New Customer Acquisition vs. Customer Retention
by Rob Wolfe
In their 2009 Survey of Marketing, Media and Measurement, King Fish Media (http://www.kingfishmedia.com/) found that “when it comes to the allocation of marketing dollars, new customer acquisition gets nearly double the attention of customer retention efforts.” On average, responding companies spend 56% of their marketing budgets on lead generation/new customer acquisition and spend 33% of their marketing budgets on customer retention. Furthermore, 91% of these companies say they measure the success of a marketing program by the number of new customers acquired/leads generated, compared with 63% that measure marketing program success by the increase in customer retention/sales from current customers/lapsed customers.
So, which is more critical going into 2010: new customer acquisition or customer retention? I posed this question to fellow members of multiple networking groups on LinkedIn. As Hiten Dedhia, Project Manager at Adventity, Bombay, India, puts it: “Customer retention is important to maintain the level of business you have achieved, and customer acquisition will help you to grow.” Generally, there seems to be agreement among sales and marketing professionals that both are critical, but how each should be handled depends on the situation, such as the life cycle stage of the company or product. For example, from a strategic point of view, Josep Perpinya Sarroca, Country Manager Grupo Romeu Tunisia, believes that “for companies duly established in the market … and not in the early stage, the most critical (and less expensive in economic terms) is customer retention.” Presumably, less established companies or products will need to place greater focus on customer acquisition, and as the company matures it will shift focus toward customer retention. Also, as Raghu Iyengar, General Manager Dealer Tire in the Cleveland/Akron area points out, “The equation for retention vs. acquisition is not the same for toothpaste and a 52″ flat screen TV.”
- Retention is usually viewed as a cost effective way of securing revenues, but is a function of product differentiation, switching costs and other industry specific parameters. To be successful, the incumbent need to smartly leverage its BI to create customized retention programs and increase loyalty at the lowest cost, lowering churn when the economy recovers. Customer acquisition needs to be positioned as a competitive project to the retention program. However, acquisition costs are usually higher than retention and warrant a thorough analysis of associated benefits, which may be more than incremental revenues. These acquisition benefits need to be fully quantified to accurately gauge the relative value of each approach. (Cedric Oudinot, Associate at Booz & Co. in Houston)
- Very often we have found you are not always getting every bit of the business with an existing customer base, so there is constant activity to ensure you reach all parts of the business and you network each existing customer fully. I also believe that so many companies become complacent and forget to show their appreciation for good customers – so focused on looking for new customers. It is hard to balance, but we need to make existing customers feel appreciated and be as proactive with those as we are with the new! (Gill Thorpe MCPIS, Director at The Sourcing Team Ltd and Owner, The Sourcing Team Limited in the United Kingdom)
Customers are becoming more and more demanding. With growing competition, the customer is getting more choice. You need to find new and innovative ways to retain and satisfy your customers, but we cannot under-estimate our competitors! While we find different & unique ways to keep customers, competition can do the same to acquire new! Thus, customer acquisition is necessary for us, too! (Durgesh Sthalekar, Head-Retail Sales Operation at L’Oreal India Pvt.Ltd in Bombay, India)
Marketing, Sales, and Profitability
I can’t argue with Kevin Huval, Strategy and Business Improvement Executive in San Antonio, who says “Retaining profitable customers is more critical than acquiring unprofitable customers. Acquiring profitable customers is more critical than retaining unprofitable customers.” In fact, 2010 “may be a key period to shed unprofitable customers, (re)build a strong customer foundation and position the company for subsequent faster growth,” says Cedric Oudinot, Associate at Booz & Co. in Houston.
Growth is just one of the benefits experienced by companies with superior retention rates. (William A. Sherden, “The Tools of Retention.” 1994) Profits also should improve considerably when customers stay on board for longer periods of time. The cost of acquiring customers and putting them on the books generally runs two to four times the annual cost of serving existing customers. So the longer you keep customers, the more years over which these one-time costs can be spread, explained Sherden.
Do Sales and Marketing work together to acquire and retain profitable customers, or is there a disconnect? As supported by a recent discussion I saw on LinkedIn, one major difference between Sales and Marketing is that Sales tends to focus on the short-term revenue acquisition with less emphasis on whether the customer will be profitable in the long run, while marketing is charged with focusing on the long term and more concerned with customer retention and profitability over time. But as Josep Perpinya Sarroca also noted, you can’t spend resources on customer attraction if you don’t have a well defined strategy of customer retention. Otherwise, you won’t have those customers in the long run—one of your competitors will, and the money you have spent on acquiring those customers will not have been well invested.
Again, it can cost anywhere from 2 to 10 times more to acquire a new customer than to keep an existing customer, which is why more of the marketing budget is allocated for new customer acquisition. However, this doesn’t mean less attention should be given to retention of existing customers. “We may spend more money in communicating and marketing for new customer acquisition,” says Gill Thorpe, “but more time in servicing existing customers to ensure we continue to not only retain but to continue to develop existing customers.”
“Your existing client base should be your main focus,” feels Pam English, Affinity Program Marketing Manager in Norfolk. “I believe in building relationships with my clients and maintaining contact on a regular basis. The business will come your way if you truly care about your clients.” Tom Pannett, Manager, Financial Reporting at Computer Associates UK in the United Kingdom, feels that “loyal customers don’t need huge amounts of work (provided perception of value is there). New customers…require at least two years to become loyal.” I say that building relationships through the acquisition process will build that loyalty and will help with retention in the future, and both Sales and Marketing need to work on maintaining the loyalty and the relationship after a customer is acquired. “More competition than ever is out there calling on our clients,” says Cathy Brooks, Sales/Consultant at Leaman Container, Inc. in Dallas/Ft. Worth. “It is important to remain solid and be a constant presence at our current customers. If we don’t, someone else will.”
Dr. Gary S. Goodman (http://tinyurl.com/yjjmmwy, “In a Shaky Economy Customer Retention Must Yield to Customer Acquisition”) suggests that the higher price of acquiring customers should not lead us to a greater focus on customer retention just because of the current economic situation. He asserts, “In a poor economy such as ours, given a choice, it would be a major mistake to redirect resources from customer acquisition to customer retention. In a dire economy, customers and clients will leave the fold for reasons that have nothing to do with factors you control. Their own business models may be under pressure, or suddenly become obsolete.” On the other hand, Guy Maser from CRM Buyer (http://tinyurl.com/y93yxv7, “How to Earn Your Customers’ Loyalty”) believes that “with the economy in its current state, it’s more important than ever to keep the customers you have. There are always competitors ready to lure your customers away, and there are always customers who will switch given any slight, perceived or real.” He says customer acquisition is an investment, but customer retention delivers profitability. Crystal Hennigan, Sales Executive, Toronto, Canada, agrees: “A company’s greatest asset is the customers they already have – this is their Gold Mine. Companies with strong brands and highly engaged customers focus on their Gold Mine. Let’s remember the Pareto Principle or 80-20 Rule: invest 80% of our efforts on the top 20% of our customers to maximize our return. We must balance our efforts between multiple channels of new business acquisition. However, I think we are leaving money on the table by not dedicating the majority of our efforts on improving engagement of existing customers. I challenge executives, marketers and sales people to treat existing customers like the revenue producing asset they can be, don’t have a “throw away” approach to customers by focusing more on the customer you don’t have. Mine the gold you already have to get repeat business, add on business and referrals for new business.”
Obviously, growth can’t occur without customer retention. Any increase in the number of new customers will be offset by any loss of existing customers. Net growth rates can be improved by retaining existing customers. However, as Peter Ramsden, Owner, Paramount Learning Ltd. (http://www.paramountlearning.co.uk/) in the United Kingdom, points out, “all businesses have a customer churn rate no matter how good they are [at retaining customers]. As a consequence, one has to expend time and effort in acquiring new clients to simply stand still…It is possible to generate growth from within existing accounts and minimise spend along the way. Any savings achieved should thus be ploughed into new customer acquisition making a win-win scenario.”