What does it really cost to acquire or lose a customer?
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?
Hi
In my opinion, Don has proposed a valid arguement that cost of retaining or acquiring a customer is highly variable, but what I am suggesting is to tag is against another variable which is dependant of the same factors like, revenue of that particular company. For example 1% (say) of revenue to acquire 100 new customers for auto industry.
Collating data by industry for different organizations might provide us some convincing figures.
Hopefully, we may get some constant figure or some good enough range by dividing one variable with another
Retention costs in a well tracked B2B company may be easier to track retention costs. If your sales rep or customer service rep indicates how much time they spend on each client and the company also tracks what else they buy or how often they renew then a retention cost can be calculated. However, this probably won't be able to track exposure to advertising (if that is part of your mix) so it could be a less than perfect figure.
As a purveyor of those "spurious facts," I should comment here.
When we discuss "facts" like that, we intend for them to be thought-provoking, so it’s good when participants wonder about relevance (or lack thereof) to their own businesses. Although based on specific sources, these numbers are intended only to be directionally true. As you wrote, each proof source cannot be generalized because of some factor—industry, date, sample size, credibility of the author quoted, etc. It cannot not prove to any participant that a "fact" is the number she will experience. In fact, many organizations track their own, similar statistics, so they already know what is their truth.
Focusing, instead, on the big picture behind the facts is a more useful lesson. For most organizations, the facts are directionally consistent—for example, it often costs more to acquire a new customer than to keep an existing one, and a dissatisfied customer almost always tells more people than a customer who is satisfied. Whether the ratio is 3-to-1 or 4-to-1 doesn’t matter as much as the general lesson and the call to action: How can I as a service provider improve the situation?
That’s why this is such a valuable activity. If a participant gets distracted by the validity of the proof sources, or uses validity as an excuse to dodge accountability for improving service, we emphasize the directional truth of the facts. As with most learning activities, this is intended as a discussion starter, not as a data transfer. It’s almost good that a participant would question validity, because the resulting conversation could build commitment better than simply having the facts presented. If a participant really wants exact numbers, we talk about ways she might measure them for her unique function/company/industry. That could also be a good application of her enthusiasm, and could lead to even more productive behaviors.
Don
Excellent question and one which I have been grappling with for some time now. I’m netting out on the side that views Retention as being the New Acquisition.
I don’t think it matters what the cost ratio of acquisition vs retention actually is.
Simple economics dictate that acquisition is the winning strategy for the long run strength of the organization. In fact mitigating against outright defections should be a relatively low priority. At least according to the folks at McKinsey (Customer retention is not enough) http://www.huizenga.nova.edu/5017/ReadingList/Coyles_Gokey%20-%20Customer%20retention%20is%20not%20enough.pdf )
In their calculations, managing the upward migration of a brand’s share of requirements with engaged customers can have as much as ten times more value than concentrating on defections alone.
And so in a flat world – the battle between the good-enough’s will not be won by bringing more people into a leaky bucket.
If an enterprise is able to develop the skill set to strengthen its customer retention – it will ‘inevitably’ lead to a stronger brand evolution program. These innovation skills, according to Patrick Reinmoellere and Nicole van Baardwijk, are crucial to helping an enterprise become more resilient in the marketplace.
The research shows that resilient companies continually orchestrate a dynamic balance of four innovation strategies: knowledge management, exploration (internal research and development), cooperation (acquisitions, alliances and other relationships) and entrepreneurship. The authors conclude that focusing on one innovation strategy to the exclusion of others may produce innovation, but it will not lead to resilience.
And so while retention used to be the applause of customers… today it’s the ticket to the show. Today, customer retention is a privilege that is earned with every purchase. The past, present and future all folded together.
Thanks for bringing up this topic. "It costs X times more to acquire a customer than retain one" is an urban myth.
First off, acquisition costs vary by industry. The auto industry needs to spend a whole lot more to acquire a customer than, say, ING Direct who can jack up their interest rates on CDs and acquire a lot of new customers.
Second, costs to both acquire and retain customers ebb and flow with economic cycles. In good times, acquisition costs decline.
Third -- and most importantly -- retention costs are INCALCULABLE. Sorry to disagree with you, but control groups don't solve the problem. A firm has to first determine what it includes and excludes in the definition of retention costs.
Do you include all the costs associated with providing customer service to customers in your retention calculations? After all, if you don’t service them, you will have less chance of retaining them.
Do you allocate all IT application maintenance and enhancements to your retention calculations? If you don’t continually improve your transaction and interaction service capabilities, your ability to retain customers diminishes.
The reality is that no one has the slightest clue what it costs to retain a customer, because no one has defined a standard for what costs to include and which ones to exclude.