Spending Tons Of Money To Attract New Customers Is A Stupid Idea
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.
Please follow War Room on Twitter and Facebook.
Join the conversation about this story »
See Also:
- 11 Entrepreneurs Reveal How They Turned Former Employers Into Clients
- How To Run A Business When You’re The Only Employee
- The Story Behind A Guy’s $14 Million Tofurky Business
—
drag2share – drag and drop RSS news items on your email contacts to share (click SEE DEMO)
Leave a Reply
Digital Consigliere
Collaborators – Digital Profs
Pages
Popular Posts
- What is Web 3.0? Characteristics of Web 3.0
- The JKWeddingDance video was real; the viral effect was MANUFACTURED - Post 1 of 2
- Netflix vs Blockbuster - Perfect example of an industry replaced by a more efficient version of itself
- Samsung 52 inch HDTV $9.99 at BestBuy - purchase receipt below (6:21a eastern time August 12, 2009)
- Facebook advertising metrics and benchmarks
- Marketing Costs Normalized to CPM Basis for Comparison
- The Grand Unified Theory of Marketing(tm) - Digital String Theory
- Twitter's Path To 33 Billion Tweets Per Year
- The Perfect Babe - Megan Fox (pics)
Tags
Prototype Web Services
- drag2share – quickly share news items by drag and drop on email addresses
- LivePhotoFrame – upload and remotely manage a digital photo frame via unique URL
- MedleyTuner – create a continuous listening experience by uploading mp3s
- MusicSamplr – discover new artists and music, listen to samples
- SharedMost – what links on ANY webpage are shared most?
- Signatory – sign and date a document and verify it hasn't been altered since that exact time.
- WebTeleprompter – just what it says it is
Archives
- February 2016 (2)
- January 2016 (6)
- October 2015 (2)
- September 2015 (7)
- August 2015 (6)
- July 2015 (2)
- June 2015 (5)
- May 2015 (4)
- April 2015 (32)
- March 2015 (57)
- February 2015 (79)
- January 2015 (86)
- December 2014 (69)
- November 2014 (98)
- October 2014 (150)
- September 2014 (109)
- August 2014 (44)
- July 2014 (92)
- June 2014 (118)
- May 2014 (173)
- April 2014 (130)
- March 2014 (247)
- February 2014 (167)
- January 2014 (222)
- December 2013 (167)
- November 2013 (111)
- October 2013 (116)
- September 2013 (214)
- August 2013 (210)
- July 2013 (200)
- June 2013 (87)
- May 2013 (87)
- April 2013 (70)
- March 2013 (114)
- February 2013 (89)
- January 2013 (136)
- December 2012 (96)
- November 2012 (130)
- October 2012 (147)
- September 2012 (93)
- August 2012 (93)
- July 2012 (112)
- June 2012 (71)
- May 2012 (82)
- April 2012 (80)
- March 2012 (122)
- February 2012 (114)
- January 2012 (129)
- December 2011 (60)
- November 2011 (54)
- October 2011 (29)
- September 2011 (17)
- August 2011 (30)
- July 2011 (18)
- June 2011 (19)
- May 2011 (22)
- April 2011 (23)
- March 2011 (52)
- February 2011 (69)
- January 2011 (108)
- December 2010 (82)
- November 2010 (67)
- October 2010 (68)
- September 2010 (44)
- August 2010 (101)
- July 2010 (61)
- June 2010 (28)
- May 2010 (28)
- April 2010 (26)
- March 2010 (33)
- February 2010 (21)
- January 2010 (13)
- December 2009 (4)
- November 2009 (2)
- October 2009 (14)
- September 2009 (6)
- August 2009 (19)
- July 2009 (34)
- June 2009 (11)
- May 2009 (4)
- April 2009 (6)
- March 2009 (13)
- February 2009 (32)
- January 2009 (25)
- December 2008 (1)
- October 2008 (1)
- June 2008 (1)
- November 2007 (1)