Retention Tension

With every new post, every new article, there seems to be a different spin on the topic of customer retention vs. acquisition and which is the more cost effective strategy to pursue.

I’ve written about this before.  But I think it’s worth revisiting in light of this post I saw from Spoken Communications this week.  I really respect @spokencomm and the wonderful content they bring to the conversation.  I did take pause however, when this most recent post, referring to data from Flowtown, started with:

“We’ve all heard the saying that it costs more to acquire a new customer than to maintain an existing customer.  But Flowtown actually did the math”

So, I’m here asking for help.  I don’t see the math in the information presented.  I do see another claim suggesting it’s 6 to 7 times more costly to acquire a new customer than retain an existing one.  But, I’ve yet to see a rigorous statistical analysis to prove the claim.  I’m looking for the formula.  What are the variables?  Flowtown suggests some “costs associated with finding new customers”.  But, I’m not seeing the hard empirical data.  Flowtown also suggests that profits from satisfied customers come from: Reduced price sensitivity; Reduced switching to competitors; Increased referrals and Increased repeat purchases.  In what industries? What type of customers?  These seem like broad generalizations.  And, by the way, can’t new customers be satisfied also?  What is the time period that needs to elapse before a customer is considered ‘existing’?  Flowtown is mixing comparative data.

As Ron Shevlin wrote in a post back in June where, at least in banking, he effectively debunked these types of claims, there is no standard definition of what costs to include in trying to calculate the cost of customer retention or acquisition.  As Flowtown demonstrated, it’s very subjective.  And, Ron’s example calls out the fact that in some cases, especially in the Long Tail, customer acquisition costs can approach zero.  While on the other hand, the cost to service those customers to the level required to deliver the price elasticity, referral and loyalty results that Flowtown suggests would be significant.

These types of articles and claims resonate with many folks because they fit with our intuition about how the customer relationship works.  On a superficial, intuitive level, I get that.  But intuition doesn’t resound with the CFO.  If your goal is to build a plan and the request investment for a customer retention program, you’ll need hard numbers.  You’ll need to first define what “cost” means; define whether your company is in growth mode (meaning revenue will be more of a focus) or you’re more of a mature company focused on profitability.

So, I’m not here to suggest heresy against the value of customer relationships and loyalty, think of it more as my Friday public service announcement.  Without a clear definition of terms and rigorous analytic process, this discussion becomes a tennis volley of splashy headlines.  And as any of us that have attempted it and gotten skewered, trying to sell a tag line into the executive suite just creates too much internal tension.  And who needs more tension?

Comments

  1. Thanks for writing about this, Barry. I say we all gang up on Forrester and see if they can actually do a valid study and publish the math. :-)

  2. What is convenient, popular, acceptable, fits our previous notions and intuitions have become sacrosanct.
    Most of these studies are firm level cross-sectional studies that overextend correlation to draw incorrect causations. I am yet to see one customer level longitudinal study done.

    As you point out about model and variables, none of these studies say what % of changes in business success metric can be explained by loyalty.

    None of these studies that tout the merits of retention take into account market dynamics (size, growth, change drivers etc).
    50% of S&P; 500 stocks were not in it 10 years ago. So if you were selling to them you would have had 50% churn. Customers switch due to many reasons, trying to hold on to them at all cost and in the name of loyalty is futile.

    -rags

  3. Rags,
    Outstanding comment! Its clear you have an analytical background. What a great example of the S&P;! And you could also look at those same companies that have come into the S&P.; they would not have gotten there without an aggressive customer acquisition strategy.

    You're last line says it all. Thanks much.

  4. Barry
    Thank you.
    Your post is a breath of fresh air. Of course you should not take my word for it as I seek out such contrarian posts that demolish myths :)
    Yes I have the analytical background but it does not sell when competing with broad predictions :)
    Just as real world example of stopping defections, I worked with a private school that was wanted to stop churn The top reasons I found why parents left were nothing the school could have done to stop (fyi http://goo.gl/Uavk)

    -rags

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