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).

Don’t Lose Your Shirt on an Acquisition

The best way to profit from U.S. deals is to buy American companies. But it can be a disaster if you don't consider these 4 key issues

John Lorinc

Despite a fondness for cheap, made-in-Asia, goods, Americans still like to buy American-made goods. Ivan Rebello, vice-president of Zenan Glass, a $19-million-a-year firm that makes customized beer and spirits glasses, bottles and other sorts of specialized stemware, came to this realization about four years ago; his epiphany was to become the driving force behind the company's expansion strategy into the U.S.

At the same time, Zenan Glass was filling smaller orders for U.S. customers, but the shipping and customs costs were proving to be onerous. Their margins were so narrow that Zenan (ranked No. 260 on the PROFIT 500) walked away from an order from a huge customer—Diageo, one of the world's largest liquor companies, according to Rebello. The company wanted Zenan to supply glassware to 20 locations across the U.S. But when Rebello and his colleagues ran the numbers, they realized they'd lose money on the order. "We couldn't fulfill this profitably."

It was a head-slapping moment.

The acquisitions
Throughout 2011 and 2012, Zenan worked their way out of this problem by purchasing a pair of financially strapped glass and dinnerware factories in the U.S., one in Rochester, New York, and the other, in Ohio, outside Pittsburgh. Together, the acquisitions cost almost $2 million.

Rebello said Zenan's bankers told him not to make the investment. He didn't listen, saying, "Entrepreneurs like myself get a kick out of taking risks."

Since completing the acquisitions, Rebello has spent hundreds of hours traveling between Zenan's Toronto headquarters and the two factories as he pushed ahead with restructuring the facilities so they could begin to deliver on the promise of improved access to large U.S. customers.

Rebello soon found himself focusing on several key issues that arose in the wake of the acquisitions:

• Do due diligence on the due diligence. "We almost lost our shirts" with the first acquisition in Rochester, says Rebello. Before the deal closed, Zenan relied on a local lawyer to supply financial information about the target firm. But once Rebello's team took possession, they discovered that the information they'd been given included a lot of falsified payables and receivables, and double-bookkeeping. Zenan paid $250,000 for the plant, yet ended up spending $1.2 million to sort out the problems. It's taken almost two years, Rebello says, to stem the losses.

• Demographics and the workforce. At the Ohio facility, most of the employees were nearing retirement. Zenan embarked on an aggressive recruiting process to bring in younger workers who would be able to use new technologies and deliver increased productivity. Today, about half the employees are new hires.

• Hire trustworthy managers who understand your vision. When Zenan completed the purchase of the Rochester factory, the company decided to keep the former owner on as the operations manager. After a year, Rebello says, it became clear that this manager was "a major problem." The former owner was replaced with his second-in-command. The new manager had a military background, which pleased Rebello, a former lieutenant in the Indian navy. "He had the necessary discipline with the operation. Knowing my background and this man's background, I would give him instructions and they would be followed to the letter."

• Invest in the right technology. Zenan picked facilities that had ovens capable of reaching the temperatures needed to make glass and dinnerware. However, much of the rest of the equipment in the plants was outdated, so Zenan replaced the aging machines with modern ones identical to the ones used in the company's Toronto facility.

These days, Zenan's revenues include almost $4 million in sales in the U.S. Heading into fiscal 2014, Rebello feels confident that he's worked out the kinks that came with Zenan's new U.S. holdings. Thanks to the technology and management changes, Zenan managed to win back some of the previous customers of the two U.S. plants, and is now better positioned to bid on large deals that have to be shipped to American destinations.

"This year we'll show profit on the two factories," he says. "Next year, I'm looking at substantial growth."

Canadian SMEs Snapping up U.S. Companies

JOHN LORINC

December 3, 2013

More than five years after the 2008 credit crisis, Canadian M&A activity stubbornly remains well below its peak 2007 levels. But, while more sluggish than the feeding frenzy of six years ago, it does look as if acquisitions are starting to pick up the pace again according to new data compiled by investment bank Crosbie & Company. Over the past year, Canadian firms have been aggressively snapping up U.S. companies at much faster rates, culminating in 120 takeovers in 2013 worth almost $32 billion.

Crosbie & Company managing director Colin Walker notes that the proportion of Canadian acquisitions of U.S. firms as a total of all foreign acquisitions has fallen by about 10% to 15% in the past decade—proof, he says, that domestic businesses are increasingly operating in a "fundamentally international" market. "It shows that Canadian companies have recognized the need to push beyond [North American] markets over a long period. It's a function of globalization."

Walker says the Canadian M&A market is driven primarily by mid-sized firms with transactions worth less than $150 million. In a typical quarter, he adds, about 40% to 50% of those deals involve cross-border activity.

According to the 2013 Q3 report published in The Financial Post, the number of all year-to-date M&As—which came to an ominous total of 666—is 7% below the same period for 2012 and 11% below the first three quarters of 2011. "Despite weak activity," Crosbie & Company says, "the value of transactions increased by 9.7% to $49 billion in the quarter due to a few large transactions, particularly in the retailing and real estate sectors."

Crosbie also reports that the number of Canadian acquisitions of foreign firms is outpacing foreign takeovers of domestic companies by a ratio of 2.2 to 1.

Over the past decade, says Walker, this "outbound" acquisition activity has been driven by manufacturers looking to move production to low-cost jurisdictions in the southern U.S. or Asia. In other cases, such as Constellation Software, a Toronto firm, companies grow within key market segments by making strategic acquisitions.

In fact, Walker says most Canadian companies aren't just looking to boost their revenues or before-tax profits when they make an international acquisition. "They're buying that company because of the benefits that it brings, such as windows on new markets, new products, new manufacturing capability or some really good people."

When Acquisitions Become Drivers of Innovation

 

In the world of technology, companies are increasingly moving beyond growing organically and using acquisitions to enlarge their operations. Some have also made a strategic decision to acquire R&D rather than try to grow innovation in house.

Take for example Apple’s acquisition this summer of Toronto-based Locationary, the venture-backed startup that specializes in location data.  According to a number of market experts, this deal allows Apple – which has its own R&D division – to immediately augment its mapping service so that users can access up-to-date information on local businesses.

Whether the acquirer is Apple, Google or Blackberry, the objective in these acquisitions must be carefully defined. That’s the view of John Banks, who teaches MBA students about M&A at Waterloo, Ontario’s Wilfrid Laurier University. “Regardless of how attractive the deal price or fortuitous the opportunity, it is essential that the impact the acquisition is intended to have on the company’s strategic direction be both understood and realistic for the transaction to be truly successful,” Banks says.

Enterprises that use M&A to supplement their R&D can approach acquisitions in a passive or active way. Those doing a formal search process tend to have access to strong corporate finance skills and are able to apply rigorous valuations and criteria for potential deals. Banks agrees with the value of using specialized expertise: “The assessment needs to be especially meticulous since research shows that this particular aspect of M&A is often characterized by incomplete if not irrational thinking.”

A smaller company is often attractive as an acquisition target because it can have the flexibility of a speed boat that manoeuvers rapidly around larger ships. “There is the ability for a small company to be nimble and to not be hampered by bureaucracy. They can do R&D at a quicker pace and without legacy products,” says Amar Varma, founder of Xtreme Labs, a Toronto-based provider of mobile solutions to businesses. (Varma coached BumpTop prior to its acquisition by Google in 2010.)

The issue for a larger company that chooses to use M&A to develop an innovative product pipeline is the risk of missing the window of opportunity to buy. If the targets are very attractive, they will be acquired. Google bought YouTube and capitalized on gaining a unique business while it was still available in the market.

A common impetus to enter acquisition mode is when the larger company is looking to grow by boosting a product or service offering. Once the target has been identified, it’s all about timing.

Says Varma: “Startups are continually looking for cash. The ability for a startup to obtain cash through customers or investors can significantly impact the upward trajectory of the deal price. This means the acquirer must purchase a startup at the optimal time – before there is too much competition to buy. Often, there is no demand until there is demand.”

When a company uses acquisitions to supplement its R&D, the corporate finance process needs to be highly streamlined and focused on its mission. “In order for an acquisition to go well, there needs to be strategic alignment for the bigger vision of the deal, an appropriate integration plan that minimizes day-to-day disruptions, and consideration for the cultural fit of both companies,” says Haroon Mirza, entrepreneur in residence at OMERS Ventures and co-founder of CognoVision, which was acquired by Intel in 2010.

The period immediately after the acquisition can be challenging, particularly if the small enterprise bought for R&D development has a superior product, as this can cause resentment by the acquirer’s team of employees. The need for cultural fit suddenly becomes startlingly clear. The on-boarding entrepreneurs will need a top executive at the acquiring business to champion the buy.

“It becomes important to keep employees of the acquiree informed about what the acquisition means for them – this can be a confusing time for employees who may feel their jobs are at risk and could consider leaving if they’re not well-informed,” Mirza explains.

Mirza was satisfied with his and his co-founders’ decision to have CognoVision acquired by Intel. “I do agree that an M&A can be a viable alternative to organic growth. For the acquirer, benefits include immediate access to intellectual property, business and technical domain expertise in terms of talent, and also our customers.

“For the acquired company, benefits include gaining access to significantly more resources for R&D, sales and marketing which can accelerate business growth by means of improved sales reach, cost optimization, and increased revenues.”

Jacoline Loewen is a director at Crosbie & Co. Inc., a provider of advice to small and medium-sized businesses. She is also the author of “Money Magnet: How to Attract Investors to Your Business.”