ustomer acquisition and retention funnels are an important part of the Business Model architecture. They group processes and activities aimed at attracting customers and money to the business. We already discussed the generalized Funnel architecture, so it is recommended to take a look at that guide before continuing.
Research landscape of a customer acquisition
There are two ways to describe the funnels: from the point of view of business and from the point of view of customers. From a business point of view, this process is not quite a funnel. It is more like a cycle of sales and marketing activities. Marketeers create content and place and promote in multiple channels, sales people make their calls, and there are probably some annual events, quarterly plannings, etc. It’s a typical cyclic process.
However, if we look at this process from the point of view of the customer, this funnel becomes a unique experience — a journey, an adventure. It may take several months and end up with a purchase, satisfaction, excitement, and loyalty, and a happy end. Or it may terminate with frustration, without actually completing the buyer journey.
So let us take a look at the complete journey and explore the separate parts.
A new potential customer, a lead, comes from one of the marketing channels. Channels are physical or virtual locations where people spend their time and potentially consume marketing messages from vendors. Some of these messages are relevant and intriguing enough to attract the customer’s attention, but it doesn’t guarantee they will buy the product immediately. It just means the customers start hearing, reading, and memorizing the brand and messages subconsciously, without active interest and buying behavior. This part ends when the customer finally decides to learn more about the brand. Then the journey begins.
The customer is intrigued by the brand or a specific product and starts exploring if the brand may be something useful. The customer explores the website, social media accounts, or physical stores. This is an important moment. The customer is already interested, but remains anonymous to the seller. The buyer already knows the seller, but the seller does not know the buyer yet. Probably 90% of buyers stay here at this stage of the journey. They hesitate to talk to the sellers and share with them their needs. Thus, sellers make a lot of effort blindly struggling to guess the needs of anonymous visitors. The sellers try the best they can, entertaining and baiting random visitors, but most of these efforts fail. That being said, if the product is good and relevant and the seller looks trustworthy, some of the customers, especially those who have already done some research, take courage to start the conversation with the seller.
This second part of the journey ends here, when the customer shares their information with the seller. That can be a business card, a phone number, a mailing list subscription, or subscribing to a social media account. These customers show they are interested and they trust the sellers to communicate back with them.
The potential customers are interested by the products or content, they take part in communications and give feedback, but do not buy yet. They are in their decision process. Most probably they are considering several alternatives and need more information to choose. The good thing is that they are open for conversation — they ask questions and answer questions. They already trust the brand, but are still not quite ready to part with their money.
The customers are wavering between “yes” and “no”, which is why we draw a wavy connection on our diagram here.
At last, if they are convinced or if the time of their final decision comes out, they say “yes”.
The customer buys the product for the first time. It is a magical moment of anticipation and discoveries. If expectations are met or exceeded, the customer is pleasantly surprised and happy to buy the product again. If the customer is unsatisfied, a purchase is still made, but for the first and last time.
As a result of the trial, we have a payment moment, a “Money in”. The only node in the process where the business makes money! All other nodes are cost centers, but here is the only node where we make revenue!
It is important to note that here customers start using the product. So, formally they are already entering what we called Service cycle — the user experience of the product. This is where our architectures (Customer funnel and Service cycle) start to overlap. Generally, that is not recommended by the MECE principle (mutually exclusive, collectively exhaustive parts of architecture) However, we will tolerate this duplication and discuss the touchpoints in both guides. If you remember the FIGARO principle (filling identified gaps, allowing reasonable overlaps), this is a reasonable overlap. The currently considered Customer acquisition funnel does not end with the first purchase, we need to observe the whole journey.
A very small fraction of the customers actually make it to this point. This part of the journey starts with the second purchase. If they made the second, they will most likely make the third, and so on. The customers already know what they can expect and they feel it serves their needs well. No magic, just business. Basically, these customers are the main source of revenue for most sellers. The process runs through the “Money in” node multiple times. Is that not truly amazing?
Some customers are so pleased with the product that they recommend it to their friends. This is actually the supreme level of loyalty and satisfaction. This is the happy end of the journey. The customer who continues to pay and buy new products, while at the same time actively recommending the products to new customers, is precious.
Though the Funnel is usually an architecture of diminishing flows from step to step, we need to add two additional connections that make this architecture a system of loops.
The first connection goes from the “Money in” node back to the channels. That is the advertising loop. The company makes money when the customers buy a product and reinvest money back to new lead generation. So the new customers will start their journey thanks to the previous revenues generated by previous customers.
The second loop goes from the “Love” node back to the channels. These are referrals and recommendations that the most loyal customers make. Again, these referrals can give rise to new customers and new journeys.
Growth cycles on top of the Funnel
That helps us to see three possible cycles of revenue growth in this architecture: The advertising loop, the viral loop, and the loop of repeat sales to the current customers. Every business should try developing all three loops but the majority of businesses are prone to one of these models.
Examples: Banks, telco companies, SaaS businesses, and next door grocery stores are heavily in a recurring payment business — customers buy from them multiple times with multiple transactions. Travel and wedding agencies and plumbing and repair services are advertising-based — most people rarely order several weddings in their lifetime. Social media, collaboration software, and games revenues are very much driven by viral loops.
The main problem is that the customer acquisition is that too few customers finally complete the “Money-in” step, instead choosing to leave earlier. There are two main reasons for this:
- Irrelevant channels
- Low conversion rate
It is important to find and develop sales channels that the target customers can be acquired from. This is one of the main goals of a Demand analysis. The customers in those channels must have verified needs that are aligned with our offering. In a more formal way, the Customer Genotype of these channels must be aligned with the Product Genotype of our business.
Irrelevant channels may be attractive because they are easy to find or the cost of lead is low. They may also generate a lot of traffic so many people get excited by your ads and a lot of them enter the funnel. However, they are not your customers. They do not have needs relevant to your products, and they will drop off the funnel on the second or third step, and they will never complete the desired “Money-in” step.
Low conversion rate
Low conversion rate is inevitable with the irrelevant customers described above, but it is particularly bad when a relevant customer decides to leave. So, it is important to discover where and why they leave.
The reasons why customers decide not to move forward differ greatly depending on the step of the funnel. It is wrong to “keep them excited” all the time. The right way to do it is to help them overcome the MoBs on their journey.
MoBs: Moves of the Buyer that change their HIT points: Hunger, Interest, and Trust
Purchasing decisions don’t come percolate immediately, they require time to brew. In fact it is also a quest for your customers to perceive that they have a need so urgent that they are willing to spend money now, and they know your product is exactly what they should buy to satisfy their need. This quest may take minutes, days, weeks, or even years.
So why do the customers drop off the funnel? Why do they decide not to move forward in their purchasing process? This is because in their journey they have a lot of MoBs — moves of the buyer, small steps and encounters with motivators and barriers. If they lose interest in one of these MoBs, they quit.
Let us measure the motivation somehow and see how it grows or drops. For that we can use the HIT points. HIT stands for Hunger (has a need), Interest (interested in a proposed solution) and Trust (believes you are the right solution provider). HIT points are the measure of “customer health”, as in the desire to buy from you and the motivation to move forward through your Customer Acquisition Funnel. If something wonderful happens the motivation grows and the HIT points increase. If something bad or confusing happens in the customer journey, the HIT points go below zero and the customer leaves the funnel.
Now let us walk in the shoes of customers and tell the story in first person, describing “The experience I have during the journey”. Every MoB is a separate piece of this story.
I Notice. As a new potential customer who has never used your product and has never heard about your company, I must be able to distinguish the voice of your marketing messages in the noise of hundreds of other communications I consume every day. Your messages must be able to grasp my attention at least for a several seconds so I memorize your message. If your message is exciting and memorable, that drives interest and gives me several HIT points, but most likely not enough to motivate me to purchase your product right now.
I Know. Most likely, I ignore your messages if I get them from random sources. But if I hear them three, four, or five times already, it gives me some reinforcement. As a result, I will probably start becoming aware that your brand exists and offers something I might experience one day. This barrier can be quickly overcome if I am guided by someone I trust. For example, if a friend or an influencer I respect tells me about your brand and your products, I will focus on your messages more quickly and more easily recognize them. A referral from someone I respect brings attention and trust and adds me a lot of HIT points.
I am Intrigued. If your messages are catchy or provocative and well-connected with my needs or interests, that can give me an impulse to go and learn more about your company and your offerings. Compelling messages drive attention and add a lot of HIT points. That gives me enough interest and trust to drive me to the next step.
Now I am ready to learn more about your company and find out if it can be of use to my cause. I am interested, but I do not know what you offer yet, so my motivation is quite low. If I feel discomfort during my journey I will drop off.
I Access. Once I decide to learn more about your offering, I want an easy shopping experience. I do not want to struggle and spend a lot of time searching for information, browsing your catalogs, and making my way to your physical locations. Please make everything accessible and make my life easier, otherwise I will lose a lot of HIT points and drop off.
I Trust. After entering your shopping funnel, the first question I subconsciously have is: Can I trust these people? Do they look and behave the way I expect from a potential seller? If your shop looks suspicious or sloppy, I will lose some HIT points. I can not be sure that you will serve me properly and that the quality of your products is trustworthy. In contrast, if I see a lot of trust signals: expensive design relevant to my subculture; respectable and secure location; well-known brands as clients, partners, or suppliers; certificates; customer testimonials, traffic and popularity among similar customers — that will boost my HIT points considerably.
I Understand. Now I am staring at your menu and trying to understand what exactly you offer and what products and services are available. I want the products to be simple, explained with the right words, and have attractive and clear visual aids that will simplify my shopping. I really want to see product demos and reviews. If the information is missing or confusing, I will lose HIT points, and you will lose me as a customer.
I Need. Once I understand your offering, I can decide if I really want or need something you have. If I am your target customer and my needs are aligned with your solutions, that is great. I have the hunger and you have the food. My HIT points grow and I am ready to start seriously considering your product. I am so interested that I can even start the conversation and give my permission to get in touch with me. I am willing to give you my phone number or email. I will subscribe to your mailing list or follow you on social media. I am not buying yet, but you got my attention, so let’s move forward.
I Compare. Of course, I have several options to choose from — your offer is just one of many. I can not buy just yet because I need some time to think and compare with the alternatives. This is where your additional information can help me decide. I need some fuel for my decision. Give me the details, explain the difference between options, and help me understand the unique properties and distinction from your competitors. I want to make sure your solution is the best choice. Every benefit that is better than competition will drive my hunger and my HIT points, especially if there is a fit with my prioritized needs (my genotype). If I am considering buying from you or from your competitor, both of you have me in your sales funnel, but only one of you will get me as a real buyer. If I choose to move forward with your competitor, you lose me on this MoB.
I Can. If I already like the product, even if I fall in love with it, that does not mean I will buy it. A blocker may be discovered once I explore the details. There can be important security, operational, or compatibility issues that make it impossible to use this product. This is usually the question of must-have features. If all critical must-haves are satisfied, I can buy and use it. If one of the critical must-haves is missing, that can be a blocker. So, if you want me to become your customer, please make sure you did your demand exploration homework, you are aware of the must-haves in your customer genotype, and you have the respective solutions and features in your product genotype.
I Rush. Am I ready to buy right now? Am I in a hurry to make this purchase? “No thanks, I am just looking.” As a seller you hate to hear these words from me, but it is the sad truth. When I am in a consideration process, I will be asking, looking, but not buying yet. That may take a lot of time before I commit the purchase. The key is the urgency of my need, how hungry I am, and what the real deadlines are. Some tricks like limited-time offers or discounts can trigger the buying decision, but when I feel it is just a trick and there is no real ground for the declared deadline, I will not fall for this hoax.
Every sales person knows that the buying urgency of a client is very much connected to their life and budgeting cycles. Some months are off-season, others are hot.
I Afford. It is a good question if the price is fair. Price is important. It is not the only important factor, but of course the price should be not too much higher than that of competitors and it must be aligned with the benefits I get. The price very much correlates with the perceived value, my unsatisfied needs, my genotype, and the HIT points I have: my Hunger, Interest, and Trust. Paradoxically, sometimes a low price can ruin trust, because the discounted product may feel like something of low quality. So, the price should be in accordance with the hit points, not too high, but not too low.
In B2B sales, the price must also fit with the budget of your buyer. If the price is a little higher than your buyer’s disposable budget, they will need to request additional funds from their managers, which usually makes the buying process much harder.
I Confirm. If I am considering an expensive purchase, it is not just me alone making the buying decision. In B2C I need to talk to my family, in B2B — I need to convince my boss, my procurement, my legal team, and a lot of other people. Thus for an expensive purchase, you as a seller need to help me convince all these people if you want a “yes”.
My buying “yes” is very different when I buy the product the first time versus when I buy it the second time. The first time “yes” is the consent for a new unexplored experience — I have a lot of expectations but am eager to discover if the product is as good as I was promised. The second time my “yes” is very different — I will buy exactly what I experienced the first time. No curiosity, no doubts, no false expectations — just the same thing if I enjoyed it the first time.
So here are the MoBs of the first trial experience:
I Wait. Usually after I say “yes” I can not treat myself to your product immediately. I need to wait for the product or service to be delivered. Wait time may seem like an insignificant factor, but it is not. My HIT points were at their peak when I finally decided to buy your product. I rejected the offers of your competitors. I spent a lot of effort convincing my boss, my family, everyone. I have taken the risks. I believed your promises. So, all my passions are running high, and nothing can frustrate me more than an unexpectedly long wait time. To save my nerves and my HIT points, please keep wait time as minimal as possible, especially at the first trial experience, because I don’t know what to expect. If waiting is inevitable, please explain what the average wait time is and make this time entertaining.
Isn’t it weird and unfair? Buyers can spend several months making sellers wait for their decision, but once they have decided to buy, several days of waiting can drive them crazy. However, this is life as it is. So when you design your customer acquisition funnel be ready to wait, but not make your customers wait.
I Learn. Finally I have received your product and am ready to dive into the anticipated experience. However, it’s my first time, and I may be perplexed and confused not knowing how to take the first steps. I need assistance, even when I am embarrassed to ask. Ideally, I want your product to be as simple to install and use as possible, so that no training is required. If it is not possible I want a very clear guide and assistance. If I am not given this help I will lose a lot of HIT points and will never buy from you again.
I GWP — I Get What’s Promised. By the end of my trial period I expect your promises to be fully kept. Everything you created in my imagination during the consideration phase should become real. If I see that the solution is not good enough, if the product does not work, and does not satisfy my needs, I will be very disappointed. Yes, I paid you once, but here my journey ends. I drop off your retentional funnel for good.
I Enjoy. However, if the promises are kept and if I discover something delightful that I even have not thought about, that can be really fruitful for our future relationship. My HIT points go up, my hunger grows, and I am on my way to becoming your loyal customer.
When I buy from you the second time, it is not so trepidatious. I already know what I will get, and even the wait time is not that important. That being said, to become your long-term loyal customer, there are several more MoBs.
I Achieve Goals. The product was bought for a purpose. It is not just about enjoying the experience, it is about the long term goals I have that make me buy the product. Your product is a tool for one of the core problems in my life cycle. If I can truly pacify the problem I will be generally happy. Some products however are not intended for infinite use cycles. When I buy medicine, I expect my malady to be cured. I don’t expect to be obliged to buy this pill for the rest of my life. So retention on a single product may be limited. However, if I achieved my goal and I did enjoy it. I will become loyal to your brand and will most likely buy more products from you.
I Get Support. The product I use may require additional services and maintenance. If you want to keep me happy, please provide me with the ongoing customer support, updates, and fixes, and make sure the quality of your service does not degrade over time.
I Discover. When using the same product multiple times I become a little bit annoyed. Yes, the product is great, but I need some novelty and want new fresh experiences. My needs can also evolve over time — some needs are satisfied, others become more important. That may drive me out of your retention funnel and throw me into the arms of your competitors. That’s why I would really appreciate it if you had new versions of the product with new great features in the latest fashion. That way I will be able to experience new discoveries and not feel like I’m out of touch or outdated.
I Master. As a customer, I am becoming more and more knowledgeable. I will be really loyal if your products could improve my skills. I am interested in understanding the details that can make me more productive and more valuable for my employer or my community because I have certain rare skills and am able to use professional tools. As I master my competences I will buy more products from you of a higher professional grade and at a higher price.
As your loyal customer, I can do more than just buy your product multiple times. I can influence other people to buy from you. My referrals can bring you a hundred times more money than I could on my own. This is how I can bring you more business.
I Share. If the product is designed to be shared with multiple people, this already launches the viral loop. I buy it not just for myself, but for several more people. I made the buying decision, they did not. But as long as they experience the product I have chosen for them they also may enjoy it and get excited. I influence their HIT points, I give them fresh experience, so if they will need to buy similar products they are most likely going to you. They will more quickly pass the awareness, consideration, and trial phases of your Customer acquisition funnel, because I already shared with them my positive experience with your brand. So if you want me to share — please design your product to make it easily shareable, give me some respect for bringing you new customers, and design a “fast lane” for them so if they come by referral, they can faster become your paying customers without slowing down on all MoBs in your funnel.
I Show Off. Another way to make me your walking advertisement is to design your product as an object of prestige, the way I can be admired by others when they see me using it. This requires a lot of focus on quality and marketing, creating the legend behind the product and making sure there are no complaints and your brand is renowned. This is difficult, and a single scandal can ruin your reputation and make your followers abandon you in droves. However, if you can handle this strategy, you will be able to keep much higher margins than your no-name competitors.
I Teach. Finally, one more way to forge the viral loop is to help loyal customers teach their inexperienced communities. When I become a Master, a skilled user of your product, I have the selfish need to show off as we discussed above, but I also have a selfless need to share my knowledge with my peers. If you encourage me to educate the other people by providing early access to your new products and amplifying my voice to the broader community I will be your advocate and evangelist for years to come. Imagine how many new customers this activity will generate.
Leveling guide — Customer Acquisition and Retention Funnel
Before discussing the steps for the Customer Acquisition Funnel, it is recommended that you take a look at a more generalized Funnel leveling guide, so we would need not to repeat the fundamentals.
If you are working with a startup and designing a customer acquisition funnel for a new product:
Analyze the customers, pick the right customer segment, and collect information about their customer genotype. Make sure there is at least a Placeholder for the product, so you can start building the funnel. Create all steps of the funnel at the Quick & Dirty level, so the funnel has a non-zero conversion rate.
Experiment with several channels, pick one that has the most relevant customers at an affordable price, and spend enough budgets to fuel the current funnel. Your funnel is underdeveloped yet, meaning MoBsare Quick & Dirty, so they are more likely to frustrate the customers and drain their HIT points (Hunger, Interest, and Trust). The only thing you can do to counter these inconveniences is your personal participation and helping customers to go through the MoBs with you hand in hand. You need at least several customers completing all steps and becoming your first paid users, so they have reached the Service cycle (Retention phase of your Funnel) and buy from you more than once.
If you work with a business with paying customers, skip the 1st and 2nd steps.
Target discovery: It is always recommended to start from the end of the funnel. Analyze the Retention and complaints of the current customers and the reasons for a drop-off at the Trial phase. These customers already decided to buy from you, so instead of spending enormous budgets and time on identifying and nurturing new customers, discover what can be done to retain those who already said “yes”. Many of them may be disappointed with the quality of your product or service. Some fixes are hard to implement and may require a lot of R&D effort. However, some other things may be easy to fix. Sometimes attention and empathy is all they need to feel taken care of. They will see that the company is trying to improve their products and services, so some of these unhappy customers will give you a second chance. After all, they already made some investment and spent money on your product. For them, getting rid of your product and purchasing from your competitor is also a useless expense. For you, conversation with these customers is not only a way to improve your Service cycle and generate some Repeat sales, but also the source of information about their needs and their buying experience, they can tell you what MoBswere painful to them in your Funnel.
Analyze the Funnel and identify where the main bottlenecks are. These can be technical problems (usability) or more importantly buying journey barriers. Use the MoBs approach, walk through the funnel in the customer’s shoes, and discover which MoBs scared away your clients and make them drop off the funnel. Some of these MoBs will be hard to fix. For example, some must-have features of the product may be too expensive to implement (I Can) or your startup may have no well-known clients yet to display in the “Our customers” list (I Trust). There’s nothing to be done here, just try to find other MoBs that you can fix at a lower cost. For example, many startups have a very bad description of what they do (I Understand) and how that can help the customers (I Need). These are cheap MoBs, so you don’t need to build any features in your product, you just need to find the right words to explain what you have already built. Try to find other leaks in the funnel that are inexpensive to fix and patch them.
When the leaks are more or less patches with inexpensive solutions, you may review the channels that fuel the funnel. Understand what channels give you more paying customers — those who go through the entire funnel and become your loyal advocates. Even if these channels are less crowded than others, even if the cost per lead is higher, these channels are your best source of relevant prospects. Consider spending more budget and time on these channels. Think about the viral loop. Probably someone from your current loyal customers can become your advocate and can plant the word of mouth in these channels. Nothing speaks louder than the success story of a real customer.
Build ground for the systematic improvement of the Funnel. Implement the end-to-end funnel analytics to identify leaks and make prioritization based on Customer lifetime value and Customer acquisition cost improvements. Improve the maturity of your funnels and your MoBs, identify and fix the leaks, and adjust the funnel with the evolution of your products in accordance with the Marketing loop.