It Costs 5x More Blah Blah Blah

Over on LinkedIn, the thought leaders were arguing about the importance of keeping a customer.

Pure, unadulterated thought leadership.

One of the gurus had to go there ... couldn't stop herself ... 

• "It costs five times as much to win a new customer as it costs to keep a customer."

It's easy to measure if somebody truly understands marketing ... if they tell you it's cheaper to keep a customer than to "win" a new customer they don't understand marketing or business.

Let's walk through an example, because this is how this stuff works in the real world.

Say you have a company with the following dynamics.

• 10,000 customers and a 25% annual rebuy rate.
• 7,500 new/reactivated customers per year.
• Your digital marketing budget and your loyalty marketing budget are identical.

Your marketing manager reads drivel on LinkedIn and decides to be "strategic". He cuts the digital budget in half, he takes the money from the digital budget (mostly new customers) and spends it on additional loyalty efforts.

The money spent on additional loyalty efforts "works" ... rebuy rates increase from 25% to 33%. SEE - IT WORKS! Of course, new/reactivated buyers tumble by 25%, but that was expensive stuff and it was, as LinkedIn says, "costly".

Base Case:  10,000 buyers * 0.25 rebuy + 7,500 new/reactivated = 10,000 buyers next year.

New Idea:  10,000 buyers * 0.33 rebuy + 5,625 new/reactivated = 8,925 buyers next year.

Somewhere there should be alarm bells going off, but LinkedIn is happy and that's all that matters.

Year 2:

Base Case:  10,000 buyers * 0.25 rebuy + 7,500 new/reactivated = 10,000 buyers next year.

New Idea:  8,925 buyers * 0.33 rebuy + 5,625 new/reactivated = 8,570 buyers next year.

LinkedIn once again celebrates. The CEO is asking questions, questions like "why are we spending the same number of marketing dollars and yet the business is contracting?"

Now it is Year 3:

Base Case:  10,000 buyers * 0.25 rebuy + 7,500 new/reactivated = 10,000 buyers next year.

New Idea:  8,570 buyers * 0.33 rebuy + 5,625 new/reactivated = 8,453 buyers next year.

By this time either the CEO or Chief Merchant is about to be fired, and neither one wants that so they decide to fire the glib marketing manager who hops on to LinkedIn looking for a job as a "strategic marketer" who knows how to "optimize budgets" while embracing "loyalty marketing". AI filters allow this resume through the door because it clicks all the right boxes.

And yet? The marker is a Lemonhead. The marketer killed a business and didn't even understand what happened.

Don't be a Lemonhead.