• 07:00:49 am on October 27, 2008 | 13
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    Is it Really More Expensive to Get New Customers?

    I don’t have the answer to this question mostly because it changes from industry to industry and organization to organization.  However, the question is valid.  As long as I have been in business (including time in college) I’ve heard a statement that goes something like “it costs [insert favorite number here] more times to get a new customer as it does to retain one”.  I have repeated it, as well as probably every one else in the world, as an unchangeable mantra of business. There have been studies that have confirmed this for different organizations or industries.

    Yet, in all the work I have done in the last few years with plenty of organizations, no one has taken the time to make sure this did apply to their business model.  I can probably count in two hands the number of organizations that have used accurate customer acquisition costs and customer maintenance cost when making decisions on CRM, CEM, and Loyalty programs.  I prefer not to tell you how many of those calculations were updated periodically as business changed.

    Even though we prefer to say it is cheaper to retain customers, it may not be.  A few things to consider.

    Customer Acquisition Costs.  No matter how much you try, you won’t have a single acquisition cost model for your organization.  Each time you generate new business, you will have incurred different expenses. Where did the leads come from and how much did they cost? How did we reach out to prospects? What were the costs of the campaign? How much did we really spend internally – including training, systems alterations and customization – attempting to get new customers?  Each time you run a campaign the assumptions will change, and the calculations will change.  What if the prospects were already part of another campaign — are your going to add the costs for both campaigns??  It gets messy and complicated really fast, and without those calculations you don’t have a real cost of acquisition per customer.

    Customer Maintenance Costs.   I have never met anyone who did a good job of calculating customer maintenance costs.  There are so many variables for each customer – even for each segment – that most organizations take a more “democratic” approach: the total cost of customer service operations divided  by the total number of customers.  Calculations should be done at the individual level, and consider each interaction, request, inquiry and final disposition for each interaction in relation to each customer.  While it is true that some customers will be virtually maintenance free, there are many others that are not.  Each time a new channel or service program is added, each time a customer contacts the organization for service or support the calculation should change. You cannot assign an average cost for all customers or you will miss the diamonds in the rough.

    Finally, once you have your customer acquisition and maintenance cost for each customer you must use them to make your on service plans.  How?  We will talk about that in more detail in future blog entries… stay tuned!

    Let me ask you first… what do you think of individual customer calculations? Are they worth doing?

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Comments

  • Glenn 1:15 pm on October 27, 2008 | # | Reply

    Esteban,

    I too have heard the stat many times. I’ve heard it expressed as “3-5 times” all the way up to “…15 times.” I sure would like to know the sources.

    Anectdotal information from my nonprofit seems to bear out that the cost of acquiring donors and volunteers is more expensive than retaining them. We don’t have the resources (or the interest) in quatifying it, but I think 3-5 times would be a conservative stat for us.

    Regards,

    Glenn

  • Esteban Kolsky 2:46 pm on October 28, 2008 | # | Reply

    Thanks Glenn… would love to see what other people have to say as well. It is my distinct impression that most people fail to count some costs when measuring these metrics. I am putting out the other two posts this week to complement this one (acquisition costs and maintenance costs), so will see… still researching on those :)

  • Haim Toeg 3:50 pm on October 29, 2008 | # | Reply

    Esteban,

    I may be making a redundant point here, but for many organizations customer maintenance may be a profit center. Therefore a customer lost does not only represent the replacement cost but also on-going revenue stream. This leads me to think that maybe this statement you quote is more relevant in environments like retail rather than in continuous interaction environments, like enterprise software. I’d be interested in hearing your thoughts on this.

  • Segmented Customer Acquisition Costs Save the Day « eVergance Blog 5:24 am on October 30, 2008 | # | Reply

    [...] Part 1 – Is It Really More Expensive to Get New Customers? [...]

  • Esteban Kolsky 1:16 pm on October 30, 2008 | # | Reply

    Haim,

    You make a very interesting point. I do agree that the cost of a lost customer must include the lost revenue, I did get that in Econ 101… but it is usually not considered since there is always a replacement revenue stream that is similar or better. At least in the B2C world where most of this theory applies better.

    The world of Enterprise Software, as well as some others like – for example – chemical and industrial products, does not function this way. There is certainly less competition, and less care for customer loss, cost of acquisition, cost of maintenance, etc. After all, how many people make the exact same widget that works for a few customers?

    That point is covered in more details in the second, and later in the third, part of the series. You made a great point, thanks. I will make sure to mention it more specifically in the last installment in the series.

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    [...] Part 1 – Is it Really More Expensive to Get New Customers? [...]

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  • Jules 6:37 pm on November 29, 2008 | # | Reply

    I think that as we gain more control over our customer acquisition channels, with improved reporting and the ability to measure channels more effectively, we will get a better understanding of this subject area?

    • Esteban Kolsky 2:50 am on December 23, 2008 | # | Reply

      Jules,

      Yes – you are very correct. However, the inability to gain control over the channel metrics is what hindering our progress in that arena. I am highly encouraged about the advance of analytics and measurement in the past couple of years — but still plenty of room to grow. Thanks for reading and commenting.

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