If the acquisition of new customers is an expensive effort and the value these customers offer to your business, the focus should be targeted at customer retention. Keeping what you have.
This is a delicate balance for marketers and business as a whole with a delicate balance between spending too much and too little resulting in extreme negatives.
On one side, a business can spend too much on customer retention and result in no profit being made as the customer is not providing enough value to justify the spending on their retention.
The other end of the scale is neglecting customers to the point that they leave for a competitor’s product or a substitute.
Calculating the cost of retention can be done by dividing the retention spendings by the number of customers retained (Bendle et al. 2016). This number must be less than the value of the customer to prove profitable. The metric is not flawless and as Bendle et al. (2016) points out, there are 3 potential issues:
- It is unknown how many customers would be retained if there was no retention spending (i.e., calculating the baseline can be difficult)
- The metric may be difficult to calculate as it is not easy to isolate retention spending from other marketing spending.
- Using the metric in practice may be difficult, as the organisation might not want to know how much, on average, it will cost to retain any customer. Rather the organisation might be interested in knowing how much, on average, it will cost to retain specific types of customer (e.g., top tier).
Even with these issues considered, attempting to measure retention costs can, at the least, provide an additional data input to a better informed decision.
References:
Bendle, NT, PW Farris, PE Pfeifer & DJ Reibstein (2016) Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance, 3rd edition. Pearson: New Jersey
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