Is it Really More Expensive to Get New Customers?

I don’t have the answer to this question mostly because it changes from industry to industry and organization to organization.  However, the question is valid.  As long as I have been in business (including time in college) I’ve heard a statement that goes something like “it costs [insert favorite number here] more times to get a new customer as it does to retain one”.  I have repeated it, as well as probably every one else in the world, as an unchangeable mantra of business. There have been studies that have confirmed this for different organizations or industries.

Yet, in all the work I have done in the last few years with plenty of organizations, no one has taken the time to make sure this did apply to their business model.  I can probably count in two hands the number of organizations that have used accurate customer acquisition costs and customer maintenance cost when making decisions on CRM, CEM, and Loyalty programs.  I prefer not to tell you how many of those calculations were updated periodically as business changed.

Even though we prefer to say it is cheaper to retain customers, it may not be.  A few things to consider.

Customer Acquisition Costs.  No matter how much you try, you won’t have a single acquisition cost model for your organization.  Each time you generate new business, you will have incurred different expenses. Where did the leads come from and how much did they cost? How did we reach out to prospects? What were the costs of the campaign? How much did we really spend internally – including training, systems alterations and customization – attempting to get new customers?  Each time you run a campaign the assumptions will change, and the calculations will change.  What if the prospects were already part of another campaign — are your going to add the costs for both campaigns??  It gets messy and complicated really fast, and without those calculations you don’t have a real cost of acquisition per customer.

Customer Maintenance Costs.   I have never met anyone who did a good job of calculating customer maintenance costs.  There are so many variables for each customer – even for each segment – that most organizations take a more “democratic” approach: the total cost of customer service operations divided  by the total number of customers.  Calculations should be done at the individual level, and consider each interaction, request, inquiry and final disposition for each interaction in relation to each customer.  While it is true that some customers will be virtually maintenance free, there are many others that are not.  Each time a new channel or service program is added, each time a customer contacts the organization for service or support the calculation should change. You cannot assign an average cost for all customers or you will miss the diamonds in the rough.

Finally, once you have your customer acquisition and maintenance cost for each customer you must use them to make your on service plans.  How?  We will talk about that in more detail in future blog entries… stay tuned!

Let me ask you first… what do you think of individual customer calculations? Are they worth doing?

2 thoughts on “Is it Really More Expensive to Get New Customers?”

  1. I know this is an old post so not sure if I will receive a response but here goes. “it costs [insert favorite number here] more times to get a new customer as it does to retain one” change retain to new customer
    or additional sale or service I have found it hard to manage when a customer is going to leave you unless it is service related and that in my experience was only 5% of the time.

    So is the challenge new customer!!!

    I am a bank consultant and use a CRM relational database to identify products or services to on-board. Changes in the bank distribution and service delivery( online banking – debit cards & ATMs) have resulted in less churn making the acquiring of new clients more difficult and much more expensive
    You always need new customers so do you have a choice regardless of cost. Do you spend 80% of your budget on customers cross sales and 20% on acquiring or 20% on customers & 80% on new? If your lost customers exceed your new customers acquired then unless you increase your acquiring budget as they said in Seattle “will the last one leaving the city turn the lights off” In support of a DM strategy.

    1. Samuel,

      You will always get an answer from me – that is a certainty! (hope you subscribed to email updates).

      Your statements are what led me to write that post (and the subsequent calculation posts, how you followed them along).

      I am not quite sure I would agree with “always **having** to get new customers. Yes, there is a traditional inclination to getting new customers and it is part of a normal business – but having is strong word. Especially if you use it in the context of replacing departing ones. I’d like to think that businesses get new customers when they want to bring their excellent products or services to new people. If they do it because they have to replace departing ones to keep alive (or some other metric constant) then they are doing it wrong.

      I agree with you that leaving for reasons other than bad service is probably a bigger reason than bad service (in my experience, unless it was their first experience it takes more than bad service for a customer to leave– and if it was the first experience then they were not a customer nor is it one you want to have. Which brings the question of why companies focus on retaining customers (even acquiring new ones) without metrical consideration… i am going to continue that research.

      Thanks for the comment.

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