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It Costs More to Get Them Than To Keep Them... Sez Who?
By: David Shepard
This Article First Appeared In Direct Magazine
The December issue of DIRECT featured a pie chart on the cover that indicated that in 1999 companies were spending 50% of their direct marketing dollars on Customer Retention and the 50% on Customer Acquisition. In 1998 Customer Acquisition accounted for 60% of spending and only 40% on Retention.
Assuming that these numbers were true, in the sense that they were an accurate barometer of what’s happening in the direct marketing world (whatever that means) the implication would be very disturbing. While there is nothing wrong per se about spending on customer retention, you can’t grow a business that way – certainly not in terms of the number of customers, and almost certainly not in terms of revenues and eventually not in terms of bottom line profits.
A related finding was that 60% of the respondents reported that they would be spending more on direct marketing activities next year while the balance would be spending about the same.
So, while direct marketing spending is increasing – and that’s good news – the percent spent on New Customer Acquisition is decreasing – and I’m not sure that’s good news.
Here’s what really bothers me. And I quote from the Direct Article “ Marketers also finally appear to be acting on the long-held contention that it’s twice or four times or 12 times as expensive – depending upon the pontificator du jour – {their wording not mine} to create a customer than to retain one”
The choice of the expression “the pontificator du jour” leads me to believe that the writer, Richard H. Levy, may have had the same experience as I have had at many direct marketing functions. Whenever I go to a DMA sponsored seminar or conference (wouldn’t dream of going to a non DMA event) and I hear a speaker state as fact that it costs X times as much to acquire a new customer than to keep a current one, I go up at the end of the session and ask where the number came from. As often as not, in fact more often than not, the answer is the speaker heard it from another speaker.
This doesn’t mean that it’s not true. But it does make you wonder. There’s nothing easier than to calculate the cost of a new customer. And, there’s probably nothing harder than calculating the true costs of keeping an existing customer. What’s more how many times have you experienced or heard of others who have experienced this scenario: We built models to predict the incremental value of individual customers, placed the customers into segments based on their predicted values and then developed programs to increase retention and/or increase profitability of the segments and discovered that while the predictions were accurate, spending against the segments did not reduce retention or increase profitability.
Now before you start sending in those letters accusing me of direct marketing heresy, let me quickly add that there is no argument that “save a customer” programs work, immediate re-enrollment programs work, and that many loyalty programs do in fact more than pay for themselves. But the “two” to “four” to “twelve” times statistic should not be accepted as gospel. Each company needs to compute this statistic for themselves: what works for a long distance phone company may not work for a credit card company, or a retail store, or a book or music club.
What’s more, the question of how to allocate marketing dollars between the amount spent on base level service, and the amount that is earmarked for retention is not all that easy. Nor is it clear as to what level of discretionary spending is required to cause a change in retention. For example a decision to spend an extra dollar on each customer per year will probably result in a loss equal to the number of customers, while a decision to spend a larger amount on a targeted segment may prove profitable. Which raises the question how large is a larger amount? And the answer is that there is no one answer, and in fact it’s a good idea to be constantly testing to determine the optimum amount to be spent against different segments.
Finally, I’d be more than happy to use this space to report on actual case studies of how companies have measured the difference between acquisition and retention costs. So, if any of you would like to share your experience please send me an e-mail at or mail your story to Direct Magazine and they’ll get it over to me.