Are Existing Customers 8 Times More Valuable than New Customers?

It’s conventional wisdom  that it is “six to seven times more expensive to gain a new customer than to retain an existing customers.”  Given today’s economic uncertainty, could the inverse also be true?  Could existing customers be six, seven or even eight times more valuable in terms of revenue and growth than new ones?

Frederick Reinchheld of Bain & Company coined the phase based his research on customer retention and acquisition in a study published in the Havard Business Review in 2001.  He would later go on to develop the Net Promoter score, measuring the impact and importance of “loyal enthusiasts” on a company’s performance. 

So for many companies, existing customers are a bellwether investment –  such as gold – in times of instability and uncertainty.  But what the research does not address is the potential existing customers represent.  Many are a goldmine of opportunity for incremental revenue growth that is often missed. 

For example, a financial services company found that because it focused on promoting and selling new products, the majority of new customers acquired in the last 2 years had high penetration of new products (75%) and low penetration of older products (40%). 

The inverse was also true: Customers for more than 10 years had high penetration rates of products older than 10 years at 65%, while new customers had penetration of 37% for those same products.

Marketing promotions, and sales compensation incented behaviors that led to new customers only being exposed to new products.  With existing customers, the company focused on retention and spent little time on trying to sell new products.  As a result, the company discovered a host of cross-sell and up-sell opportunities as a result of this segmentation … opportunities that may exist in many other organizations. I would recommend segmenting your customers by date acquired, and the age of the product they own or use to discover your own goldmine.

This incremental revenue potential, combined with the value a customer represents as a brand advocate (Reinchheld’s Net Promoter Score) powered by social media raises the stakes even further.  It is a solid argument for suggesting that existing customers are in fact, even more valuable than Bain originally suggested ten years ago.

Don’t get me wrong; new products, markets and customers are critical for growth.  I’m not advocating that a company abandon these pursuits, however I am suggesting that given the current situation there might be an overlooked, low-cost opportunity for growth right in the backyard.

You just need to mine it.

Need another reason? At this writing, an ounce of gold is trading at about $1,700..  Two years ago, it traded at $1014, appreciating 68% over this period.  

Treat customers like gold and you might see the same kind of return. 

Why Measuring Customer Lifetime Value Matters for Lead Generation

Post is featured on MarketingProfs.com

This month BtoB magazine published the Lead Generation Guide 2011.   The special issue is filled with articles focused on all facets of lead generation written by marketing experts and journalist over the last two years.

The final section titled, “Data” contains charts with assorted research findings.  One of the most interesting is a slide from a Benchmark report produced by ITSMA.    The graph show the metrics regularly used to measure the success of lead-generation activities. 

The top responses are what one would expect; Number of Qualified Leads (68%), Number of Closed Deals (63%), Revenue Growth (54%).  The metrics that ranked lowest are far more interesting: Cost per Customer Acquired (15%) and Lifetime Value of Customers Acquired (19%).  

If you are a tactical marketer, I can understand why those metrics ranked the lowest since the data is hard for marketing to track, it may not be marketing’s responsibility, and/or the calculation is too complicated. However, if you are a strategic marketer, capturing and tracking these metrics is very important.  

Years ago, I consulted for a research division within a professional services firm.  The company sold primary research and custom reports that typically cost between $80,000 – $150,000 Acquiring new customers was largely a transactional effort. As a result, it relied heavily on marketing and new business activities to fill the pipeline.  Increased revenue targets meant that it required increased marketing budgets to meet corporate goals.

I was tasked to find a solution since the model was unsustainable.   The key to unlocking the answer came from calculating their Customer Lifetime Value (CLV).   Almost immediately the analysis pointed to issues with their average price point, YOY churn rate (retention) and average account size.   Not surprisingly, the company had a negative CLV, but no one was measuring it or analyzing it.

Even though the symptom of the problem manifested itself as marketing, this was not only a marketing issue.  The challenges reached across the organization and into the product and sales groups as well.  Of course, understanding the cost envelop for acquiring customers helped guide future marketing investments and activities, but fixing this problem was not only about cutting or right sizing the marketing budget.

As a result of the analysis, the firm set on a course to build and implement other areas of improvement:

• An upsell and cross sell program. 
• Complimentary products that could be sold as follow on/add on 
• Enhanced products to drive a higher initial (01) price points
• An account management and retention program
• Account managers

By implementing the aforementioned items, the company was able to correct the problem and generate a profitable CLV, which became a key performance indicator (KPI).

While it is not commonly used, CLV is one of my favorite metrics to track because it is a “process” metric.  It can help guide sales and marketing performance by ensuring that profitability, acquisition cost, and retention rates are being properly measured.  Marketers tracking CLV have an early warning system that can indicate:

• Targeting the wrong audience  - too small, short term focused, etc.  
• Creating the wrong type of leads – clients may only be interested in the initial offer and are not interested in a longer term relationship (see the next point for more).  The value of the lead is not worth the cost.
• Promoting the wrong offer – the offer may be incenting the wrong behaviors - this especially true with discounts associated with individual purchases such as retail store cards that offer 10% off the first purchase if a customer opens an account.
• Setting the wrong price point – the true cost of sale may not have been considered or known.
• Having a retention and/or account management issue – this will show up quickly (the “leaky bucket”).

Marketers that ignore this important metric are in danger of missing out on an early indicator of top line performance measures.  While CLV may not be included in the performance report, it is important to track and understand the CLV goal or baseline.  

As illustrated in the case study, the symptom may show up in marketing, however these issues will cut across the organization. Budget cutting will not fix the problem. Marketers need to be able to point to other parts of the equation that are contributing to the issues, which is good for the other CLV: Career Lifetime Value.