August 26, 2008

Long-Term Profit Myth

I spent yesterday reading numerous articles about cross-selling and up-selling.

I've also analyzed an awful lot of customer data over the past twenty years. In the past four years, brands have largely increased sales by getting customers to spend more. Of course, we can't borrow against our homes anymore --- so spend per customer stopped increasing, and the era of psuedo-growth ended.

We spend a lot of time trying to get customers to spend more. In fact, we spend most of our efforts trying to get customers to spend more.

We have an opportunity to simply find new customers.

Oh, it is expensive to find new customers, right? The cross-sell and up-sell folks tell us that it costs seven or ten times more to obtain new customers than it costs to retain an existing customer.

Most of the brands I work with retain fewer than fifty percent (and often, fewer than forty percent) of last year's customers. When this is the case, the profit relationship show in the image above plays out over time. In other words, future profit is largely generated by future new customers, not by today's customers.

While it is important to retain existing customers, it is generally more important to find new customers. In fact, when retention rates are under sixty percent, the order of importance is as follows:

  1. Acquire New Customers
  2. Retain Existing Customers
  3. Get Existing Customers To Spend More
Getting existing customers to spend more simply benefits profit today. Some believe that getting a $100 customer to spend $115 increases the long-term value of the customer. I'd rather obtain a new customer than spend money to get customers to cross-shop or fall for an up-sale opportunity.

Retaining more existing customers sounds romantic, but in reality, is exceptionally hard to do. Seriously, how do you get 59% of your customers to buy from you next year instead of the 53% you've always enjoyed? How do you do it? You can advertise more, that doesn't guarantee profit though, does it? And the pundits who tell you to have exceptional product at a fair price would be hard pressed to put that advice into play, wouldn't they?

Finding new customers is something you can partially control, right? You can spend more on paid search, or portal advertising, or e-mail marketing, or catalog marketing, or social media --- and obtain new customers in the process.

And when you acquire a new customer, you obtain additional sales in year two, year three, year four, and year five. There's a multiplicative effect, a long-term effect, that benefits your brand.

The marketing community perpetuate a myth about increasing value among existing buyers, preaching the importance of catering to your best customers. It's always good to treat your best customers well. It's just as important to constantly find new customers. In fact, your long-term health depends upon new customers.