The Preoccupation With Pre-Customers

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Many companies devote considerably more energy and resources to capturing customers than they do to keeping them. But, all customers are not created equal; some have more potential value than others. It’s extremely important for targeting the best customers that their array of value requirements are well understood and that the resources devoted to getting these customers be well-applied. Companies can achieve a higher, more attractive cost/benefit ratio for customer acquisition and advocacy efforts. The key is to attract high-value customers by identifying high-potential prospects and delivering what they want and need.

Marketing consultant and author Robert Tucker has stated, “Companies are often so concerned about attracting new customers that they denigrate their unique value proposition to loyal customers.” They focus instead on chasing down the next sale, competing on price and compensating employees more for winning new accounts than for keeping existing customers happy, engaged and loyal.



Several years ago, a multi-industry continental Europe study by Professor Adrian Payne (University of New South Wales, and formerly of Cranfield University in the U.K.) showed that 80% of companies spend too much of their marketing budget on customer acquisition. He calls these companies Acquirers. Parenthetically, his study found that 10% spend too much on retention; another 10%, Profit Maximizers, seem to get the mix right.

Why does this overemphasis and preoccupation happen? Professor Payne cites five reasons:

1. Management believes that existing customers will be retained; therefore the company needs to focus on acquisition.
2. Companies experience high churn rates: leaky bucket syndrome.
3. Customer acquisition is reported regularly to analysts, shareholders and senior management; but churn rate may or may not be reported.
4. The lifetime value, i.e. profit, impact of lost customers is not sufficiently reviewed.
5. Sales force and senior management compensation is often based on acquisition, not retention or per customer revenue optimization.

The acquisition mindset of senior management and marketers is not likely to change anytime soon. We can preach and preach about the advantages of a balanced, reasoned, profit maximization approach to customer management and optimizing value over the life cycle. But, as researchers and consultants, we had better be prepared to help acquisition-oriented and acquisition-obsessed companies in the real world

The drive to acquire customers often leads to twin challenges: a) the superficial approaches to customer targeting and qualifying, and b) understanding the factors that impact emotional subtexts of perceived value and behavior for the prospect that has yet to make an initial purchase.

Let us deal with the second challenge first: gaining insight into what represents value for prospective customers. While much attention is given to learning what leverages customer retention, customer loyalty, positive customer relationships, and even customer risk and loss, there is little research around what causes a prospect to become, or not become, a first-time customer.



There are three main applications of customer management systems: selling and sales force automation, informal and formal marketing/communications, and customer service. Implementation relies on integration of multiple sales and communication channels. However for prospective customers, the system is built on outbound contact and streamlined lead management. The enterprise view of customer management is focused on helping sales groups generate customers, and providing seamless support and service once customers are on board. Infrequently, companies attempt to identify 1) what prospective customers really want or need, or 2) how well companies themselves are positioned to address and meet those wants and needs.

As a result, customer management systems tend to be less effective at the front end of a customer’s life cycle. Process-oriented companies focus on creating benefit by keeping customers, optimizing their purchases over time and stemming rates of defection or recovering lost customers. They rarely give enough attention to pre-purchase processes or value creation.

One of my white papers, “Linking Employee Behavior to Customer Advocacy”m points to studies showing that customers who complain to an organization and have their complaints resolved satisfactorily tell an average of five other people about the good treatment they received. But if they received poor treatment, they tell at least 20 people. Surely the same is true with regard to pre-purchase experiences in today’s Internet-connected world.

Everyone can repeat stories of being ignored, treated poorly or given incorrect or insufficient information or service by badly trained, indifferent sales and service staff, thus preventing them from making an initial purchase. Unreturned phone calls, non-response to email messages, or poorly designed web sites are also barriers to initial purchase. These are just some of the pre-customer process breakdowns in both b-to-b and b-to-c worlds that customer management systems could address but rarely do.

The other prospect challenge is that of customer suitability. Stating that all customers are not created equal is hardly an oversimplification. Like the pigs in Orwell’s Animal Farm, some customers are more equal than others. No company has unlimited resources to service or support all their customers equally. Repeat buying power is everything when prospecting for potential customers. Some customers are worth a great deal; some may become more valuable over time; some may be valuable for a brief period but may be easily lured away; some are only seeking a price which would be disadvantageous for the supplier; and some are never likely to become valuable.

At minimum, companies need to segment their customers to determine how long a customer will remain with them, how much revenue and profitability each customer will contribute, how much and what kind of services the customer should receive, and what efforts will be needed to keep them whether they are new, at risk or already lost. Also, if a company is changing product or service focus, i.e. beginning a new communication or frequency marketing program, decisions have to be made about which customers they want to retain.



Companies are becoming smarter about keeping the customers they want or firing less attractive customers through stepped-down or added-charge services. Now they have to invest more up-front to learn which potential customers will be the most valuable over time. This goes beyond segmentation. It is almost pre-segmentation.

16 COMMENTS

  1. This is a great article, Michael. One of the things that can help change the culture of ‘new is better than existing’ is a change from thinking about experience to thinking about engagement. Engagement, by its meaning, implies commitment in the long-term. Changing the tone of the conversation about what we do, as professionals within the field, is critical to encourage others within our organizations to also adapt to, and then realize, the longer term benefits of farming _ as Gautam said so well above.

  2. Fiona –

    Wow! Wonderful to hear from you….and thanks for the comment. Strategically thinking about customers also means building a value-based relationship and an emotional connection. Another way of expressing the concept is brand-bonding. Most companies are focused on the front end of the customer life cycle. Too few organizations apply this broader, more customer-centric perspective, preferring to hunt and trap rather than farm, and that’s a key reason why building engagement and loyalty are such a challenge.

    Michael

  3. Hi Michael – I figured it was about time to join the conversations. I agree. The latter half of the customer journey is so often an afterthought when it is equally important as it can strengthen or destroy a relationship and therefore a chance to increase share of wallet or have to invest more to find new customers. Journey mapping across the life cycle, with a solid foundation of priorities for improvement, based on customer data, is crucial.

  4. Fiona – You might also like this extended blog post on customer life cycle: http://customerthink.com/perceived-value-and-customer-life-stages-a-tale-of-two-bakeries/ We think it is essential to understand impact of both rational and emotional drivers of customer behavior at each life cycle stage, and research in this area (Emotional Signature) enables our clients to do that. We can, for example, look at customers at the OOBE stage and more long-term and identify what most strengthens the relationship and/or creates risk.

  5. Hi Michael

    I fear that you have been engaging in a dialogue with the deaf. Most consultants recognise the superior economics of retaining existing customers over continuously having to win new ones to replace the ones that recently left, particularly in mature markets. But then most consultants have never been and never will be managers faced with aggressive net add targets set by their boss’ boss.

    Having been a consultant for almost 30 years, interspersed with interim positions running CRM, marketing and customer lifecycle management operations for various large organisations, I can see the disconnect between the rhetoric of retention and the reality of repeated acquisition.

    There are essentially three ways to look at the disconnect. All are driven by established behavioural archetypes:

    The Reactionary looks at the data on customer flows and recognises that most customers will probably stay anyway, almost irrespective of what you do to them. Take retail banking in the UK for example. Despite constantly being in the news for all the wrong reasons – excessive charges, miss-selling of PPI and let’s not forget about the 2008 financial melt-down – the churn rate for customers still hovers around 2-3%. Even the recent UK Govt. mandated introduction of an easy 7-day switching process hardly moved the churn needle. Why bother to retain customers who most likely are not going to leave anyway?

    The Pragmatist looks at the data on customer flows a little more deeply than the Reactionary and acknowledges that lots of customers are going to leave, however, they also recognise that they urgently need to be replaced before thinking about how to keep them longer. Look at mobile telecoms in the UK for example. A recent analysis of one of the mobile operators revealed that it spent approx. 70% of its GBP 100 million marketing budget acquiring new customers to replace the 25% of its customer base that had churned the previous year. This occurred in a regular annual cycle. Acquiring customers was a relatively straight-forward marketing exercise. So was saving ones that said they wanted to leave and winning back ones that had left earlier. However creating a sense of commitment and loyalty was anything but simple, requiring design research, experience redesign and phased implementation. In short, a large, risky project with no guarantee of success and lots of opportunities to fail and with it, to kiss your career goodbye. Frankly, who needs the hassle?

    The Cynic looks at their marketing budget, heavily loaded in favour of acquisition over retention and says, “What the Hell!” Why should they rock the boat by requesting the budget by rebalanced in favour of retention. Why should they risk their career, just as it is starting to take off, by going against the prevailing wisdom. As long as they keep making their acquisition numbers with the budget available to them they will stay on track for that long awaited promotion to Head of CRM; where they may be able to swing the budget in the right direction. But tomorrow is another day. And retention will just have to wait.

    Whether you are a Reactionary, a Pragmatist or a Cynic, there are always plenty of reasons to focus on repeatedly acquiring new customers rather than retaining the ones they have, or better still, making them emotionally loyal. And no amount of retention economics, consulting rhetoric or hand-wringing is going to change that. As the old saying goes, ‘the only thing we learn from history, is that we learn nothing from history’.

    Acquisition promotion anyone?

    Graham Hill
    @GrahamHill

  6. My colleague Colin Shaw has labeled the customer-centric evolution of organizations as “naive to natural”. At the naive state, enterprises are intensively sales-focused and product focused. It’s not until they have progressed to a natural stage that they recognize that a culture focused on value delivery throughout a customer’s full life and the commitment of employees to providing that value will generate desired long-term growth and profitability. Given that most organizations are still struggling to evolve, they will continue to focus on refilling the ever-leaky bucket.

  7. Hi Michael

    I couldn’t agree more with you and Colin.

    Many organisations are caught in a ‘company-centric attractor’ of their and their industry’s own making. This is often characterised by there being one dominant system, e.g. the continuously reacquiring churned customers through promotions system in saturated mobile telecoms markets, and practically all the players in the market following it slavishly. It takes a different type of company, often one not from the industry itself, to introduce a radically different type of customer-centric system that eventually, may shift its old-school competitors in the industry to a new customer-centric attractor.

    The introduction of customer-centric MVNO GiffGaff in the UK mobile telecoms market is a good example. Despite being a wholly-owned daughter of Telefonica O2 it was co-designed from the get-go together with potential customers. A growing community of customers integrated tightly into the mobile telco lies at the heart of its success. The community co-produces WOM marketing and customer service for GiffGaff, resulting in some very fast community response times for customer questions and unheard of CSAT and NPS scores too. And much cheaper pricing than its traditional competitors, including its parent whose network it uses.

    The thing to note is that GiffGaff’s success is not based on value ‘delivery’ – which implies that the company packages value into the product and delivers it to customers to be used as is – but on value ‘co-creation’, where GiffGaff and its community of customers provide valuable resources to each other to help each achieve their individual service goals at different points over customers’ lifecycles. Value co-creation through service almost always trumps value adding through products. This is the essential lesson from Vargo & Lusch’s Service Dominant Logic that has already swept service marketing academia and is now sweeping service design practice.

    Graham Hill
    @GrahamHill

    Further Reading:

    Forrester, ‘Case Study: Giffgaff Uses Co-Creation To Build A Differentiated Mobile Service Business’
    http://www.slideshare.net/LithiumTech/forrester-giffgaffusescocreationtobuildadifferentiatedmobileservicebusiness-afi3u2oe

    Vargo & Lusch, ‘Evolving to a New Dominant Logic for Marketing, Journal of Marketing
    http://courses.ischool.berkeley.edu/i210/f07/readings/VargoLusch.pdf

  8. Graham:
    Why do customers leave? Because they perceive better value elsewhere. Some of these do not leave because of inertia (they are too lazy to change). Others find the differences are too small. Or that the competition is just as bad.
    If we take your argument, customers do not leave, where are you going to find customers…from your competition’s left customer pool? which you say is nto going to happen.
    I do not agree with this.
    What is value co-creation? the creation of value? I again do not understand what you are saying. Co-creation is a value creation methodology.

  9. Michael, I agree with your and Colin Shaw’s thinking.
    I think people use the word value loosely.
    When I worked for a Fortune 50 company, the loss of a billion dollar or a 50 million dollar customer were both considered disasters. The effort in winning them back and the years it took was stupendous.
    Any customer lost (that we do not want to lose) is bad…we are doing something wrong, and destroying value for the customer
    I would also worry about the word customer management (I do not want to manage the customer, I want to create value for him and hence it is customer value management, unless you are thinking only of the processes and CRM)

  10. The ‘continuously reacquiring churned customers through promotions system’ trap really resonates with me. Some years ago, I gave a keynote customer retention/customer loyalty/customer advocacy presentation to a worldwide security company at their annual sales meeting. Part of the event was honoring and giving special cash awards to the company’s best salespeople. The most visible awards were for bringing in new customers. Several of the salespeople confided that their company’s ‘system’ allowed established customers to lapse and then be reacquired through promotion, thus showing as a new customer. Wow.

  11. Every company must expect – and plan for – customer churn. That reality means two options: 1) do nothing, and increase prices and decrease services for existing customers to maintain revenue and profit, or 2) acquire new customers. For this reason, most customers would (or should!) prefer to work with suppliers that consistently devote resources and assign strategic priority to maintaining account growth.

    There are other benefits, including technology transfer, and reduced customer risks because suppliers are not over-dependent on revenue from stagnant or declining industries.

    When it comes to customer acquisition, different companies have different business models, and the importance of new customer capture varies with the life cycle of the business. No epiphany that nascent companies with high fixed costs must make customer acquisition a priority, or they will surely perish. Similarly, other companies – like B2C replacement window services – rely on closing new business because once customers buy, the add-on revenue potential is so small. Finally, because I work with many start-up companies, it’s important to remember that many sales organizations have a demanding imperative: focus on marketing to pre-customers, because that’s all there is!

  12. Hi Michael

    You don’t even need to always reacquire churned customers. Sometimes they reacquire themselves!

    In mobile telecoms and similar industries a significant percentage of churning customers are so-called ‘internal churners’. These are customers who churn at the end of their contract, only to sign-on again immediately afterwards to take advantage of incentives only available to new customers.

    What a topsy-turvy business world we live in!

    Graham Hill
    @GrahamHill

  13. Hi Andy

    You are right, every company must plan for churn. If the number of new customers more than compensates for the numbers leaving then you don’t have a problem; although replacing them gets increasingly expensive over time.

    Customers leave for a variety of reasons. Research by Keaveney and others has shown that customers are more often ‘pushed’ due to service failures (and particularly, by service recovery failures) after they have bought a product, rather than ‘jump’ due to a better product offered by competitors. In either case it is reasonable for customers to look elsewhere rather than stay. And it is equally reasonable, post hoc, for the company to try and replace them from the pool of available customers.

    There are some customers, however, that should not be replaced: unprofitable customers. If unprofitable customers leave it is better for all parties. It is better for the company as their profits will rise. It is better for profitable customers as the company will no longer have to subsidise unprofitable customers from their profits. An unethical burden on profitable customers. And it is better for the unprofitable customers as obviously, it wasn’t working for them either.

    All customers are equal, but some customers are more equal than others.

    Graham Hill
    @GrahamHill

  14. To expand a bit on Graham’s point, in some industries departing customers can receive one of two labels: Voluntary and involuntary. The voluntary leave because a trial period ends, they no longer need the product or service, and/or because they find better value,i.e. more benefits and lower prices, elsewhere. Involuntary defectors are those who the company fires because they are abusive to service staff, overtax resources, or who are never going to generate a profit. Involuntary defection can be the result of inefficient selectivity and targeting at the front end of the customer life cycle, one consequence of the preoccupation with pre-customers

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