Understanding the Costs of Acquiring and Retaining Your Customers

I recently wrote about knowing when to exit a customer relationship (When It’s Time to Fire Your Client), when the terms for doing business are no longer equitable for both parties.  Neither the concept nor the practice is new but the process for doing it effectively, requires some skill.  At the same time, when considering customer relationships, it is important to understand the differences between the costs of acquiring and the costs of retaining your customers.

There are many articles and studies on the subject, including one that I find exceptionally useful (“Manage Marketing by the Customer Equity Test”, Blattberg and Deighton, Harvard Business Review), but the basic premise of most is that “it is harder and more expensive to acquire a new customer than retain an existing one.”

The costs of acquiring and retaining customers may vary widely within an industry or market segment but when you consider that corporations such as McDonald’s report that their repeat business from certain heavy use customer segments comprise more that 75% of their sales, the cost of replacing a lost customer versus maintaining that customer needs to be well understood.  This importance is further emphasized when you consider that many organizations use the “equity” that they have created in their customer relationships to fund their new customer acquisition programs. 

Sure, we all know that existing revenue streams via sales activities are the major source of funds for marketing activities in established companies.  But how many companies measure the equity of a given customer in that manner?  Understanding who are the highest value customers and creating plans to keep them suddenly becomes the basis for business decision making.

So what do you do?  Put a program in place in your organization to begin to measure the costs associated with acquiring and retaining your customer base. 

Start with the Acquisition / Retention exercise.

1)      Begin with your existing customer base for the previous 12 months, or whatever time period is appropriate in your business. 

2)     Quantify the number and value of the customers that were acquired versus retained during that period.  Your CRM, Weekly Sales “Wins” reports, and Monthly Billings or Invoicing reports should get you there quickly.  The ratio of these numbers may also give you a quick understanding (and possibly heart palpitations) of importance and impact of your new and existing customer base, to your business’ revenue streams.  But don’t stop yet, you only have part of the picture.  You need to also understand the costs associated with both groups of customers.

3)     This step is often the hardest part, which may be telling.  It’s time to quantify the costs associated with the acquisition and retention process.  Consider all marketing costs, sales costs, support costs and any other cost that is directly related to those activities.  Where you draw the line on costs should be a cognitive and honest approach to what you really spend on the activities.  But don’t take the easy route and avoid the less than obvious costs.  The hidden costs of acquisition and retention are often significant and erroneously understated.

4)     Now construct your acquisition / retention investment return matrix.  You can keep it simple with simple acquisition- retention ratios and related revenue-cost ratios or make it complicated with net present value and internal rate of return calculations.  Much of the decision is based on the “revenue and spend” timeframes and your level of sophistication.  In any case, you have now constructed an information system that will aid in your assessment of your true costs and returns for acquiring and retaining customers and most importantly allow you to make intelligent decisions related to individual clients or groups of clients and the equity that they bring to your company. 

5)     Perform the analysis. 

  1. What is the ratio of new customers to retained customers for the period of interest?     
  2. What was the cost for each dollar of revenue for your new and retained customers?   
  3. Did it cost more to acquire or retain your customers?  Do the results match your expectation? If not, why? 
  4. If your retention costs are greater per revenue dollar than your acquisition costs, can you afford to keep those clients or does this highlight a different problem?
  5. If your retention costs are lower per revenue dollar than your acquisition cost but the relative ratios are close to being equal, what can you do to increase the “equity” (improve the revenue/cost ratio) created by your retained customer? Additional on sales programs? Value added services? Cross-selling of products and services?
  6. Do you have customers or groups of customers that have significantly different retention costs than others?  Can you find common threads in those groups?  Can you take proactive actions to improve as mentioned n #6 below?
  7. Do you have newly acquired customers that don’t translate well when they are retained?  What has changed?

6)     Baseline your results and monitor your performance moving forward. 

  1. Measure the effectiveness of your marketing and support activities against your baseline. 
  2. Keep a close eye on the ratio of acquisition to retention.  High acquisition may feel good but low retention means churn and ineffective use of the available spend. 
  3. Use the results to dig deeper into customer sentiments and habits and attack those areas that lead to unattractive ratios.

With a deeper understanding of the acquisition and retention dynamics of your target customer marketplace, you now have the tools to make better decisions about your marketing programs, investment levels, and the relative value of your target and existing customers.  Armed with those tools you can maximize your investment dollars and their return.

I am interested in your feedback and experiences as you implement these programs in your organization and will collect and publish your responses in a future article.

———-

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About Tod Kerr

Tod is a senior corporate leader with 20 years of experience managing business operations in numerous functional areas, with a focus on developing and marketing business to business technology solutions to world-wide high tech markets that allow customers to operate their business more efficiently by driving out costs, improving productivity, and creating value for their clients.
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One Response to Understanding the Costs of Acquiring and Retaining Your Customers

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