Does it Really Costs Five Times More to Acquire than to Retain a Customer?
Since the late 1980s, several sources claimed retaining a customer is 5X cheaper than acquiring one. Later a Harvard Business Review article “The Profitable Art of Service Recovery” rephrased the myth with a simple calculation based on a set of assumptions. Since then any random management consultant has been quoting this “mind experiment” as scientific proof. The theory behind it is so pervasively intuitive that it has stood unchallenged for more than 30 years. To my knowledge, it has never been scientifically validated.
It Poses Even the Wrong Question
What are the costs of retaining a customer? Isn’t having an acceptable product/service and acceptable support typically what retains them?
Most customers are inert. They change only if there is a strong reason.
How much of your core service can be really attributed to retention?
Same with customer acquisition. There is a share of customers who come by word of mouth or they find you on their own by researching hard enough.
How much of new customer business is really the outcome of an investment in customer acquisition (marketing and sales)?
This comparison is not just unfair. It is not even relevant.
Why? A theory is only relevant when it informs a decision. Are you really considering closing customer support or marketing and sales entirely?
No, you don’t. The decision is whether to invest more or less in retention or acquisition.
This means: comparing customer acquisition costs with retention costs answers the wrong question.
It’s not about costs, its about ROI
Is this a win when a bank wins two retail customers but loses one affluent client?
It’s a huge loss.
Of cause it depends on what kind of customers you acquire or retain and which products you sell to new vs. existing clients.
So when doing the math, it’s only worth the work if you look at both sides of the coin.
The right question to pose then is
“Does it has Five Times higher ROI to Retain than to Acquire an Additional Customer?”
Do Not Trade CX with Acquisition
“How well does a knife cut meat?” Answer: It depends. Blunt knives do not cut at all. “Whats an impact of advertising?” Answer: It depends. Bad ads have no impact at all.
What’s the impact of customer retention initiatives?
We at CX.AI did the exercise to measure the ROI of CX several times for clients and compared it with customer acquisition.
When modeling on real customer data, you can quantify the impact of certain retention or acquisition actions.
With this, you can calculate the ROI of those actions. Here is what we learned:
Customer loyalty initiatives vary largely in it’s ROI. A typical range is anything between 0 to 10X payback of the investment.
Customer acquisition ROI is much better understood. As a rule of thumb, 5X is what can be expected. But still, practices easily vary from 0 to 10X as well.
As you can imagine the actual picture heavily depends on the domain and industries. Markets with huge growth have much lower customer acquisition costs and businesses in saturated markets.
The same is true for customer loyalty. According to research from the worlds largest marketing institute Ehrenberg-Bass, the market leaders always have higher loyalty. If not, they do not serve the same market.
Does CX Make Any Sense Than?
If driving loyalty is not necessarily more impactful than acquisition, when increasing market share always comes with a higher loyalty, then, is managing your customer experience really important.
The simple answer is: YES.
It doesn’t need a comparison with marketing and sales.
What it takes is an estimation of the ROI (plus the risk profile) of potential CX initiatives. (this is what CX.AI has now integrated as a feature)
Senior leadership should ask in the same way it asks for CX ROI then also for marketing and sales initiatives ROI in order to pick the highest ROI strategies.
The simple decision logic is to pick those initiatives with the highest ROI / Risk ratio and to not simply believe CX or Marketing has an impact. It only has an effect if done with mastery.
I recently hosted a webinar on this topic. Happy to share the link to the recording (firstname.lastname@example.org )
If you want to deep dive into this, our CX Analytics Masters Course takes 5h to guide you through the how’s, tricks, and trades.
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What is your take?
What do you miss in this article?
Let me know and I will improve 😉
Thanks so much