December 02, 2015

Customer Acquisition Means Everything: ESPN

Let's look at cable/satellite television. You have ESPN. They pull in $6.00 +/- per customer per month from cable/satellite. Say that is $72 a year (I know, #math).

If you are ESPN, and you have 100,000,000 subscribers at $72 a year, you have $7.2 billion in revenue, each year.

So there are three ways to grow revenue from subscribers. First, you charge Comcast and DirecTV more when your carriage deals end. That gets you more money, right? Second, you have to "retain" your existing audience. It's quite possible that 5% of the audience churns per year ... reduce that, and you have something (which is, of course, impossible). Third, you have to find new customers ... new cable/satellite subscribers.

When you hear about young people cutting the cord, what you are really hearing about is a customer acquisition problem. Instead of spending $125 a month ($6 for ESPN), a 24 year old chooses less expensive options, especially those with better technology. ESPN does not get a new customer.

Now, computer guy up there ignores this fact in 2009 - 2013 ... computer guy just sees 100,000,000 subscribers at $5.50 each per month ... and then 100,000,000 subscribers at $6.00 each per month ... and then 100,000,000 subscribers at $6.50 per month. Then, expenses are planned against seven billion in annual revenue ... then eight billion in annual revenue. You spend more.

But customer acquisition eventually haunts you. Because younger folks don't subscribe to cable/satellite, ESPN doesn't get new customers. Because 5% of subscribers, +/- drop each year, ESPN doesn't retain everybody. Eventually, 100,000,000 subscribers becomes 92,000,000 subscribers. You either charge the remaining 92,000,000 subscribers more (and risk losing even more), or you find a way to be relevant to the 8,000,000 subscribers you would have had but no longer have ... how do you generate revenue from those folks?

Maybe you don't generate revenue from those folks. Then what?

Now you, sitting on the train reading this on the way to work, you can look at ESPN and you can see that long-term, they are doomed. When 92,000,000 subscribers becomes 80,000,000 subscribers in seven years, with fixed costs increasing, the business model implodes. It doesn't die, but it implodes and then fundamentally changes. You can see this. You can see the future. You are smart.

Now how about your business?

If you are a retailer, odds are you are like ESPN. ESPN got customers to pay (and pay more) for multiple TV channels and multiple physical channels (magazines, website, 538, Grantland, ESPN3) from 2009 to 2013. ESPN followed an "omnichannel" strategy, just like most retailers did. When omnichannel only appealed to existing customers did the strategy become a problem. The world changed. Retailers lost the battle to young customers ... to "cord cutters" if you will ... with "cord cutters" shifting to fast fashion and online brands and new retail concepts.

If you are a cataloger, odds are you are like ESPN, but you are 10 years down a path that ESPN is just 1 year down. You know exactly what happens. Your customer is 62 years old (for 75% to 80% of catalogers - those without kids/party/home products). For you, the "cord" was cut back in 2003-2004, back when Catalog Age became Multichannel Merchant.

Customer acquisition means everything. You are always going to lose customers. How you manage new customer acquisition means everything. Use cases like ESPN to think about your own business. What would you do if you were ESPN? You will be able to give an answer to that question. Now draw the parallel to your business. What would you do with your business? How should your customer acquisition programs appeal to those who have "cut the cord" with your business?