Marketing’s most dangerous myth …

Customer Retention vs. Customer Acquisition

Einstein failed math, MSG gives you headaches (monosodium glutamate, not Madison Square Garden; you can easily get a headache at Madison Square Garden), you can see the Great Wall of China from space, humans only have five senses, lightning never strikes the same place twice, and we only use 10% of our hearts. Of course, none of these are true.

Here’s another myth:

It costs 5x more to acquire a new customer than to retain an existing one, and improving retention by 5% can increase profits up to 95%.

Wait. That’s a myth? Yep. It’s actually two distinct ideas that have been Voltron-ed together to form one of the most pernicious myths in marketing.

Let’s say you’re the Marketing Director for Black Anvil Laundry — a boutique washing machine and dryer brand. You’ve been around for three years. Last year, you sold 20,000 washers and 20,000 dryers, and it was your best year so far.

(Black Anvil Laundry also offers fun, expensive upgrades — titanium agitators, lint screens made of space-age nanomaterials that are slightly better at capturing cat hair, chromed-out dryer vents, personalized scented laundry detergent, a grizzled, Nick Offerman-ish AI assistant that gives you laundry and life advice, and so on.)

Customers can trick out their washing machines and dryers to their hearts’ content. You might say you’re “putting the custom back in customer.” Or don’t say that, at least not out loud.)

You’re excited to grow your brand. Do you …

Try to reach potential new buyers?
Launch a loyalty campaign to retain current customers?

Your sweet summer child of a CMO is keen to launch a loyalty campaign to increase retention. Why? Because one of the obvious truths in marketing is that it costs way more to acquire new customers than to retain existing customers. And, of course, if you can increase retention by a mere 5%, you’ll magically double or quadruple or whateverple your profits.

You instantly realize this is madness. Because …

People generally do not purchase more than one washer and dryer. Attempting to get them to buy more is impossible and/or bananas.
Washers and dryers last for roughly a decade, which means your existing customers won’t be back in the market for a very long time.

In a very real way, Black Anvil Laundry does not have existing customers to retain, especially in the short term. Sure, maybe you’ll sell a few titanium agitators or chrome dryer vents, but you’re not going to sell more and more washing machines to the same bunch of people.

And what would a loyalty campaign even look like? Weekly emails with coupons? A buy 12, get one free punch card? Exclusive Black Anvil Laundry get-togethers where Black Anvil owners test the latest models and show off their own custom washers and dryers? Actually, that sounds kind of fun, sort of. Improbable but fun. Still …

Obviously this is an extreme case, and durable goods with 10‑year replacement cycles make loyalty schemes look absurd. And that’s kind of the point. But this isn’t just about washing machines. Even in categories where people buy more frequently, the growth pattern is remarkably similar.

Research from Ehrenberg‑Bass shows that in everything from packaged food to finance, brands grow primarily by reaching more buyers, not by dramatically increasing purchase frequency among existing ones.

A loyalty campaign might squeeze a bit more from the people already buying you, but the bigger pool of sales comes from light buyers drifting in and out over time.

So let’s go back to our myth, take it apart and put it back together in a smarter way.

It costs 5x more to acquire a new customer than to retain an existing one.
Improving retention by 5% can increase profits up to 95%.

To be fair, that first statement is roughly true, though whether it’s 5x or 2x or 7x is wildly irrelevant. Why?

Because statement #2 is complete nonsense.

And where did #2 come from? A 1990 article in the Harvard Business Review called “Zero defections: quality comes to services,” written by F.F. Reichheld and W.E. Sasser Jr. In it they write, “Reducing the defection rate just 5% generates 85% more profits in one bank’s branch system, 50% more in an insurance brokerage, and 30% more in an auto-service chain. And when MBNA America, a Delaware-based credit card company, cut its 10% defection rate in half, profits rose a whopping 125%.”

That sounds effing miraculous. One tiny problem, though. We assume these miraculous numbers are real, but there’s no actual research or data in the paper to back up the extraordinary claims. There are charts, but they don’t actually say anything. It’s almost like they made these numbers up. (Hint: They did.)

Retaining customers can help protect your margins, but you cannot try to sell more and more washing machines — or financial services, health care, pancakes, lawnmowers or anything else — to the same group of people and expect to grow.

Okay, now let’s make our two myths true:

It costs money to acquire customers. It costs money to retain customers.
There is no #2. Marketing is an investment.

If it helps, think of every customer as a new customer. Repeat buyers are easier and cheaper to reach because you have their information. And they are statistically more likely to choose your brand because you’re already in their consideration set. However, you still need to reach them so they remember you.

As the Marketing Director of Black Anvil Laundry, you want to make your brand easy to think of, easy to feel good about, easy to find and easy to buy for as many people as possible. That includes people who have already purchased your products.

Eventually, some of Black Anvil Laundry’s buyers will become repeat buyers … and some won’t.

Churn is going to happen. Here’s the good news: Churn is not binary. Non-buyers become light buyers. Light buyers become heavy buyers. Heavy buyers suddenly become light buyers or non-buyers. It’s incredibly fluid. Keep reaching more and more people.

So, are all loyalty and retention programs pointless? Of course not. If your goal is to gather customer data, they’re okay. If your goal is to give discounts to people who were already going to buy from you, they’re pretty great for that, too.

And for many categories, you still need both acquisition and retention working together. Acquisition to drive growth, and retention to help protect margins.

Deliver the best possible product and customer experience, but stop killing yourself trying to retain customers.

For the most part, loyalty is a function of brand size. Larger brands have more buyers who buy slightly more often. Smaller brands have fewer customers who buy slightly less often. And in any given category, buyers are “polygamously loyal” to a handful of brands, usually larger ones.

Again, it costs money to acquire customers. It costs money to retain customers. You need both. You may be better served by spending more on acquisition.

(Our guess is that when “retention marketing” works, it’s because you’re rebuilding and refreshing mental availability by getting your brand and message in front of people. So when they are ready to buy again, you’re top of mind. Email is both cheap and quite good at this.)

It’s really important to remember that people do not care about your brand. They only care about the needs, wants and desires your category happens to solve for. And they need to be reminded over and over that you exist. If Black Anvil Laundry disappeared tomorrow (and it will because it doesn’t exist), all your hypothetical customers would at some point buy an LG or a Whirlpool or a Viking or some other brand they’ve heard of.

Again, deliver the best product and customer experience possible. Constantly and consistently reach as many people as possible with emotional, memory-building, brand-coded, fame-building advertising.

Retention helps protect what you’ve built. Acquisition builds what comes next. We can help.

We’ll see you next time.

Sources!

Zero Defections: Quality Comes to Services – Harvard Business Review
How Brands Grow Part 2 – Jenni Romaniuk and Byron Sharp
Loyalty Myths – Ehrenberg-Bass Institute for Marketing Science