Acquisition vs Retention: the fool’s paradox

There’s an ongoing debate on how Marketing should balance its focus on acquiring new customers vs keeping existing ones.  This article will detail the economics of the tradeoff and show how most companies under-invest in Retention.  After outlining the reasons for Acquisition’s over-indexed attention, the reader is rewarded with four ways to achieve a better balance and increase profitability through customer lifetime value.       

Its an AND not an OR. Studies that pit acquisition against retention miss the point.  Of course new customer acquisition is an essential objective for growth minded companies striving to satisfy earnings targets.  But there's a clear tendency for companies to under-invest in retention efforts as they rush to fill their leaky buckets.

Why Retention Matters  

Of the many benefits of retention, lets focus on the comparison with acquisition:

     1.       A good defense is the best offence: Remember the leaky bucket? According to Bain, a 5% increase in retention equates to a 25%-90% increase in profitability.

	2.       The 5 for 1 tradeoff: Even Forbes quotes the common benchmark that the cost to acquire a new customer is five times the cost to retain one.  Of course there is a diminishing return to this payout, but it’s amazing so few companies optimize for this return on retention investment.

     3.       Sell to friends not strangers: Anyone in sales will tell you how much easier it is to sell to existing customers vs new prospects (50% easier according to Marketing Metrics).

     4.       Don’t help your competitors: Keep in mind most customers who leave you bring their business to a competitor.   For this to sink in, make it a point to estimate what portion of your competitor’s gains came from recently departed customers the next time you look at market share trends.

Why Acquisition Overshadows Retention 

In Deloitte/Fuqua/AMA’s most recent CMO survey, more than 70% of companies anticipated acquisition growth compared with only 50% that were optimistic about improvements in retention.  Here are four reasons why this imbalance occurs:

1.      All eyes forward.  New customer acquisition is a forward-looking metric of growth and weighs heavily in calculating future valuation.  New Acquisition is the success measure used to determine effectiveness of large investments in media.  In contrast, retention is rearview in nature, often measured months after an event and with shared accountability between multiple functions.    

     2.       Measure me this: A vibrant sector has emerged to attribute the success or failure of vast sums of marketing budgets from the various media sources.  Intense debate surrounds this sector as brands seek to improve attribution model transparency. Attrition is far behind the disputed attribution science, and messy functions like servicing don’t make it easier to attribute causes.   

     3.       Agency Able: Part and parcel with the attribution industry, agencies have rushed to support the acquisition arms race.  Because of its position at the top of the funnel, acquisition responds quickly to increased investment and is much easier to outsource.  

     4.       Get along to get on: In contrast to Acquisition, improving customer retention requires tight integration with product, operations, and technology teams.  Unless joined at the hip by shared performance targets, Marketing and Operations are more likely to go it alone with less success. 

Knowledge is half the battle

With the root causes for retention’s under-investment in mind, here are four steps you can take to find a more profitable balance:

     1.       Listen: Pay attention to both direct and operational measures to deduce and manage attrition pain points:

a.       Direct Feedback: VOC surveys including NPS and customer effort, listening via social, voice call and text recognition, and digital tracking including heat mapping, click through and engagement rates.

b.       Operational KPIs: retention rates by cohort, service volumes, delivery SLA’s, issue resolution time.  A worthwhile exercise here is to calculate the financial benefit from a 1% improvement in retention at each key journey stage to give context and prioritize focus.

     2.       KPIs: Define and Assign Accountability for meaningful retention metrics. 

a.       Define: Assign attrition rates targets at key stages in the product lifecycle (e.g. 10 days, 100 days, 1 yr).  Choose up to 3 other meaningful and measurable metrics from the direct and operational measures defined above and add them to your scorecard.

b.       Assign: Share accountability for KPI targets across relevant stakeholders.  Its ok to start small, assigning targets to an adhoc project first and then adding operational and feedback goals to departments in successive waves.  Since all departments impact the customer experience, its important to choose a measure that can instill employees a sense of ownership.

c.       Refine: Segment your customers by profitability.  Check out Chris Zook’s work to learn more, since it’s very important to include future profitability potential in your segment strategy to avoid alienating future stars. 

     3.       Integration: Establish a cross functional work team to focus on a specific area of opportunity with accountability for a measurable KPI improvement.  If you are just getting started, it’s recommended to pilot a smaller and winnable project (low hanging fruit) to gain momentum before tackling bigger opportunities. 

     4.       Budget: There’s a number of ways to systematize the more balanced prioritization of investment in retention efforts within the day to day operational culture. 

a.       Set aside a defined investment: Perhaps the easiest way to ensure adequate budget is to set a defined investment % amount for retention related projects.  This works well in a top down scenario to jumpstart adoption.    

b.       Project IRR Thresholds: Ensure the window of time used to calculate returns from new project is long enough to include the compounded value of retention improvements.  Companies that use < a 2 year minimum ROI expectation risk erroneously prioritizing short term growth over more profitable alternatives.    

c.       Level the field: Every marketing budget contains big-bet investments that are must do’s.  Set this must-do budget aside.  Now create a level playing field comparing the remaining little-bet investments and your retention initiatives and let the best projects win.   

So the next time you feel forced to decide between Acquisition and Retention, take a deep breath and don’t get forced into making a King Solomon split decision.  Instead, expand your profit outcome horizon and take a deeper look at investments that can stop the leaks.