All through my professional life I have learned, experienced and advocated, that acquiring a new customer costs more than to retain one. Furthermore, a loyal and happy customer generates significantly higher revenues and margins. There is all the incentive then to nurture this loyal relationship and to make it a key strategic priority. Not convinced? Here are some stats:
- It costs 7 times more to attract new customers than it does to retain existing ones (Bain and Co).
- Repeat customers spend 67% more than a new customer (Manta.com).
- Increasing customer retention by even 5% can increase profits between 25-95% (Harvard Business School).
However, as striking as it seems, 70% of CMOs did not recently list retention as a top priority (Forrester).
So why is that companies still invest so heavily in acquisition?
I believe one of the key fundamentals behind this is that failing to acquire new customers every month can erode market-share in the long-term. This market-share is essential to generate economies of scale, that then lead to healthier margins. This is the case for example is the telecommunications industry. Critical mass is fundamental for players in a competitive environment, that requires heavy operational costs, both initial and operational, as well as where players have to subsidize inter-operator calls. So there seems to be little choice but to keep the acquisition machine running in order to keep a healthy market-share. A “healthy” market-share. The trick lies here.
It is relatively easy in saturated markets to pump the acquisition machine over and beyond the “healthy” limit, attracting low-quality customers and generating arbitrage between offers. Further to this, with several levels of suppliers, it is often the case that fraud plagues sales channels, still largely driven by antiquated acquisition-driven-commissions. The lower quality of inflow is further pressured by a stubbornly stable or even increasing cost of acquisition, with margins being further squeezed. As a result, most management will tend to focus on solving the problem = improving the acquisition machine. This is often done by doing one, or more, of the following, :
- Lowering prices
- Increasing acquisition subsidies
- Increasing communication spend
- Increasing commissions
The point is that fueling acquisition costs can further tip the balance of the sluggish acquisition machine. In order to overcome a problem, these companies are brain-wired to fuel it even more!
The solution? Understand well the problem. In most cases, rebalancing towards retention maybe just what is necessary.
“Increasing customer retention by even 5% can increase profits between 25-95% (Harvard Business School).