Why Customer Retention Is More Important Than Acquisition

Image: Mashable Composite, Getty Creative, Robert Churchill 

"To be or not to be?" asks Shakespeare's Hamlet.

For years digital marketers faced the same conundrum: "to buy or not to buy?" in reference to purchasing leads and prospects — also known as spamming (although hopefully you're in the "not to buy" camp).

Knowing how to spend your marketing budget with confidence is always a challenge. Where do I allocate the money so it makes the most impact? How do I allocate the money in a way that I can show tangible results? These are the typical questions marketers ask themselves.

Of all the questions, the most critical to answer is: Do we invest good money in acquiring new customers, or do we focus on retaining the customers we have already acquired and personalize their experience? "To retain or acquire?" — this is the question.

And before I let you know the answer, let's look at what marketers are currently doing.

Image: Clickz

According to a survey by Econsultancy, 34% of the participants indicated that they will increase their investment in acquisition, while only 18% will focus on retention. If we look at content marketing strategies, one of the main goals is acquisition (71% of responders), and Forrester concurs: "Marketers obsess over acquisition. Even as the lines between marketing and customer experience blur, our survey respondents prioritize customer acquisition efforts over nurturing and deepening relationships with their most valuable and loyal customers."

Image: Clickz

Looking at what the others (not "the others" from Lost!) are doing, it is very clear that marketing budgets are over-focused on acquisition rather than retention.

If you're a regular reader of my columns, you'd be expecting me to start talking about increasing allocation of budgets to retention. And you would be right, this is exactly what I am going to do...

Here is an example to start illustrating my thinking:

Joe is an online shoe retailer who became really successful with his business. He uses Google and Facebook to advertise the branded shoes he has on offer. In a hyper-competitive branded-shoe industry, the customers are only looking at the prices they can easily compare with a simple search. So Joe needs to invest a lot of money to generate sales. Ninety-eight percent of his business is first-time buyers. With only 2% repeat buyers, his product costs are most likely to look like this:

Acquisition: $20.00
G&A: $10.00
Shipping: $5.00
Product cost: $50.00
Profit margin: $15.00
Total: $100.00

With higher advertising costs and lower loyalty, he is seeing his acquisition costs spiking. With this example, and provided that advertising costs remains the same, he will need to sell 6,600 pairs of shoes for a profit of $100,000.

To prove my point, let's assume that 98% of his business will be focused on selling to clients he has already acquired: His profit margin grows to $35, as he is dropping his acquisition costs. In order to reach a $100,000 profit, he will now need to sell only 2,800 pairs of shoes (i.e. 58% less). This in turn will probably further help to decrease the G&A costs, and Joe will be able to pass on some of these savings to his customers.

I've recently argued that the role of the digital marketer is to sell, and here is a good example of a real impact on the company performance and margins that is directly attributed to the efforts of the marketer.

Continuing with this train of thought, it becomes clear that if you focus your efforts mostly on acquisition, you're actually working for your competitor who provides their client with a more individual customer experience, and making sure that their customers stay loyal. 

And the winner is: retention!

If your startup days are behind you and your business is established, chances are that growing your business will be cheaper and faster if you retain and sell to your existing client base. This is not to suggest that you need to abandon acquisition efforts completely, but you need to shift the focus to your existing clients.

If you are a startup, then naturally your initial objectives should be to focus on new business acquisition, and then as the customer base increases, start shifting the focus to retention.

But before I finish, a quick word of caution regarding ERFM: If you intend to use ERFM analysis on your database, be careful if you are focusing too heavily on acquisitions. You will find that most customers will be skewed to the right hand side of the life cycle (inactive or churning clients), with much fewer customers in the center (loyal) and in the initial stages (first-time buyers).

Three Steps to Identify Your Wasted Marketing

 

Since the 1950's, executives have been saying the equivalent of, "Half our marketing budget is wasted. The problem is, we don't know which half."

Whether you are in senior management or on the front lines, you should want to finally end this sea of red ink that masquerades as "valuable promotion." It should be intolerable not only if you work in marketing itself, but also if you work in finance, operations, engineering, design, or customer service. 

Wasted marketing dollars prevent true innovation from taking place. Marketing waste makes it impossible to fund a wide range of actually useful initiatives.

The best reason to identify waste is not to cut costs, but instead to free up much-needed funds to improve customer experience, develop innovative products, and actually attract high potential customers.

I'd like to suggest that in three steps, you can find much of the waste in your marketing budget.

Here's how:

1. Identify the marketing programs that you have no metrics to measure.
One of the downsides of social media is that it has led some marketers back to the sort of fuzzy results that used to be associated with image advertising. Many vendors resist any attempt to attach specific metrics to their efforts.

For example, they imply you are a hopeless Neanderthal when you ask, "In a success scenario, how much will your social media program increase our revenues?" Beware such vendors.

It is quite possible to attach metrics to a well-thought-out social media effort, or any other marketing effort that actually results in your business winning, keeping or growing customers. This doesn't mean that every marketing dollar needs to correlate to, say, three dollars of additional revenue; it does mean that you should set specific goals and track the results.

Bottom line: don't ever spend money on a marketing program unless you can measure the results.

2. Identify the marketing programs that have no benefit for customers.
Some of you just blinked, shook your head, or re-read the last sentence. You might think that I'm confused. Marketing, after all, is about growing sales for our company. Its purpose is to help our company, not our customers.

Nope.

In today's hyper-connected world, marketing must benefit your customers. It should teach them valuable information they can use immediately. It should enable them to enjoy benefits and services about which they were previously unaware. It should broaden their perspective and deepen their understanding.

Years ago, I was part of a team that CFO Magazine engaged to reach out to hundreds of financial executives to determine which CRM programs were most successful. There was one clear factor that determined whether a project proved profitable: whether or not it had a tangible benefit for customers. In contrast, projects that simply automated internal marketing functions almost never paid for themselves.

Marketing that has no benefit for customers is nothing more than spin selling, and spin selling nearly always ends up with a race to cut your prices to almost zero.

Bottom line: don't ever spend money on a marketing program unless it has clear benefits to your customers.

3. Identify the marketing programs that have attracted unprofitable or marginal customers.
I was one of the first Groupon-haters. Why? They encouraged small businesses to sell services at a loss to customers who would nearly always be unprofitable to serve.

If the only means you have to attract a customer is to cut your prices in half, you don't want to attract that customer.

Too many companies focus their marketing budgets on customers who will never be profitable to serve. Such companies are living a fantasy: they delude themselves into believing their firm has a bigger market than it actually has. They also suck the energy right out of their business.

Look at it this way. If you work like a dog 70 hours a week to make no profit, you are not running a business, you are running a charity. (Caveat: ignore the last sentence if you plan on selling your company for $5 billion; more on this if I ever am foolish enough to write an article on How to Build the Next Facebook.)

The truth is, your company could be better off diverting money from advertising into customer service or product development. Get a bigger share of the business from your most profitable customers; the way to do that is to expand the scope - and quality - of the services they find useful.

Bottom line: don't ever spend money to attract customers on whom you will lose money.

 
Posted by: 

Bruce Kasanoff