Thursday, December 27, 2007

What’ So Funny About Peace, Love, and Customer Acquisition?

By John Gaffney, Contributing Editor

I’ve been talking to a lot of smart people lately about the obsessive focus many businesses have with customer retention and loyalty these days, and the current wisdom says this picture is a bit out of focus- especially among retailers.

I don’t know when customer acquisition fell out of fashion. Maybe it was that McKinsey report that got a lot of play a few years ago that said it was 10 times more expensive to acquire a customer than it was to retain one. Maybe it is the relative “plug and play” ease that so many loyalty programs have morphed into. Maybe it’s just a simple view retailers developed that drive them to highly value the customers they were tracking and ignore the customers that hadn’t entered their database.

“Too much work centers around customer retention,” says K. Sudhir, Professor of Marketing at Yale School of Management. “The opportunity is in customer acquisition. Customer strategy should be integrated. It should be a blend of acquisition, retention, loyalty, experience and influence. It’s easier to count customers than to predict their behavior, so most companies count. I think business is about the customer you don’t have.”

Whatever it is, retailers need to take a look at customer acquisition as a strategy. On a very basic level, new customers are still the lifeblood of any retail operation. It’s true that it will come with a cost, but I would argue that Internet marketing has driven down the cost of customer acquisition substantially. It’s nowhere near the 10x figure attributed to McKinsey. There’s no easy formula to measure acquisition vs. retention costs, but I’ve heard some sound arguments that say any measurement in this area is flawed.

“They are incalculable,” says Ron Shevlin, VP of Marketing at Epsilon. “Let me put it this way: No one has any idea how much it really costs to retain customers. 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.”

So what’s your retention cost? What your acquisition cost? Even if you can answer these questions accurately, the bottom line is that a static customer base will only shrink. A growing customer base may include customers that are not loyal and are not high-value, but there’s also enough marketing wisdom to show retailers how to get close to the customers that look like your currently valuable and loyal ones.

By the time retailers have to take inventory on this holiday season, the data will show who bought what and how frequently. It will also show who bought this year that didn’t buy in 2006, but it won’t show who didn’t buy at all. Therein lies the opportunity.

1 comment:

Carolyn Gardner said...

I totally agree with your comments and question how anyone can accurately say how much customers cost in terms of retention versus acquisition. And I also agree that the opportunities are all around potential customers - i.e. those who are not buying. With respect to the internet and all its capabilities, there is so much opportunity! I work for a company called Sitebrand ( and we see these underperforming segments as HUGE conversion opportunities. With web personalization, e-commerce sites can present consistently persuasive messaging that will automatically change in real-time according to every visitor’s interests’, past history and current online behaviour (length of visit, depth of visit, etc.). It's all about converting visitors into buyers and buyers into long time customers. I would also say that more businesses need to recognize and respect a first time visitor so they can incent them to become a customer. On the flip side, the repeat, loyal customer should experience a whole different set of messaging. Bottom line - like you've so well expressed, there needs to be balanced investment between acquisition and retention.