Retention vs Reacquisition
Here’s a marketing paradox: It is 6 times more expensive to acquire a new customer than retain an existing one; yet, just 10% of marketing budgets are spent on retention. If marketers were to wake up to this fact, they would become the single biggest profit boosters for their organisation instead of the tech trio of Google-Facebook-Amazon.
SignalMind offers some additional nuggets show the importance of existing customers even as marketers chase “shiny” new customers:
- The average conversion rate from promotions sent to new customers is less than 1%
- The probability of a sale from a new customer is 5-20%; the probability of converting an existing customer is 60-70%
- Loyal customers are worth up to 10 times more than their first purchase
- 80% of future profits will come from 20% of existing customers
- A 5% increase in customer retention can increase profits by 25%
In fact, quoting from “Marketing Metrics”, Tricia Morris writes that “the probability of selling to an existing customer is up to 14 times higher than the probability of selling to a new customer.”
From conversations I have been having from marketers, my assessment is that a third of acquisition budgets are being spent, knowingly or unknowingly, on reacquisition. This is because the pool of available customers is limited. Outside of the loyal cohort, the lifetime of other customers with brands is perhaps no more than a couple years – which means half of them churn each year. And since they were valuable at one point of time, they are more likely to get retargeted for acquisition.
So, despite all the evidence to the contrary, marketers prioritise acquisition over reacquisition. This is the marketing’s big mystery. Why? I can think of 3 reasons:
- New acquisition is what the top management wants to see, because that is what investors want to see. In a land grab market, marketers are measured by customer growth, not customer retention. Hence, the focus is on new acquisitions, irrespective of their profitability. Everyone else is doing it, and therefore how can a brand miss out?
- Spending on new acquisitions is easy. Google-Facebook-Amazon have made it child’s play with their awesome analytics and targeting tools. External agencies are there to help if the in-house team cannot do it.
- Retention success takes time. Customers have to be nurtured, relationships have to be cultivated, preferences have to be understood for personalisation to work. Not every brand has instant recall in the customer’s mind; hence the only way to bring them back to the website or app is via push messaging. And as we saw earlier, attention recession means fewer brand messages are being opened, leading to a break in the hotline between the customer and the brand.
Put it all together, and it becomes clear why acquisition is preferred over retention. Easy vs Hard. Flashy vs lowkey. Today vs tomorrow. Unless marketers look at the evidence and change their mindset, they are in a race where they all collectively lose to the tech giants. In a gold rush, it is the shovel sellers who make the profits.