Addiction to acquisition of customers is taking a toll on customer experience ROI. Did you know that 1.8 trillion dollars lost through customers switching suppliers every year in the USA is equivalent to the GDP of Canada or Italy? This is almost as much as the combined valuation of Facebook and Google ($2.1 trillion).
Forty-four percent of companies don’t know their customer turnover rate. A 20% churn rate means that our companies are selling for five quarters to hold onto the revenue of four quarters.1 These stark awakenings were presented by Adam Dorrell, CEO of CustomerGauge, at the San Francisco Monetize! conference and in his article, Welcome to Churn Nation, The 9th Biggest Country in the World You’ve Never Heard of — But Are Living In. He said:
“Warning: Losing customers can damage your wealth. It’s been proven that it costs 5X to 25X more to acquire customers compared to the cost of retaining customers. And increasing retention rates by 5% can increase profits by 25%-95%.”
Do we believe “the purpose of Marketing is to maximize revenue leads for Sales” as 70% of CEOs now expect?2 Do we really believe “the purpose of business is to maximize profit for investors” as economist Milton Friedman proclaimed?3 Or do we really believe that “the purpose of business is to create and keep a customer” as management guru Peter Drucker taught?4
Your choice among these 3 disparate goals is much more than semantics.
- Maximizing profit for investors (i.e. Wall Street-centric management) justifies all kinds of shortcuts that ironically have high costs. A recent Wall Street Journal article reports: “James Dimon and Warren Buffett are urging companies to consider ending the practice of providing quarterly earnings guidance, arguing that it encourages an ‘unhealthy focus’ on short-term profits at the expense of long-term growth and economic strength.”5
- Maximizing revenue (i.e. Sales-centric management) is a continuous hamster-wheel that perpetuates complexity of managing expectations. Sweetened deals to lure away competitors’ customers can alienate existing customers. A wider array of customers means more customer personas and subsequent high demands on Customer Service and Customer Success roles. Marketing’s preoccupation with the first stages of the customer journey means weak attention to post-purchase stages. Michael Brenner, CEO of Marketing Insider, says: “The biggest mistake companies make when analyzing retention rates is not seeing that a high churn rate is the result of poor customer acquisition efforts.”6
- Creating & keeping a customer (i.e. customer-centric management) is guided by customer lifetime value. It balances growth of revenue and profit, short-term and long-term, and interests of customers, employees and investors. As such, it requires stellar alignment. That’s not as impossible as it seems, given the promises of today’s technologies. The best-loved brands are cracking the code. A Harvard Business Review article explains: “Pushing organizations to rethink how they add value to their customers stimulates enormously productive discussion. By investing in and enabling new customer capabilities, firms create new ways for customers to increase their lifetime value. Making customers better truly does make for better customers.”7
Do you need a 12-step program to kick acquisition addiction? Maybe. Four prerequisites are outlined in my article, What is Customer-Centricity DNA? — align from the top, all hands on deck, maximize value attainment, and maintain transparency. A one-time investment in these four prerequisites establishes the foundation necessary for achieving the full financial promise of customer experience investments. Give yourself a gift that keeps on giving.
For Marketing’s shift from acquisition addiction to retention riches, here are three keys: context, alignment, and nimbleness.
1st Key to Retention-Rich Marketing: Context
Outside-in context should be natural for marketers, with access to market research, customer intelligence and predictive analytics. Outside-in refers to the importance of customers’ inputs as a guiding light for an organization’s inner workings. It’s vital to step into customers’ shoes to double-check that every marketing effort meets outside-in criteria.
Customer lifetime value context brings data to life. Speak the language of managers by quantifying customer intelligence in currency figures. Even if customer lifetime value is expressed by quick-and-dirty revenue estimates, this tells managers how much of their future is at stake (or in opportunity). It prioritizes resources and motivates action and momentum. An example of this is CustomerGauge’s Monetized Net Promoter Score® which clarifies and compels strategic management of customer experience. Continual improvement of operations, policies, processes, and handoffs is essential to customers’ realizing Marketing’s value propositions and brand promises.
End-to-end customer journey context allocates Marketing resources and attention to maximize customer lifetime value. It’s a reminder that customer experience is cumulative: interactions are additive and forgiveness for mis-steps can be difficult and costly.
A surprising realization of over-emphasizing customer acquisition versus retention was revealed when marketing professionals at a conference used colored stickers to indicate their Marketing department’s current role in each phase of the customer lifecycle: green for strong marketing efforts, yellow for mediocre marketing efforts, red for weak marketing efforts. Far more green stickers were placed on customers’ steps for discovery, decision, buy, and get help — primarily pre-purchase phases.
On the other hand, far more yellow and red stickers were placed on customers’ steps for receive, install, learn and use, and achieve goals — all post-purchase phases. Keeping the customer’s end-to-end journey in mind is essential to maximizing customer lifetime value.
2nd Key to Retention-Rich Marketing: Alignment
CEO-CMO alignment right-sizes expectations for Marketing’s role in customer experience management and revenue growth. Marketing is a critical player, but pragmatically, other disciplines must lead certain essential aspects of customer experience and growth. For example, Legal and Operations functional areas obviously play major roles in customer experience performance. Marketing has definitive strengths which are complemented by others’ strengths to do the whole job in tandem.
Marketing-Sales alignment right-sizes attention across the end-to-end customer journey. Shared passion for customer experience excellence is proven as the ideal rallying point for Marketing and Sales alignment. Strong customer experience performance in the post-purchase phases yields better customer references, case studies, and referrals. Continuity of customer expectations management from Marketing to Sales to Operations simplifies customer retention and reduces the burden on Customer Service and Customer Success.
Enterprise alignment sounds scary, but it’s a matter of sharing customer intelligence with relevance and resonance across the company. The more educated Marketing’s counterparts become, the more in-tune with customers’ expectations they’ll become. This shared outlook nurtures common goals, transparency, and collaborative attitudes.
In response to a McKinsey article, We’re All Marketers Now, a blogger observed: “This new era of engaging customers is requiring commitment from the entire company and how that means the marketing organization must be redefined and adapted.”8 Customer engagement is much more than experiential marketing; it’s influenced by the cumulative effects of the company’s ecosystem.
3rd Key to Retention-Rich Marketing: Nimbleness
Organizational agility — or nimbleness — means the Marketing department can shift gears “on a dime”. New developments in our 24/7 global marketplace, emerging mobile apps and startup businesses, and other sudden changes require Marketing to be quick-footed. Digital marketing and predictive analytics are vital to real-time customer experience effectiveness.
Scalability to meet rapidly evolving demands relies not only on technology but also on organizational learning, knowledge management and formal change management skills among all marketers. The more holistic marketing management becomes, the greater influence Marketing will have on the company’s customer-centricity and customer lifetime value growth.
Kick your acquisition addiction. Rehab your company by getting back to the basics of creating and keeping customers: understand them thoroughly, show them you care about their goals, and be obsessed with increasing mutual value now and across the maximum lifetime of the customer relationship. A focus on creating and keeping customers yields the desirable byproducts of optimized revenue and profit growth. Claim the full promise of customer experience ROI by balancing customer acquisition and retention.
12018 NPS® & CX Benchmarks Report, CustomerGauge.
2Almost 70% of CEOs Now Expect CMOs to Lead Revenue Growth, VentureBeat, 16 December 2016; citing CMO Council / Deloitte study: The CMO Shift to Gaining Business Lift.
3Milton Friedman and the Social Responsibility of Business, Greenbiz, 24 November 2006.
4The Importance of Creating & Keeping Customers, Financial Times, 2011.
5Buffett, Dimon Team Up to Curb “Unhealthy Focus” on Quarterly Earnings, Wall Street Journal, 7 June 2018.
6Customer Retention — The Lost Art (And Science) Of Marketing, 30 August 2016.
7What Most Companies Miss About Customer Lifetime Value, Harvard Business Review, 18 April 2017.
8Redefining the Marketing Organization — Would Peter Drucker Have Been in Agreement? Business Insider, 5 August 2011.
This article is fifth of a six-part series as an exclusive CustomerThink Advisors column: How Customer-Centered Marketing Steps Up Your Performance & Influence.
1. Customer-Centric Marketing: Step-Up Performance
2. Customer-Centric Marketing: Align for Growth
3. Is Your Customer Engagement Really Customer-Centric?
4. Marketing’s Role in Employee & Customer Experience Journeys
4a. Customer Journey Insights Increase Marketing Impact
5. Acquisition Addiction’s Impact on Customer Experience ROI
Image licensed to ClearAction Continuum by Shutterstock.
Hi Lynn: great post. I agree that there is a lot of confusion around corporate goals, and calling them into question is an important mission today. I wrote about this in an article, Is Maximizing Shareholder Value Poisonous?. (please see: http://customerthink.com/is-maximizing-shareholder-value-poisonous/) My question was rhetorical. I believe it is poisonous. Yet, in my undergraduate business school education, maximizing shareholder value was the gold standard, and underpinned the “right” approach for business case analyses.
Regarding customer churn: as unpleasant as it may sound, it’s a business risk that virtually every company must accept. Acquisition (or capture) strategies are as vital to organizations as retention strategies. And I view the cost argument (retention is cheaper than capture, so do that) as misguided and largely unsupported. The choice to grow customer populations – and how to do it – must be governed by strategic objectives. Like uncertainty, churn has a theoretical minimum, but it can never be eliminated. And attempting to do so is a fool’s errand. Better to figure out how to reduce the risks of churn, and better still, concentrate resources on reducing churn of profitable customers – not just reducing churn for the sake of reducing churn. What about the rest? Well, let the chips fall where they may, because churn can never be eliminated.
I thought a long time about your statement, “1.8 trillion dollars lost through customers switching suppliers every year in the USA.” I tried to figure out how that number could be derived, but couldn’t. Based on past sales? Anticipated future sales? What defines ‘switched suppliers?’ – a “clean break?” or reallocating purchases from a primary vendor to a secondary vendor? After what period does a vendor become ‘lapsed’, whereby resumed purchases are measured as ‘switched?’ If you can provide a source for this finding, I would be most interested in learning how this measurement was made.
This is very timely and important. A couple of years ago, I wrote a blog on this exact subject: https://beyondphilosophy.com/preoccupation-pre-customers/ Far too many companies continue to invest too many resources, financial and otherwise, to get, or capture, customers, and neglect the relationship continuity and engagement, proactive communication, and churn mitigation required to deliver value over time. To your three keys to retention marketing, I’d add a fourth, and it is perhaps even more basic and essential: a stakeholder-centric culture, focused on optimizing employee and customer experience.
Hi Michael: you raise an interesting point, but I see the dichotomy as a false choice. I haven’t seen companies divide budgets and expenses this way. That is, there’s no singular pot of money which managers are attempting to parse into new account capture versus taking care of existing customers. While some companies have a handle on their direct lead-gen costs, there are many overlapping expenses with customer care (e.g. content development, Legal/contracts, HR). Further, aside from staffing “Retention Specialists” in a call center (a bad move, in my view), retention costs are typically not assigned General Ledger accounts or otherwise segregated as such. So it’s hard to say whether there’s an imbalance.
While I can’t comment on whether companies generally over-invest in new account acquisition, only a small percentage have the luxury of not needing to bother with it. Some companies depend on new account generation in order to survive: Window replacement companies, capital goods providers. Others depend on farming long-term relationships. The business model is to begin the sale with the proverbial “foot in the door,” and then build revenue from there. Most organizations I’ve sold for and consulted with are a hybrid. Some sales involve a large capital expenditure up front, and service plans kick in some ancillary revenue down the road. Other sales start with a small trial or pilot for a proof-of-concept, and expand to national or international deployments. In those situations, the relationship continuity you mention is key.
Marketers might have different objectives, but for sales reps, most cannot make revenue targets (quotas) without consistently and steadily obtaining new accounts. This is not an accident – it’s a reflection of the business model. In fact, most sales managers I work with make it clear early on that they don’t want their reps milking existing accounts to make goal. Their rationale is that this breeds complacency, and there is some truth to that. Consequently, the calculus behind B2B territory sales quotas demands new account capture. To what degree depends on the business.
When specific customers are considered strategic to the vendor, a Major Account Executive role is established. That rep’s job is quite different from a general territory rep whose quota achievement and bonus incentives depend on a portion of revenue coming from new accounts.
I think the notion of ‘retention marketing’ is itself problematic. When companies are doing what they are supposed to do in providing outstanding service, high customer value, and great customer experience, doesn’t retention take care of itself? To me, ‘Retention Marketing’ is a band aid, tantamount to an admission that the business is failing in places where it should be performing, and the “fix” is to throw yet another business process at the problem. The same argument has been made about profits. Companies that are “Profit focused” tend to make decisions that ultimately undermine the right outcomes for stakeholders. They wantonly cut costs, and become hellbent on increasing revenue, discarding internal governance along the way. Lately, we’ve come to the realization that profits – and profitability – is a byproduct of value delivery, and not a goal unto itself.
Hi Andy, thanks for your comments. In answer to your first question, $1.8 trillion was estimated by Adam Dorrell, CEO of CustomerGauge, based on findings from a study they conducted: https://www.linkedin.com/pulse/welcome-churn-nation-9th-biggest-country-world-youve-never-dorrell/.
I’ve taught college courses for nearly 6 years at the undergraduate and graduate levels, and it’s a fact that textbook authors and instructors do not always get it right — just because something is taught a certain way in college does not mean it’s a gold standard, or the best way to run business. In fact, textbooks are constantly updated partly due to new findings as the field matures over time.
Churn is a business risk, as you point out, and it can never be eliminated. However, many business risks can be mitigated, or at least a balance or optimization can be achieved among various risks and opportunities.
This article does not say “don’t acquire customers” — it says don’t over-focus on acquiring customers to the exclusion of keeping the customers that can be kept if ease-of-doing-business can keep them. The focus, as you suggest, should definitely be on how to retain profitable customers.
Perhaps the direct tone of my writing comes across as implying absolutes. I think a careful reading reveals that my articles advocate getting back in balance on things that a lot of companies are out of balance on. Retention is under-served, and it is wreaking havoc for customers first of all, for employees, and for shareholders that we’re not as retention-rich as we should be in our strategies and in the consequences of daily decisions.
I look forward to replying to your second set of comments tomorrow, Andy.
Spot on Lynn!
Why is the marketing effort still so unaccountable in the age of digital acquisition? Why is the mis-acquisition of so many customers tolerated? This unchecked practice brings “customers” into the business eco-system that should never have been your customers in the first place. Another part of the company then spends millions on trying to activate and keep them from “churning”.
Hi Lynn: thanks for replying and for the link to the CustomerGauge study. The points I gather from the article is that for companies, some churn is possibly preventable, and could be worth reducing. No epiphanies, but I fully agree.
My concerns are 1) the assumptions used for the finding are tenuous (“CustomerGauge made some estimates of just how large Churn Nation is. By taking the Fortune 500 companies (approx. revenue $12trn, with $1bn profit) and assuming a lowest possible scenario of 15% churn, we can size the problem: $1.8trn), and 2) the company has a service offering for customer retention. (Copy from the company website: “When retention grows by 5%, profits grow by 25%-85%. Now that’s good science. However, whenever you talk about customer retention you also need to talk about customer churn. Customer churn or customer turnover, is the loss of customers.”)
On the first point, the factors apparently not considered are normal churn (e.g. families stop buying diapers as their children age up), churn from business realignment (e.g. we no longer provide an SMB solution), churn from bankruptcy or credit disqualification. Then there is account dormancy, in which a customer hasn’t selected an alternate supplier, but they have stopped buying for a period of time. There are few forms, documents, or official “triggers” that signal churn, so assumptions must be made, and I didn’t see meaningful details.
On the second point, I see a more significant problem, because it is widespread: companies conducting “studies” or research that in essence, is designed to underscore or embellish what they sell – a practice that Coca Cola famously engaged in when they hired a firm to “scientifically” declare that excessive sugar consumption did not cause obesity, but rather lack of exercise. Their tactic was transparently self-serving, and the company was roundly criticized. Coca Cola later issued an apology as an op-ed in major newspapers.
As practitioners, I think it helps all of us to examine similar findings closely, and to understand the relationship between the company that found them, and what they sell or promote.
Hi Andy, you’re right that “controllable customer retention” may be less than $1.8 T in the U.S. Still, it’s most likely a shockingly huge number, even at half that figure. And I agree with CustomerGauge that companies need to be shocked out of complacency about the imbalance of the acquisition treadmill and retention leaky bucket when it comes to Marketing and Customer Experience teams’ strategies and resource allocation. I think Sales would be grateful to see longer-lasting business results from their hard work in acquiring customers — such a shame to see those wins as short-lived lifetime value.
It’s true that a great deal of research is poised to serve the interests of the sponsoring firm. And it’s true that authors hand-pick factoids from research to support key points in their articles and books (also applies to webinars, conference speeches, advertising in all forms, etc.). Even the great analyst and management consulting firms’ research may contain bias in the types of questions included in research. Alas, there are only so many questions respondents can handle so it’s a big quandary in research design.
Still, I think the main point you’re making is for readers to be aware of just that, as savvy consumers in the information age. Recipients of research findings should also exercise caution in ignoring certain findings that don’t jibe with their personal agenda . . . and for a long time, customer retention findings have been squelched by the thirst to feed the “acquisition addiction” as demonstrated by the conference exercise (see photo in my article) I conducted with marketers.
In my 3 keys to “retention-rich marketing” I call for greater balance. Customer experience management has gone too far in my opinion with efforts to change customers’ behavior, get Net Promoters to do things for the company, use enticements to save the day in customer renewals, etc. — in balance with — efforts to align their company’s internal and external policies, processes, and cadenced routines with customer experience insights. There’s too much “band-aid” stuff going on that’s wasteful of precious resources which could be better managed to make the lot of all stakeholders better: customers, employees, investors, etc.
Hi Lynn: thanks for your comment. I question whether any widespread “imbalance” exists in acquisition versus retention. Sure, a given company can misapply its marketing spend, but I think the problem has been over-extrapolated and over-hyped, supported by an odd rationale, “it costs more to acquire a customer than it does to keep one.” As I know firsthand, some customers are ridicu-donkulously expensive to keep. Few people talk about that, unless it’s under the inflammatory title, Fire Your Customer. More short-termism – equally unhelpful, in my view. Pick the right customer, and capture the right number new customers, and you won’t need to devote so much corporate decision time to customer firing and re-balancing.
Account acquisition is an artifact of enterprise risk management. I understand your point that if companies were more vigilant about customer retention, they might not need to be such voracious customer acquirers. But if a company asked me for investment capital, and disclosed in their risk statement that they were dependent on just one customer for all present and future revenue, I’d pass. As I mentioned in my comment to Michael (above), revenue doesn’t always accrue the ways we want it to. There’s enough for another article on just this point (I’ll release it this month), so I won’t elaborate here, other than to say, for example, if I close a $2 million dollar software and services deal in October, I can reliably predict that my customer will spend the next 24 – 36 months implementing it. I know this from past experience. What does that mean for future revenue from that account? Well, I won’t see more than a pittance in follow-on revenue. Until they rip-and-replace. And by that time, most reps work for another company. Why? Because their employers raise their quotas. The only solution for making goal, then, is to keep landing new accounts. It’s a vicious, often exhausting cycle, but it’s one that vendors willingly engage in. Retention is a great concept, but until there are appropriately large revenue numbers derived from retention, most sales reps will see the idea as Pollyanna, and just roll their eyes.
Michael, thanks for your comment. I really appreciate the article you cited and the sources it referenced. An interesting study of stakeholder-centric management is described in the book “Firms of Endearment”. The study started by asking people which companies they like best, followed by a review of their financials and comparison to S&P 500, then analysis of what they were doing with customers, employees, investors, suppliers, community. Interestingly, the conclusion was not that a certain stakeholder had higher priority, but more of a balance across all stakeholders.
Still, unless a company is paying attention to maintaining and growing relationship strength with their primary target market, and keeping a pulse on evolving customer expectations as their guiding star — then focusing on aligning company-wide accordingly — none of the other stakeholders’ interests will be served. Case in point is so many companies that once were pillars of the business landscape yet no longer exist.
Andy, there are studies validating the widespread imbalance between customer acquisition and retention. One is described in Michael Lowenstein’s article (link in his comment above):
“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.” I recommend taking a deeper look at that study’s findings.
Account-based management is certainly a Sales mandate to grow accounts regardless of individuals within the account shifting jobs, and as a customer lifetime value endeavor. Some industries have a finite number of customers, and for them, of course customer retention is an absolute for Sales. Semiconductor equipment companies, like Applied Materials where I worked for 11 years, sell their equipment among a total of a couple hundred existing and potential customers. By definition, Sales needs to focus on customer acquisition as it’s primary goal, and retention as appropriate to the industry and similar factors. But this article, ironically, is not targeted at Sales!
I’ve seen Marketing budgets allocated among acquisition and retention strategies, and most budgets more accidental or light on the retention side. It is indeed problematic, as you point out, when acquisition or retention is more about the numbers than about trust-based relationship strength. The best way for marketing departments to support customer retention is through information and perks that add value to existing customers as they’re using the company’s solutions — not so much through incentivizing customer evangelism and renewals. Far too much that’s done as a “customer experience program” is indeed a Band-Aid(R) trying to make up for things that were out-of-sync with customers.
This article series is aimed at Marketing. My 2018 bi-monthly column as a CustomerThink Advisor is entitled “How Customer-Centered Marketing Steps Up Your Performance and Influence”. Its main message is to get in-sync with customer experience insights (focus first and foremost on your primary target market(s) rather than being all things to all segments), prevent the need for Band-Aids and thereby increase value for customers, employees, investors alike.
I like your statement that “profit – and profitability – is a byproduct of value delivery, and not a goal unto itself”. Amen!
Craig Lee, thanks for your comment. It is remarkable, as you point out, that super smart marketing people have fallen into the trap of assuming “more of anything is better”. The pressure from Sales and the CEO is immense, and the turnover of CMOs is frequent.
You’re right that in this digital age there should certainly be greater discernment between well-suited customers and less-attractive customers for both acquisition and retention. It’s a shame to see precious budgets squandered.
This impacts not only customer experience ROI but also dampens customer experience performance. It may be a significant cause behind the lackluster and static ceiling of top customer experience ratings in studies such as the Forrester CX Index, which shows the best performing CX topping out around 70 on a 100-point scale.