The Cost Of Retention Versus Acquisition

Chief Marketer conducted a survey of more than 1,000 marketers across a range of industries and company sizes. I found the following comment — in response to the finding that nearly half of respondents plan to focus on acquiring new customers versus 26% that will concentrate on retaining and reactivating customers — particularly interesting:

“Customer retention and reactivation are less costly, but marketers may redouble efforts to reach new potential buyers”

This notion was recently echoed in an article in Insurance & Technology magazine:

“While the cost of retaining an existing customer is usually far less than the cost of acquiring a new one, all customers are not equal and different customers tend to have a different “cost of ownership.”

My take: Damn. It’s 2010, and this myth about the costs of acquisition versus retention still hasn’t been exploded. People, listen up: This notion that “it costs 5 (or 6 or 7) times more to acquire a customer than to retain one” is bunk.

If you’re in the banking world, put up a website, offer a 5% rate on a savings account, do some online advertising, bring on board an ex-Twitter exec, and you’ll acquire a bazillion customers. Very cheap (except, maybe, for the equity you’ll have to give to the Twitter dude).

Keeping those customers is another thing.

You’re going to have to build a damn good customer service delivery capability. Oh, and you’ll need to provide account access, and transaction support in what, like ten different customer-facing channels? Don’t forget the money you’ll need to invest in security and fraud protection.

And when the next genius comes along and offers 6% on a savings account, you’ll have to raise your rate. And the additional interest you have to pay out is a cost of retention, my friends, not a cost of acquisition.

Here’s the issue: There is no defined standard for what costs to include and which ones to exclude when calculating customer retention. Or acquisition for that matter.

The point is moot, of course. Why “of course”?

Because it doesn’t matter what the cost of acquiring a customer or retaining a customer is. The only thing that matters is how profitable the customer is. If you have a customer that will produce $100 of profit per year (that’s ongoing + incremental revenue less the cost of marketing to that customer and the cost of servicing her), wouldn’t you be willing to spend more to acquire her than a customer that will only produce $50 of profit per year?

Sure you would. But if you’re like many of the marketers surveyed, you can’t figure any of this out.

Among the Chief Marketer’s survey respondents, 63% don’t track customer lifetime value by channel. Now, that’s OK if those firms only interact with customers in one channel. But that’s unlikely. Bottom line: Those marketers have no clue what their real customer lifetime value/profitability numbers really are.

So marketers’ focus on acquisition versus retention has nothing to do with perceived costs, or even expected customer profitability. Instead, it reflects a philosophy that their best opportunities for growth come from new customers instead of existing customers.

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10 thoughts on “The Cost Of Retention Versus Acquisition

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  3. You nailed it, although I think the most important point you made was understated. Once you acquire a customer, you pay the same costs to retain that customer as any other customer – ON AVERAGE. To rationalize your customer acquisition costs, you need to understand the lifetime value of a customer – most companies that can do this can only do it, again, as a broad average. The most important point you make, in my opinion, is that there is a difference between a good customer and a bad customer – good customers (at least by my definition) are more valuable than bad customers. So the key is to understand the value of good customers over their life with your organization. You should pay as much as makes business sense to acquire those customers. You should deliver a higher level of service (at a higher cost) to retain those customers.

    We tried to help a large nonprofit understand the value of their “customer” (Donor) base at a very great level of detail, taking into account not only current value but potential value. That nonprofit didn’t use any of that information to any great effect; when the economy turned they simply added more activities to attract short term donors whose average gift was less than $20 (raised at a very high cost). There’s all sorts of cultural, political, etc. etc. reasons why they didn’t use that information (that WAS available to them); good business sense was NOT one of the reasons.

    Nice post – as Einstein said, “make things as simple as they can be, but no simpler.” Customer value questions have been grossly over-simplified for too long.


  4. Kevin: Thanks a lot for commenting. So I’m with you about the need to understand customer lifetime value. Or I should say “desire” to understand. Because CLV is fraught with problems. If a company doesn’t have a good handle on activity based costing, then allocating costs to any individual customer is inaccurate, and CLV is unreliable. In addition, at the point of acquisition, all a firm can really have is projected CLV. But projected based on what? Demographics? There’s no easy answer here.

    BTW, if you haven’t seen it already, you should check out Jim Novo’s blog. Has a lot of great stuff to say about CLV.

  5. Interesting conclusion – sort of a don’t build it (infrastructure to handle new customers) and they will come (Twitter users fall for anything if its tweeted).

    If the goal is to increase customers then the infrastructure to handle them is an acquisition cost. In companies that don’t care that new customers are immediately marginalized by an uncaring corporate leadership; retention is not even a consideration.

    Further, the most often cited reason that customers leave is a perception of indifference by the company. This ties in nicely with a company who acquires without concern to service.

  6. So, If I use your banking example – you have to pay cusomters 5% interest to attract a new customer and increase it to 6% to retain them when someone else offers a better deal…By my math, cost of retention is 1% (from 5% to 6%) and cost of acquisition is 5% – wow, it is 5 X more expensive to acquire than retain.

  7. Perhaps it’s the simple, weary acknowledgment of marketers that most opinions are formed & set within the first few interactions, max.

    Plus, the practice covers both sides of the success bell curve: crappy product? You’re a one-shot & already know people aren’t coming back. Build an attractive brand? Your customers become fans, opt in & don’t need as much remarketing anyway.

    “New eyeballs only plz”

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