know if your CRO/CGO/CCO can tell you how much it costs to acquire a new Client followed by how much is being spent to retain clients.
There are other and often more powerful ARR levers to pull than new client acquisition. Ask another executive in your organization, your Chief Experience Officer, and she would likely point you to this data: (click to see the rest of the article):
"Business revenue streams follow the theory of the Pareto principle. That is, 80% of future profits will come from 20% of existing customers."
2. Increasing client retention rates just 5% can increase profitability by 25%. "The high cost of acquiring new clients makes many client relationships unprofitable in the early years." See: Rule of 78s.
If your existing client base loves doing business with you and talks about you as a partner, is willing to tell their peers about working with your solutions, and act as a Sales reference, they become far more valuable assets and will take care of your ARR. Pull THAT lever. Then, when your Board wants at least 110% YoY growth, you can align your current clients to deliver AND you'll have an easier time bringing new clients onboard to go far beyond 110%.
Why wouldn't you do that?