LinkedIn B2B Marketing Trend #6- "The Loyalty Lie"

Hello, I'm David Dundua, CEO of the marketing company ReachHUB . This is my fifth newsletter, and today, in this article, I will discuss one of the LinkedIn B2B marketing trends - "The Loyalty Lie" Before reading the article, please subscribe to the newsletter so that you don't miss important news.

The Real Key to Brand Growth: Focusing on Customer Acquisition

When it comes to growing a brand, there's a common debate: Should your primary focus be on acquiring new customers, or should you concentrate on retaining the customers you already have?

Many marketers believe in the power of customer retention—loyal customers who not only keep coming back but also spread the word, leading to organic growth. You've likely heard popular sayings like:

• "It's five times more expensive to acquire a new customer than to retain an existing one."
• "Reducing customer churn by just 5% can increase profits by 60-80%."

These ideas resonate because they're simple, they promise profitability, and they feel intuitively right. They’ve become almost gospel in marketing circles, often driving significant investment in loyalty programs and retention strategies.

But here’s the surprising part: much of this belief system is based on a single article, "Loyalty-Based Management" by Frederick Reichheld, which has shaped the loyalty marketing industry for decades.

Unpacking the Loyalty Myth

Frederick Reichheld’s article is famous for claiming that reducing customer churn by just 5% can lead to an 80% increase in profits. This sounds incredible—and it’s often quoted as a key reason why companies should focus on keeping their existing customers happy.

However, DR. Byron Sharp , a renowned marketing scientist who leads the Ehrenberg-Bass Institute for Marketing Science, decided to dig deeper into this claim. What he found was surprising:

1. Exaggerated Numbers: Reichheld claimed that reducing churn from 10% to 5% would result in an 80% profit increase. But here’s the problem—reducing churn from 10% to 5% is actually a 50% reduction, not 5%. The impact was overstated by a factor of ten.
2. Lack of Real Data: Reichheld's theory wasn’t backed by solid evidence. Instead, it was based on a thought experiment using hypothetical data in a spreadsheet. There wasn’t any real-world data to support his extraordinary claim.

The Truth About Brand Growth: It’s All About Penetration

So, if loyalty isn’t the key driver of brand growth, what is?

Research by Andrew Ehrenberg, a pioneer in marketing science, and further validated by Dr. Sharp and his team, reveals that the real engine behind brand growth is customer acquisition—getting new customers to try your product or service.

This finding has been consistently demonstrated across various industries, from consumer goods to B2B markets. The data shows that brands with higher market penetration (i.e., more customers) not only grow faster but also naturally develop more loyalty.

The Law of Double Jeopardy

This phenomenon is known as the "Law of Double Jeopardy." It essentially states that smaller brands face a double challenge—they have fewer customers, and those customers are less loyal. This law holds true across different industries and product categories.

The key takeaway for marketers is that to grow your brand, you should prioritize customer acquisition over retention. While it’s important to keep your current customers satisfied, your primary goal should be to continuously attract new customers into the fold.

Where Should Your Marketing Budget Go?

Given these insights, where should you allocate your marketing budget?

For large brands, the strategy should be to leverage significant advertising budgets to increase market penetration and expand your customer base. This not only drives growth but also helps maintain your dominance in the market by crowding out smaller competitors.

For smaller brands, the focus should be on creative and effective customer acquisition campaigns. Since smaller brands have fewer customers, they often need to invest more in acquiring new ones to steal market share from larger competitors. Interestingly, small brands might actually be more likely to invest in acquisition, as they are not as pressured to maintain a large existing customer base.

The Evidence from Binet & Field

To further investigate whether acquisition or retention strategies are more effective, renowned marketing researchers Les Binet and Peter Field analyzed data from the IPA’s Databank, which includes over 1,500 case studies.

Their findings were clear: Customer acquisition strategies consistently outperform loyalty strategies when it comes to driving key business metrics like market share, sales volume, profit margins, and overall profitability.

However, the most effective approach wasn’t just focusing on either acquisition or retention—it was targeting everyone in your market, both customers and non-customers alike. By doing so, brands can achieve maximum growth. This strategy ensures you’re bringing in new customers while also staying top-of-mind for your existing ones, encouraging repeat purchases.

A Practical Example: The Netflix Case

Let’s break this down with a simple example. Imagine someone who isn’t a Netflix subscriber sees an ad for a popular show like "Tiger King" and decides to sign up. Once they’ve subscribed, their decision to stay or leave isn’t going to be influenced much by more advertising. Instead, it depends on the quality of Netflix’s shows, the user experience, and the service overall.

In this scenario, advertising plays a crucial role in acquisition—getting that new customer to sign up in the first place. But retention is driven more by customer experience. If Netflix consistently offers high-quality content and a great user experience, subscribers are likely to stay. On the other hand, if the service fails to meet expectations, even the best advertising won’t keep them from leaving.

Why Advertising Should Focus on Acquisition

There are a few key reasons why advertising should be more focused on acquisition rather than retention:

1. Most churn is out of your control: Many factors that lead to customer churn—such as budget cuts, changes in jobs, or retirement—are beyond your influence. These external factors mean that even the best loyalty program can only do so much.
2. Limited growth potential from existing customers: Even if you were able to eliminate churn entirely, the growth potential from your current customers is limited. You’re likely to see more substantial growth by bringing in new customers who are buying for the first time.
3. Retention is largely about customer experience: As seen in the Netflix example, customer retention is more about the quality of the product and service than about continued advertising. Advertising should focus on what it does best—acquisition

Conclusion: Focus on Customer Acquisition for Growth

To sum up, if you want to drive significant growth for your brand, focus on acquiring new customers. While retaining existing customers is important, it’s the new customers who will fuel your brand’s expansion and increase market penetration.

In the end, the most profitable strategy is to target everyone in your market—customers and non-customers alike. By doing so, you’ll ensure your brand is constantly growing, both by bringing in new customers and by keeping your current customers engaged and loyal.