Does It Still Cost 5x More To Create A New Customer Than Retain An Old One?
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Most people have heard the saying it costs more to create a new customer than keep an old one. We hear this in business blogs and at conferences, but I wanted to look at if this was still true, considering many of our business models are now different thanks to new industries and experiences created by the internet. The old rule of thumb was that it cost 5x more to get a new customer than it did to keep an existing customer.
However, the 5x rule is based on mass-produced products, and business models that focused on pushy sales tactics. In the past we did not have predictive analytics to tell us accurate educated guesses around future behavior which we have now thanks to advances in machine learning and artificial intelligence. The selling world is much different than it was, and now we face a new selling world, one where personalization can can increase overall consumer spending up to 500%.
A lot of companies focus on the old notion that it costs 5x more to get a new customer, but in doing so, they lose focus on what really matters—connecting with customers and delivering value - now and in the future. The most successful companies find a balance between the two costs. When considering how much to spend to create or retain customers, it’s important to consider a customer’s lifetime value, or CLV. This number is different for each company. Companies that consider the potential of a customer – for the future – are much better off.
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Consider what Wharton Marketing Professor Peter Fader told me in an email interview: "Here’s my take on that old belief: who cares? Decisions about customer acquisition, retention and development shouldn’t be driven by cost considerations—they should be based on future value.” Fader doesn’t believe costs should be ignored, but believes there’s a good chance that, in many cases, the cost differences will be small relative to the value differences between retaining a so-so customer versus acquiring a (potentially much more valuable) new one. He doesn’t believe that acquisition always trumps retention, but it should always be based on comparing the projected CLVs. When most companies approach customer experience, calculating how much a customer is worth is seen as a nefarious activity - something done in a basement. But knowing how much your customer is worth can help you make smarter, more accurate investments in your relationships, rather than spending a lot of money everywhere.
Fader added, “If we could see CLV as clearly as costs, all firms would get this. But because costs are so tangible and CLVs are a mere prediction, it’s really hard to get firms to adopt this mindset. But it’s [CLV] the right one, and they should be working hard to become comfortable with CLV as the key driver to this kind of decision.”
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This was a very insightful post! Sustaining customer relationships can lead to major returns for an organization.
Customer Experience Practitioner & Principal Consultant
2 年Retention is the new acquisition, period.
BI and Analytics Professional: Database Administrator, with Data QA/Master Data Background
2 年I would be concerned, with the CLV calculation being biased, or inaccurate in some way... which obviously, could be a fatal mistake. Certain customers might be considered "low-value" if they are a long-time customer of a low-end package, where in reality they are simply living within their means. For example, Charter/Spectrum offers hundreds of channels, but I only subscribe to internet. The value proposition for me, is over $200 a month, for just two people, who tend to watch 7 channels, on one TV, together. Our life isn't super-dominated by media consumption, because we're too busy building out our life, volunteering, and trying to make our way... The same company would likely value us lower, when it comes time for an internet outage service call, because we don't subscribe for the "triple play" (Phone/Internet/TV), and never have. We recently purchased our home in the past two years, so we aren't really a long-time customer. Even though we chose the fastest internet offering they provide, as customers, we would be at the bottom of their list, and therefore, cheap to let go, under the idea of CLV. The other case, is if the customer lives in an area where the infrastructure has issue/is unstable. Repeat caller = lower CLV?
Strategy || Engagement || Experience?
2 年The challenge lies in early detection of who’re your good customers and who aren’t. In the changed/ever-changing times we’re in, our success lies in creating more customer ambassadors. Way to go.
Chief Experience Officer at billquiseng.com. Award-winning Customer CARE Expert, Keynote Speaker, and Blogger
2 年I agree with you, Blake. To me, your business success does not depend on how many customers you find. It’s all about how many customers you keep. Spend as much time, money, and resources to keep a customer as much as you do to find new ones. Even more. Marketing is not you advertising to your customers. It’s your customers raving about you to others.