Does It Still Cost 5x More To Create A New Customer Than Retain An Old One?

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Most people have heard the saying it costs more to create a new customer than keep an old one. We hear this in business blogs and at conferences, but I wanted to look at if this was still true, considering many of our business models are now different thanks to new industries and experiences created by the internet. The old rule of thumb was that it cost 5x more to get a new customer than it did to keep an existing customer. However the 5x rule is based on mass-produced products, and business models that focused on pushy sales tactics. In the past we did not have predictive analytics to tell us accurate educated guesses around future behavior which we have now thanks to advances in machine learning and artificial intelligence.

The selling world is much different than it was, and now we face a new selling world, one where personalization can can increase overall consumer spending up to 500%.

A lot of companies focus on the old notion that it costs 5x more to get a new customer, but in doing so, they lose focus on what really matters—connecting with customers and delivering value - now and in the future. The most successful companies find a balance between the two costs. When considering how much to spend to create or retain customers, it’s important to consider a customer’s lifetime value, or CLV. This number is different for each company. Companies that consider the potential of a customer – for the future – are much better off.

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Consider what Wharton Marketing Professor Peter Fader told me recently in an email interview: "Here’s my take on that old belief: who cares? Decisions about customer acquisition, retention and development shouldn’t be driven by cost considerations—they should be based on future value.” Fader doesn’t believe costs should be ignored, but believes there’s a good chance that, in many cases, the cost differences will be small relative to the value differences between retaining a so-so customer versus acquiring a (potentially much more valuable) new one. He doesn’t believe that acquisition always trumps retention, but it should always be based on comparing the projected CLVs. When most companies approach customer experience, calculating how much a customer is worth is seen as a nefarious activity - something done in a basement. But knowing how much your customer is worth can help you make smarter, more accurate investments in your relationships, rather than spending a lot of money everywhere.

Fader added, “If we could see CLV as clearly as costs, all firms would get this. But because costs are so tangible and CLVs are a mere prediction, it’s really hard to get firms to adopt this mindset. But it’s [CLV] the right one, and they should be working hard to become comfortable with CLV as the key driver to this kind of decision.”

*Article first published on forbes.com

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