Current Customers Need Not Apply.

We don’t care about you.

The term “broken” is a kind way of saying the relationship between brands and customers is fundamentally screwed up. Marketing spend as a percentage of total investment is heavily skewed to acquisition, not retention. Many companies version of the lifetime value model (LTV) is measured through attrition and net conversion vs. retention. Solving for this issue should be paramount for companies; but unfortunately, marketing has an addiction. New customers have a tendency to be more attractive or “interesting” than existing customers. Let’s look at the data before delving deeper. Typically, acquiring a new customer costs approximately 5–25X more than retaining a customer. Adobe conducted a study that looked at conversion rates of repeat customers. They found that a customer who’s purchased from a brand two times before is nine times more likely to convert than a first-time shopper. There are so many studies related to this issue — so do your additional research if you’d prefer. What’s been studied using significant variants (methods and models) is essentially a reflection of common sense and logic. So, if this is the case, why do companies spend so much on acquisition vs. retention? We’ll delve into this later, but the answer is key to the premise.

If the cost of customer acquisition is actually a 5–25X multiplier to retention investment, how does that translate to conversion, profitability and, specifically, the marketing ROI calculation? Remember marketing is only a single element in the profitability equation. According to Fred Reichheld, the creator of the Net Promotor Score (NPS), in collaboration with Bain & Company, increasing customer retention rates by 5% increases profits by 25% to 95%. Additionally, the global average value of a customer lost is $243 USD according to Kissmetrics. So again, why focus on new customer acquisition vs. existing customers if we know this data to be accurate? Let’s go shopping, shall we? 

Why We Want What’s Next.

We’re conditioned. We want the latest and greatest. Marketing and advertising are both an art and a “science.” Marketers understand that once they’ve acquired an individual as a customer, preference drives adoption. This preference can be influenced by the most simplistic and mundane to highly complex rationale. Simplistic is reflected in ease of transaction. Amazon already has all of my payment information. They’ve eliminated “friction” by obtaining, with my own contribution, multiple addresses to ship to (sisters, parents, children, etc.), multiple methods of payment, etc. So once you have me, it’s easier to sell to me. An important ingredient within the model is the “dopamine” hit that occurs when we buy. Remember, it’s Amazon… the price has to be excellent. Well, unfortunately, you’re probably paying more than you need to, but the experience is simple, comfortable and consistent. 

Think about this for a moment: how many brands are you loyal to that have absolutely no commitment to you in any way? As a marketer, the truth is, most large companies could care less about you because they have access to vast “pools” of customers through third-party data brokers, significant media spends for awareness and substantial promotional budgets (e.g. Buy 1 get 3 free, etc.). Tomorrow, if you chose to leave Amazon, would they care? Would they offer you a promotion — “Stay with us and we’ll reduce your Prime annual fee.” No, they just simply move on. 

Let’s be clear. In business, customer retention and LTV aren’t critical if you can continuously fill the pipeline with new customers — at least that’s the underlying premise until revenue figures fail to deliver on expectations. Growth is key to earnings per share (EPS), but how a company grows is less of a concern within the four walls and with Wall Street unless the level of deviation from industry expectations becomes significant to equity analysts.

The Never Ending Pursuit of the “Deal.”

Brands created the game. They know how to play it better than the consumer, and they’re almost always going to win. There are those few individuals in your life that seem to constantly find the most incredible “deals,” but even so, it’s that one item, that incentive, the buy one get three free that you weren’t aware of and unfortunately missed out on. The reality is that it’s more like the equivalent of the “House” in Vegas. Just when you thought you found a great deal, it turns out there’s a better one two months later. Let’s look at this a bit deeper. 

Promotions — For those who are loyal customers of brands, they’re the least valued. We stay around, promotion after promotion. Incentives be damned — they stay with Xfinity or AT&T because, well, the process of changing is difficult. Brands, especially tech-related and, in particular, subscription services (e.g. data plans, internet access, streaming, etc.) create friction. You can’t transfer your music without paying a separate fee, or it just doesn’t transfer, or it’s a pain in the #&!^% to transfer the files. Whatever the reason, we remain loyal despite the fact that brands are effectively the equivalent of a the husband or wife that cheats, while the spouse holds on not wanting to break up the family for the sake of the children.

Brands know they can turn the dial: “If you sign up for the family plan” or “Add another line and you qualify for a free iPhone 12.” Let’s take a look at the logic using an example of a loyal customer who has decades of $350-$500 USD per month in cost with their data plans and installment plans on each new release of an iPhone, Samsung, etc. This isn’t the customer with the 3 free LG phones and smallest data plan. This is the holy grail of customers. But is it? Not really. Let’s say, for the sake of example, that this is a wireless customer, with any of the major carriers. The customer is viewed by the wireless provider the moment the transaction is complete, whether online, through a CSR or in-store, as account no. 143945198712021. That’s it. Simply put. Decades of loyalty at a spend level of $4,200 — $6,000 USD isn’t worth the time of the wireless provider to ensure that programs are in place to retain the customer. It’s effectively a “next in line” business model with new incentives and means of attracting the “replacement” customer. This same customer, with decades of loyalty, isn’t “eligible” for the latest incentives to bring in a new customer. “That sign up for a family plan and you get 3 free iPhone 12’s” isn’t valid for the customer who’s spent $84K — $120K w/ the provider.

Think about this for a moment. As a brand, the business model is aligned to pursuing and capturing a new, unknown customer over retaining a customer who’s proven loyal and willing to spend significant dollars. But that’s just it. The brand, using its algorithms that include look-a-like models, believes the customer won’t leave. It’s the Vegas odds game. Acquiring the new customer, the unknown, is valued more than the existing known. Try calling a wireless carrier and asking for the equivalent of the current “promotion.” The answer, “Unfortunately, you’re not eligible for that promotion, but we can offer you free access to an app that you’ll never use” or “You’ll have to add a new line… to qualify for a new phone.”

Companies calculate their cost of customer acquisition (CAC) by taking their total amount of marketing and sales investment and dividing it by the number of new customers acquired in a particular period of time. They then take this cost and add up your average purchase value, average purchase frequency, your customer value (average purchase value x average purchase frequency) and your lifespan as a customer to determine your lifetime value (LTV). Companies take approximately one year to recoup their CAC. The industry standard for investment is a LTV to CAC cost of 3:1. This means the value of the customer is three times the investment made to acquire the customer. If the ratio gets closer to 1 to 1, the investment is too high.

Let’s look at the average CAC for a few industries. It’s actually interesting data. 

Companies spend on average 7% of the gross revenue on marketing. B2C companies spend more than B2B, so this average isn’t necessarily a great comparison, but it provides context. When you look at a sample of spend to acquire a customer, you can better understand the “addiction” of these industries to the cycle of marketing promotions.

• Retail: 21.9%
• Automotive: 12.6%
• Financial services: 12.2%
• Telecom: 10.7%
• CPG & consumer products: 8.8%
• Travel: 8.0%

Statista

It’s Beyond Time for Brands to Reimagine the Customer Relationship.

The question that has to be addressed is how do we change behavior? As a 20+ year marketing strategist I’m going to answer the question in a way that’s counterintuitive.

1. Marketing and advertising agencies make their money effectively through 2 methods — a. fee for service (T&M, Retainer, Fixed Project), b. markup on third-party services (e.g. media buys and production services). The agency model is built on the need to provide a perpetual flow of new creative. One of the most effective ways for “agencies” to generate revenue is to focus on clients that churn customers and need significant media weight and supporting creative including offers / promotions. As an example, direct insurers such as Progressive and Geico paid an average of $487 USD to acquire a customer while captive insurers State Farm and Allstate paid approx. $792 USD to acquire a customer. These costs include marketing and “selling” expenses. According to J.D. Power, the rate of annual switching among auto insurance shoppers has risen to 35%. For Progressive, their $1.62B USD marketing / advertising budget equates to a spend per active policy holder (customer) of $124.62. USD This isn’t the cost of acquisition of new customer, rather how much of each policy paid by an active customer goes to new customer acquisition spend. Using this example, if Progressive reduced their spend, while reallocating the investment to premium reductions, the potential reduction in velocity of churn could be reduced, equating to a direct causal based increase in EPS. By changing the strategic approach to focus on existing customers through engagement with their personal data, deepening the understanding and ultimately the relationship, including pricing sensitivity and elasticity, brands and their agencies can collectively benefit along with the consumer.
2. Create “real” loyalty. Today’s behavioral targeting looks similar to the Model A sedan vs. the Tesla. They both have 4 wheels, steering wheel and seats — that’s about the extent of the similarity, The industry is no where near where it needs to be with data modeling as enormous assumptions are made by the current models and supporting tech. The result, churn. So, how does the industry address the challenge today? It focuses on buying more third-party data, putting into DMPs and attempting to make sense of the information. The reality is simple. Ask questions. When you go to the doctor, does the physician say, “You’re 40, male, overweight and tall compared to others so here’s what’s wrong or right with you.” Let’s call this physician’s answer the “lookalike” model. Rather than actually engaging the customer with questions in order to obtain correct answers, this approach is a series of data points to create large assumptions. Why, as an industry, don’t we actually engage customers to allow them to “data cleanse” themselves? This is counterintuitive to the CRM industry. The opaque nature of the data brokers and the propensity models within make it a black art. Couple this with the never-ending onslaught of offers and promotions that marketing teams develop and execute internally and with external agencies, and there’s an addictive model that’s difficult to change. The belief that the more you know about your customers, the better you can service them is lost in the current approach to data, which is effectively rooted in an if / then and lookalike bias. Without revealing more, the concept of actually engaging and asking customers questions and “cleaning” their data is the next investment I, along with a brilliant team, are investing in building — so you have a sneak preview.
3. Provide a tiered value model. The auto insurance category has recognized the value of this approach and is quickly adopting the strategy based on competitive risk. Within the insurance industry, the premium reduction is based on a number of factors, but first and foremost is avoiding accidents over a specific period of time. For companies such as wireless carriers, this could entail higher data usage at no incremental cost, lower monthly data rates, discounted equipment, discounted access to OTT networks, etc. Rewarding customers doesn’t have to be correlated directly to spend but rather to time. Time is the most precious “commodity” we have, and the longer an individual remains with a company or buys new products and services from a company, the lower the cost associated with each individual transaction or monthly renewal. As a basic business principle, this is lost on companies for a myriad of reasons, but highest among them — a. reluctance to change, b. limited investment in test, measure and refine models, c. short-term focus on quarterly EPS — in any given quarter, the first 4 weeks are typically all that exist in order to achieve target goals. At the end of the first 4 weeks, sales performance data will determine whether it’s “all hands on deck” w/ promotions, sales, etc. to ensure the quarterly forecasts are achieved or it’s a “steady as it goes” approach in order to not jeopardize the performance.

Share your thoughts and perspectives.