When to think about upselling existing customers vs acquiring new customers

Customers mean revenue, and revenue means cash which is ultimately why we are all playing this game. So it makes sense that above all else, this is a key aspect of focus for any business. But, there is a dilemma, its easy for businesses to constantly think about new customers, the obsession of getting more new customers and setting up the business and team to acquire new customers. This isn’t wrong, but it is one sided.

Ultimately we encounter many companies who, with the best intentions have constantly double down on acquiring new customers. Acquiring customers comes at a huge cost to a company, generally at the early stages its a more manual process, especially for B2B, requiring the CEO’s time and multiple meetings over a period of months to close a deal, then further months working under contract before the money hits the bank, this can be a death blow to cashflows and really limit growth of a business. 

CAC (customer acquisition cost) generally only considers the marketing and sales costs of acquiring a new customer, but in this sense it neglects the impact of time and cashflow. 

For most companies just starting out their CAC is less than the revenue of the client they bring in. (I’m going to highlight, my references here are generally more B2B than B2C) this is generally fine if you’re a modestly growing agency-style business, but for startups with VC funding and expectations of exponential growth in a matter of a few years, its not fast enough. So, for more aggressive companies we need to consider a CAC that in some cases is higher than the revenues, or more specifically the annual recurring revenues for a business, in other words, we need to consider the scenario where customer acquisition cost exceed the initial contract value of the customer, and we make a probabilistic assumption on the likelihood of a customer renewing or churning.

This is where things can get challenging for founders, to be able to think about a CAC number above the contract value, we have to make a few assumptions and impact the probability of those assumptions before hand. We have to think about how to calculate the life time customer value, we have to look at the churn rate, and we have to consider any potential up/down sell aspects.

In simple terms however, if we can get a customer to go from a single 1 year contract, to a two year contract, we can afford to spend between up to 1 year of revenue or at least double the CAC to acquire a new customer, the rational being that if growth is our priority then profitability can be secondary, so long as we can continue to have cashflow, if we make the assumption that CAC will always bring in a multiple in revenue, then we can arguably make this an open wallet, so long as our predicted LTV, churn and contract values align with our plan. This means if we have better renewal and churn rates than competitors (we can keep customers longer and paying more) then we can also outspend them on CAC.

This all seems complex, so where to being. Start with existing customers. It sounds easy, and it isn’t but every effort made to improve churn and stickiness of customers will always pay dividends since the more a customer renews, the less CAC you need to spend on that customer and therefore the more CAC budget left to bring in new customers. In contrast, if churn is high, then you’re constantly spending CAC to fill a leaky bucket, and you end up in a vicious cycle where CAC is spend simply to stay in place.

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