When Willie Sutton, a highly successful bank robber in the 1940s, was asked about why he robbed banks, he responded – “because that’s where the money is.” When data-driven marketing analytics was coming of age in the late 1990s, consultants of all stripes echoed Willie’s comments in their defense of a marketing mix that favored customer retention over customer acquisition. The rationale to support retention over acquisition has been articulated and proven by many, but two of the most resounding reasons are:
- Increasing customer retention rates by five percent increases profits by 25 to 95 percent. (Harvard Business Review 2014);
- It is five to 25 times less expensive to keep a good customer than to acquire one (B-to-B Customer Experience, Forrester 2008).
The arguments behind the statistics are these:
- Your best customers are your competitors’ best targets … you could almost stop right there;
- Loyal customers are the least expensive to service, so your total cost of ownership goes down year over year;
- If you cannot keep them, you are throwing away your total cost of acquisition, onboarding, and development;
- They know you, how well you can solve their problems, and they buy more from you … a lot more;
- Loyal customers will forgive your sins … more than once;
- you lose them, you lose your best advocates;
- Which customers do you suppose are going to model in the top decile of your acquisition pools?
While working for a high-end specialty retailer in the late 1970s I was a part of team that discovered that ~18.4 percent of customers generated ~73.0 percent of sales (see the red circles in the chart below) and more importantly, that ~7.4 percent of customers delivered about 50 percent of sales (green below). While acknowledging that all customers were important, the team quickly realized that while all customers were important, some customers were more important than others. So, long before Pareto had been re-discovered by savvy marketers in the early 1990s, we had created a strategic justification to focus on best customer retention, not new customer acquisition.
The numbers revealed what anecdotal-based business trends had implied (i.e., that while there were millions of customers that bought Valentine’s Day or Mother’s Day gifts once a year, we had to be the right store for those customers that shopped with us all of the time. When the ratio of best customer spend to average customer spend is 60:1 (see below), we also realized that for every one of our best customers who walked across the mall to a high-end competitor, we would have to solicit 5,000 new prospects to replicate that one customer’s overall spend.
For the past 25 years, many companies and their in-coming senior management regimes have declared, “We are now going to be customer focused.” They created charts like the one above and pledged their fealty to a “customer first” approach. The second thing that they did was to declare their alignment with product portfolios and despite all of the good customers-first intentions, “product portfolio marketing” became the organization type most favored by large companies. It is as if all of the customer-focused learnings that have been shared since the 1990s and 2000s, have been shelved.
A consequence of a product-focused organizational framework is that customers are getting bombarded everyday by marketing materials and branding from competing organizations within the same company. Product group X has its numbers to reach and so does product group Y. The fact that both groups market to and compete for the attention of the same customer at the same time and in the same channels, does not seem to concern them. Sure an engagement process exemplified by buyer control rather than seller execution helps improve customer engagement, but how many companies are actually providing the right pull and personalized inbound digital experience to move the revenue needle and increase Net Promoter scores.
If companies were more often organized by customer segments rather than product portfolios, customer portfolio leaders would see the benefits in retaining their best customers and would spend more on retention then they currently do. Further, product acquisition and development sequencing would follow more of a 21st century view- “develop the products my customers need,” rather than a 1950s view of- “find me the right customers for the widgets I have to sell.”
Customer churn and defection is so easy today. A buyer’s knowledge about “products like yours” is just a click away. When you lose a best customer for one product, you can be assured that defection from your other products is not that far down the click-stream. Then you are going to have to wait for your former best customers to become dissatisfied with their new preferred supplier or through arduous spending, campaigning, and sales efforts, you bring them back into the fold.
As easy as defecting is for customers, churn identification is that easy for you. Big data, DMPs, and predictive analytics has made it less complicated for you to identify probable churn almost in real-time. Long before your best customers cement a deal with your competitors, you can measure their intent to leave. Armed with that insight, you can determine if company or client “A” is worth retaining or not — and at what cost. Think of the 60: 1 ratio above. Hopefully you will choose to save the best.