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.