A study commissioned by the Institute of Practitioners in Advertising seems to debunk the long held notion that it's cheaper to retain an existing customer than it is to acquire a new one. This from their study:
Encouraging customer loyalty has long been a goal of brand marketers, on the grounds that it is cheaper to retain customers than recruit new ones. But according to a recent study carried out on behalf of the Institute of Practitioners in Advertising (IPA), it is not necessarily the best use of marketing resources Relevant Products/Services.
The report concluded that as few as 9% of loyalty campaigns deliver significant profits, and in most cases do so not by retaining customers but by winning new ones. "Companies are wasting a huge amount of money on activities that don't work," declares Les Binet, co-author of the report and European director at DDB Matrix.
After Binet and marketing consultant Peter Field analysed 880 IPA Effectiveness Awards case studies, including unpublished data, they found that most marketers judged their work to be successful from short-term indicators such as brand awareness or image, rather than the long-term impact on market share and profitability.
Binet believes the potential of loyalty to generate huge profits is a myth propagated by management consultants, and for which there is little evidence. He points to research by marketing scientist Andrew Ehrenberg, which suggests loyalty does not differ significantly between brands within a category, and that trying to build a brand this way is futile.
Those in the loyalty industry naturally disagree. But several are quick to concede that if firms are not measuring their loyalty campaigns properly, something is badly amiss. The point of applying accountability to marketing is to measure bottom-line effects, not to disguise them "There is so much we can and do measure, but if marketers are not looking at the real value the programs are creating that is a huge challenge to the industry," says Jane Asscher, managing partner of communications agency 23red.
I began hearing customer
retention rationalizations like this back in the late 70's.
We sales folks were being told that it was cheaper and easier to
maintain an existing account as opposed to prospecting and closing a
new account. This rationalization was driven primarily by the costs
incurred in pursuing new customers that were theoretically not needed
to service existing accounts. Costs like advertising, travel and
entertainment. The accountants loved this rationalization.
I was first presented with the customer retention rationale during a
Xerox Professional Selling Course which were quite popular back in the
day. I remember our instructor going to great pains to make sure we
understood the risks of focusing on maintaining old customers over
finding new customers. His point was that it was easy to maintain an
existing account- the tough part was winning new accounts. Tough
because it took a special breed to deal with cold-calling and
rejection. He explained that you needed organizational skills to manage
existing accounts and aggressive, competitive instincts to fight for
new accounts. And that these skills tended to be mutually exclusive.
Contemporary hunting and gathering.
The 80's saw the emergence of a new sales role called key account
managers. Key account managers were charged with maintaining and
expanding the business of a current account. Organizational and
nurturing skills were highly-valued in this role. Key account managers
were trained to be advocates for the customer - in essence an employee
of the customer. In fact many key account managers actually had offices
or a desk at their account. IBM in the early 80's advanced this
practice to an art form. An important element of key account management
was to work with the customer as a partner in collaboration.
During the 80's there seemed to be a well-balanced portfolio of
competencies in the sales and marketing suite. An effective combination
of nurturing and aggression. But as the nineties unfolded, and new
economy notions took hold, the kinder gentler crowd began to monopolize
the conversation. And like any system that becomes unbalanced, the
sales and marketing suite began exhibiting decidedly dysfunctional
behavior. Customer acquisition skills are different from customer
retention competencies. A healthy, vibrant sales and marketing
organization needs both sets of skills in order to thrive.
Christofer Bassford in a recent
post offered the following analysis of offense and defense - which can
be considered the functional equivalents of customer acquisition and
retention:
Whenever two concepts form a true logical antithesis, in
other words, one is the complement of the other, the one is essentially
implied in the other. However, if the limitations of our mind do not
allow us to consider both at once, and to find the totality of one by
mere antithesis in the totality of the other, in any case,
nevertheless, strong light is shed by one that is adequate to
illuminate many parts of the other.
Hence in addressing the attack, we shall most often have the same subjects before us as when considering the defense.
Interesting analysis.
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