Debunking Marketing Myths: The Cost Of Acquisition Versus The Cost Of Retention

How many times have you heard that it costs X times more to acquire a customer than to retain one? The most recent incident for me was in an article in CRM magazine. In this case, the author wrote

according to Gartner it costs eight to ten times more to acquire customers that it does to retain them.”

Oh really? I had heard it was five times more, but I guess that with inflation and all, it’s now eight to ten. Yeah, right.

It’s time to eliminate this urban legend from our repertoire. Here are just a few of the reasons why the claim that acquisition is so much more costly than retention is pure fiction. The costs of acquisition and retention:

1) Vary by industry, by product, and company strategy.
Don’t tell me that the ratio is eight or ten to one across every product and industry. The automotive industry probably has a fifty (or hundred) to one acquisition to retention ratio. Car dealers, as far as I can tell, don’t spend a dime on customer retention. In the world of financial services, though, I’d bet that HSBC and Emigrant Savings have effectively acquired savings account customers online with above-average industry rates. Retaining — and, as importantly, cross-selling — those customers could not have been as easy (i.e., cheap).

2) Ebb and flow with economic cycles.
Lenders found it a whole lot cheaper to acquire new mortgage and home equity loan applicants a few years ago than they do today. And why would anybody assume that retaining those borrowers from a few years ago was a piece of cake that didn’t require much investment? Hogwash.

3) Are incalculable. Let me put it this way: You have no idea how much it’s costing you to retain customers. Do you include all the costs associated with providing customer service to customers in your retention calculations? After all, if you don’t service them, you will have less chance of retaining them. Do you allocate all IT application maintenance and enhancements to your retention calculations? If you don’t continually improve your transaction and interaction service capabilities, your ability to retain customers diminishes, you know.

No, the fact of the matter is that you don’t have the slightest clue what it costs to retain a customer, because no one has really defined a standard for what costs to include and which ones to exclude.

So the next time you find yourself wanting to cite the “fact” that the cost of acquiring customers is X times greater than the cost of keeping them, do us all a favor. Don’t. Cuz’ it ain’t true.

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10 thoughts on “Debunking Marketing Myths: The Cost Of Acquisition Versus The Cost Of Retention

  1. Hi Ron,

    This is going to be the first day of my marketing life. Reading your post, I was realizing how much I had bought into that “fact” (read “crap”), and it’s interesting that you call it an urban legend. True, Marketing seems to carry a lot of those semi-truths, or plain mistakes. Maybe an effect of WOM: one misquotes a study, and that gets misquoted as well, and so forth. Or maybe, it’s the result of hastingly reached conclusions by think tanks who need to constantly publish…

    Thanks for finally busting that myth, and for the nice shirt on which I spilled my coffee reading your post!

  2. Jacques: Here’s my “fear of the day”: That my boss will read this post, call me, and say “nice move, Einstein. Now go find the 257 pieces of marketing collateral we have that references your so-called urban myth, and rewrite those pieces by the end of the week.”

  3. I agree with you Ron. Accurate Customer Retention costs are not easy to find. And many a times the customer retention policy itself leads to increased acquisition by something called Word of mouth.

    I have taken forward this discussion in my blog.

    — Bhupendra

  4. I LOVED this post. And, yes, I’ve been guilty of citing the fact that it costs 5x to acquire a new customer than to retain an existing one (although I’ve NEVER heard the 8-10 numbers…).

    I guess it boils down to this–regardless of campaign type (retention vs. acquisition), we need to dedicate marketing dollars where we can have the most impact.There are some people that will never become your customer. Conversely, there are some customers that will never leave you–they just like the status quo. Those are two groups who don’t need to hear your marketing message.

    Thanks, Ron, for making us re-think what we thought was the truth.

  5. Oh man. That myth used to really annoy me. I always noticed that no one could point to a single fact about the truthfulness of it. Glad to see you busting through those “marketing” legends.

  6. Ron,

    One variable that is also left out is what I call the “Jerk Factor”. This is the customer/client that wears a t-shirt that says “The Customer is Always Right – Even When I Am Wrong”

    What does this guy cost to retain and is there a benefit of retention? Look at Sprint. They dumped hundreds of customers because of the amount of resources these customers sucked up. Obviously they didn’t feel that retention was better than acquisition.

    Sometimes having a few qualified and profitable customers is far better than retaining a hundred “Jerks”

  7. Hi Ron. I have linked to your blog post as well, showing how the card payment industry can focus on acquisition tactics more (as opposed to loyalty) in order to develop new features which lead to better protection of interchange fees. Acquisition tactics are often much more valuable to merchants, and, as a major side benefit, it turns out that they function best on general purpose credit or debit cards, rather than store cards, so merchants need banks more. http://aneace.blogspot.com/2007/08/how-focusing-on-customer-acquisition.html

  8. Pingback: CNBC Discovers Customer Loyalty « Marketing Whims from Ron Shevlin

  9. Howdy,

    Could you advise what issue that quote was pulled from? I’d be interested in reading more to see it in context, etc. Otherwise, did it list what study it was from or make a direct quote?

    Thanks!

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