April 19, 2011

Why New Customers Matter

Here's one that came up a few weeks ago.
  • Company has 300,000 twelve-month buyers, and a 50% annual retention rate.
  • Company has 1,000,000 lapsed buyers, 5% will purchase next year.
  • Company acquires 200,000 new buyers per year.
  • Company wants to increase loyalty by 20% to grow the business.
Well, this can work.

First, let's look at how many buyers this brand will have next year.
  • 300,000 * 0.50 + 1,000,000 * 0.05 + 200,000 = 400,000 buyers.
So this is a healthy business, isn't it?

Now, let's look at the impact of a twenty percent increase in loyalty.
  • 300,000 * (0.50*1.20) + 1,000,000 * (0.05*1.20) + 200,000 = 440,000 buyers.
Here's the problem.  It's REALLY HARD to increase customer loyalty.  If it were easy to bump retention rates by 20%, everybody would be doing it, and all of our businesses would be growing at unfettered rates, right?

Try this one on for size.  Grow new customers by 20%.
  • 300,000 * 0.50 + 1,000,000 * 0.05 + 200,000*1.20 = 440,000 buyers.
Improving customer loyalty requires fundamental shifts in marketing, merchandising, and service.  It's terribly hard to improve customer loyalty.  Go back and look at retention rates over the past decade, you'll quickly notice that retention rates barely move.

Now go back and look at new customer acquisition counts over the past decade.  You'll quickly notice that YOU decide new customer acquisition counts ... you make changes to your marketing budget, and you see an immediate cause-and-effect, don't you?

New customers matter.  Best of all, you control your own destiny.  So few loyalty initiatives push the peanut.  So many new customer acquisition investments pay off over time.

3 comments:

  1. Kevin,

    Great post and timely topic for me. So, the questions that come to mind are in your experience is retaining customers equally as difficult for companies with a low retention rate vs. companies with higher retention rates? Do businesses, based on their business model and DNA, tend to start out at a given retention rate and barely move from that spot regardless of the effort? Or, is it more often the case that leadership is taking the path of least resistance with the way resources are allocated or they are just unaware how to align marketing, merch and service to focus on driving improvements in retention?

    I know in my experience, I've personally operated a business without the knowledge of how to align all departments to the value of retention and subsequently, I've allocated most of the resources to where the growth was coming from...new customers.

    Would love to hear your thoughts on the topic Kevin. Thanks,

    Shilo

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  2. My experience --- all businesses have a certain retention rate in their DNA, a rate that is moved, up or down, based on the effectiveness of the Management Team.

    Wal-Mart ... their retention rate is going to be amazingly high, that's part of the business model.

    Eddie Bauer ... their retention rate is going to be at a mid-level, you buy clothing a couple of times a year.

    Pottery Barn ... depending on the product line, retention rates end up being low. How often do you need a new couch?

    Retention rates are a hybrid of the business model and the merchandise you sell. Marketers are responsible for optimizing retention rate, given the business model. It turns out that, for maybe 75% of businesses, short-term growth (i.e. 1-3 years out) is best achieved by focusing on new customers.

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  3. Thanks for sharing your insights and experience Kevin.

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