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Don Peppers | May 19, 2008

What does it really cost to acquire or lose a customer?

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Someone recently asked me, very seriously, whether I could tell them how much it really cost acquire a customer, relative to the cost of losing a customer. I didn’t have the heart to tell him that this is a nonsensical question. There’s no answer to it. That is, the answer is always going to be “it depends.”

Consider the cost of acquiring a customer -- well, what particular kind of customer are we talking about? Will that be an ice-cream cone buyer, an Amazon book buyer, a Toyota Camry buyer, a construction firm buying a new crane, a computer software consulting business buying janitorial service for twelve months, or a business class air traveler who’s never flown on your airline but frequently flies with your competitor? And who’s doing the acquiring? Are you a monopoly, or a duopoly, or in a highly competitive market, or an international one? Do you have the best product, the worst product, the second best, or something in between? Are we talking about acquiring a very loyal customer, or one who might jump to the competitor in response to the next offer?

I’m sure you see the problem here. Ditto with the cost of "keeping" a customer. Let’s see, will you want to be keeping that customer for another week? Month? Year? Forever? Is this a high-volume customer you want to keep or a low-volume one? Did this customer come in on someone else’s referral, or in response to an advertising promotion of some type, or what? And has the customer generally been satisfied with your service or not? Does anyone else offer a service just as good as yours? Do they price it competitively or not?

All this being said, in any particular business situation you can always calculate the cost of acquiring the last set of customers - simply divide the money you spent on the task by the number of customers you've acquired, and presto!

However, in calculating the cost of keeping a customer, the best way (really the only way) to do this is with control groups. You have a set of policies designed to make your customers more loyal, and these policies cost some fixed amount. You apply the policies to a population of customers, but you hold aside a control group of statistically identical customers who are not exposed to the policies. Then calculate the difference in customer retention rates between the two groups of customers, and that absolute difference - the extra customers who remain in the non-control group, over and above the number you would have expected based on the retention rate in the control - that's the number of extra customers you "kept" with the policies you applied. So again, divide the cost of the policies by that number of extra customers, and there's your answer. For now. For that situation and for those policies, at that time.

One more thing: There is a spurious “fact” that circulates widely alleging that "it costs five times as much to acquire a new customer as it does to retain an existing one," although sometimes people say it is seven times as much or ten times as much. This fact originated with a Harvard Business Review article a couple of decades ago, which was the result of a general study of retention policies compared to acquisition policies across a range of businesses in different (consumer) categories. I think it was Earl Sasser, et. al., and the "service quality initiative" or something like that. However, if the academics who did this study had taken a different sample, or applied their calculations to different categories of businesses, then the numbers would obviously be different. This number is valid for the particular set of firms they looked at, in that study, but you can't simply apply same number, as a general principle, across all marketing.

I’d actually be interested in hearing from anyone out there who has their own figures – how much does it cost YOU in YOUR business to acquire different kinds of customers? And do you know how much it costs to retain them, as a general proposition?

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