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Spending Tons Of Money To Attract New Customers Is A Stupid Idea

Source: http://www.businessinsider.com/spending-tons-of-money-to-attract-new-customers-is-a-stupid-idea-2011-11

If you’ve ever tried to explain the concept of “make new friends but keep your old ones” to a five-year-old, you have a pretty good perspective on how many high-growth businesses approach customer acquisition and retention.  Growing businesses tend to spend so much of their time and money acquiring new customers that they often overlook their best source of growth: retaining and growing their existing customer base.

One of our clients has more than 90 percent of its resources–people, marketing budget, etc.–focused on creating millions of new customers a year. Their business model is based on monthly recurring feeds, much like the cable or wireless industries. Customers come in and they stay…until they don’t. An analysis of the client’s historical data shows that the average customer stays for an average of 2.5 years. Because their customer acquisition cost is lower than their expected customer lifetime revenue, they reach a break-even point in less than two years. So it’s a great business, as long as they keep generating new customers, right?

Wrong. The problem is that as the management team’s growth expectations increase, it gets increasingly harder to acquire more customers. As a result, customer acquisition costs go up and the quality of customers, in terms of how long they stick around, goes down.

To solve this growth dilemma, the client needs to ask three key questions:

• What revenue growth will we achieve if we keep our existing customers for just one additional month, on average?
• What will it cost us to do this by, say, improving customer service or adding customer benefits?
• How does this growth compare, both in magnitude and cost, to acquiring new customers?

The answer for our client will be the same as it is in almost all businesses. It’s cheaper, easier, and more effective to retain current customers than it is to acquire new ones. In fact, if this business can retain all of its customers by just one additional month on average, they can achieve an additional 3 percent of annual growth. If they can retain their customer base for four additional months, they can create double-digit growth–without adding a single customer.

It’s simple math–something that even a five-year-old might understand.

This post originally appeared on Inc.

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• 11 Entrepreneurs Reveal How They Turned Former Employers Into Clients
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• The Story Behind A Guy’s $14 Million Tofurky Business

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