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Retention vs. Acquisition - and the Winner Is…

  |  July 20, 2014   |  Comments   |  

Marketers need to decide which is more important to them - acquiring new leads and potential customers, or retaining and nurturing the current customer base.

"To be or not to be?" asks Shakespeare's Hamlet.

For years digital marketers faced the same conundrum: "to buy or not to buy?" in reference to purchasing leads and prospects...also known as spamming (although hopefully you're in the "not to buy" camp).

Knowing how to spend your marketing budget with confidence is always a challenge. Where do I allocate the money so it makes most impact? How do I allocate the money in a way that I can show tangible results? These are the typical questions marketers ask themselves.

Of all the questions, the most critical to answer is do we invest good money in acquiring new customers, or do we focus on retaining the customers we have already acquired and personalize their experience? "To retain or acquire?" - this is the question.

And before I let you know the answer, let's look at what marketers are currently doing.

econsultancy-surveyAccording to a survey by Econsultancy, 34 percent of the participants indicated that they will increase their investment in acquisition, while only 18 percent will focus on retention. If we look at content marketing strategies, one of the main goals is acquisition (71 percent of responders), and Forrester concurs: "Marketers obsess over acquisition. Even as the lines between marketing and customer experience blur, our survey respondents prioritize customer acquisition efforts over nurturing and deepening relationships with their most valuable and loyal customers."

customer-retention

Looking at what the others (not "the others" from Lost!) are doing, it is very clear that marketing budgets are over-focused on acquisition rather than retention.

If you're a regular reader of my columns, you'd be expecting me to start talking about increasing allocation of budgets to retention. And you would be right, this is exactly what I am going to do...

Here is an example to start illustrating my thinking:

Joe is an online shoe retailer who became really successful with his business. He uses Google and Facebook to advertise the branded shoes he has on offer. In a hyper-competitive branded-shoe industry, the customers are only looking at the prices they can easily compare with a simple search. So Joe needs to invest a lot of money to generate sales. Ninety-eight percent of his business is first-time buyers. With only 2 percent repeat buyers, his product costs are most likely to look like this:

Acquisition: $20.00
G&A: $10.00
Shipping: $5.00
Product cost: $50.00
Profit margin: $15.00
Total: $100.00

With higher advertising costs and lower loyalty, he is seeing his acquisition costs spiking. With this example, and provided that advertising costs remains the same, he will need to sell 6,600 pairs of shoes for a profit of $100,000.

To prove my point, let's assume that 98 percent of his business will be focused on selling to clients he already acquired: He's profit margin grows to $35, as he is dropping his acquisition costs. In order to reach to a $100,000 profit he will now need to sell only 2,800 pairs of shoes (i.e. 58 percent less). This in turn will probably further help to decrease the G&A costs, and Joe will be able to pass on some of these savings to his customers.

I've recently argued that the role of the digital marketer is to sell, and here is a good example of a real impact on the company performance and margins that is directly attributed to the efforts of the marketer.

Continuing with this train of thought, it becomes clear that if you focus your efforts mostly on acquisition, you're actually working for your competitor who provides their client with a more individual customer experience, and making sure that their customers stay loyal.

And the Winner Is...Retention!

If your start-up days are behind you and your business is established, chances are that growing your business will be cheaper and faster if you retain and sell to your existing client base. This is not to suggest that you need to abandon acquisition efforts completely, but you need to shift the focus to your existing clients.

If you are a start-up, then naturally your initial objectives should be to focus on new business acquisition and then as the customer base increases, start shifting the focus to retention.

But before I finish, a quick word of caution regarding ERFM: If you intend to use ERFM analysis on your database, be careful if you are focusing too heavily on acquisitions. You will find that most customers will be skewed to the right hand side of the lifecycle (inactive or churning clients) with much fewer customers in the center (loyal) and in the initial stages (first-time buyers).

Until next time, stay tuned.

Ohad.

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ABOUT THE AUTHOR

Ohad  Hecht

Based in Hong Kong with a diverse marketing and management experience in Asia, Ohad has managed a number of accomplishments in his fledging career. Highlights include creating the patent registered luxury brand Swana. He speaks four languages and is well versed in the interwining his Western management philosophies into the Asian business model. His experience is complemented with establishing core digital strategies with expertise in e-commerce and email marketing. A regular speaker in the industry events. Armed with a B.A. and M.B.A., he now heads the Asian-Pacific operations of emarsys LTD .

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