How much is acquiring new customers to replace the ones you lost costing you?

Igor PauletičMarketing Automation, Sales

If your competitor had to lose a customer so you could gain a new one, this post should be interesting to you. I decided to write it after I visited a company and they showed me a meticulous cost analysis for acquiring new customers. But when I asked them about the cost of retaining customers, no one could answer me.

Retaining a customer is much cheaper than gaining a new customer to replace the one you lost

This wasn’t my only question of course. I just wanted to show them that reaching the same growth with fewer lost customers could save them money for other business developments, since they wouldn’t have to spend as much money gaining new ones. The average customer acquisition cost (CAC) would therefore be significantly lower.

It is understandable that rising aggressiveness in marketing and sales leads to higher costs of acquiring new customers. The effects therefore can’t justify the investments forever since the cost begins rising exponentially, and in my opinion this is one of the areas that is important for every company’s profitability. I often say that you can minimize CAC by abolishing promotion and coast along on your good name and “natural” recommendations by your enthusiastic customers if this satisfies your business growth appetites.

Do you really believe that a lower price is what drives the customer’s decision to switch providers?

Can you imagine a subscription provider (such as an internet provider) that builds its value proposition on guaranteeing an equal price for every subscriber? A promotion that attracts new customers would therefore also be available to existing customers. If the customers come and go because of the pricing, this should be an ultimate value proposition. It could only potentially be beaten by a system where years of loyalty bring benefits that are not available to new customers.

I must admit that seeing a commercial with benefits that only affect new customers of my internet provider, mobile phone provider, electricity provider… only stirs up unpleasant thoughts. But I don’t do anything about it just like most subscribers who remain loyal customers. I calm down and keep paying my services at the same prices and conditions that were offered to me when I signed my contract. Switching providers takes some effort, and even though switching (to a different provider) would save me some money, my laziness is stronger than my wish to save that amount of money. Someone might interpret this laziness as fear of change, but this doesn’t change the fact that inactive subscribers are the most profitable.

At least 70% of Slovenian households never switched their electricity provider. Click To Tweet

The simple fact is that a lower price does nothing to activate me and start my purchasing process. This is also true for most subscribers. The difference is probably too small and something else must happen to make me consider switching. When I decide to leave my existing provider, I will gain an entirely new perspective on service prices and benefits for switching. They are very important in selecting a new provider, but almost insignificant in my decision to leave my existing provider.

What triggers the decision to switch providers?

Every analysis of customers that decide to leave their service providers shows that these customers contact support more often and at the same time pay more than average customers. Both indicators show that these customers are probably (or will soon become) unhappy with the provider’s service. Such customers are most vulnerable to attacks from your competitors.

A customer that pays invoices addressed to their grandfather who died 20 years ago is simply great. Click To Tweet

How to prevent your existing customers from leaving?

The people who sell subscription services usually recognize a pattern of lost customers and search for customers with a similar pattern among their existing customer base. Then they try to tie down such customers by offering benefits if they commit for a certain time. This is a crucial mistake, since it triggers a purchasing decision which can lead customers to switching providers. Any predictive analytics that is based solely on past events and ignores the current customer behavior may therefore cause unwanted collateral damage, because the range of its countermeasures is simply too wide. The profits from many subscribers are lowered since you have to provide cheaper packages for them, and some subscribers may even be driven to thinking about the offers of your competitors.

Marketing is quite defensively focused in some industries

It is much wiser to monitor the digital activities of your existing customers (on your website) using marketing automation tools and only address (through CRM calls to action or email notifications) customers that:

  1. are currently checking your general terms and conditions (they might be trying to find the terms for ending their subscription contract?),
  2. are interested in prices and are trying to find a better sales package,
  3. came to your website from another website where offers by different providers can be compared (such as Consumers’ associations),
  4. are searching for support contact information or reading your FAQ, but have not visited your website or contacted you in a while.

As someone who focuses on customer retention, I would be extremely happy if you would just stop spamming your regular customers with promotional activities for gaining new customers in the digital environment, since modern websites can dynamically adapt their content to individual visitors based on their data in marketing automation systems. It would be very useful if:

  1. the website could adapt its content so existing customers are not exposed to promotional offers intended for customers that you want to entice to leave your competitors. These promotional offers could be replaced by support content.
  2. you could personalize the content of your email newsletters, so you don’t send promotional materials for attracting new customers to your existing ones.
  3. all the existing customers that we wish to keep on their current deals are excluded from Google and Facebook advertising campaigns. Such segmentation requires some skills, but it is definitely possible nowadays.
Retaining existing customers is much cheaper than acquiring new ones. Click To Tweet

The technology that we have been successfully implementing for a number of years can notify your sales people when a customer who shows signs of browsing through your offer appears. You could be in danger of losing such customers, since they could also be browsing through your competitors’ offers. This is a perfect moment for getting your foot in the door. Retaining existing customers is much cheaper than acquiring new ones. You only need the right tools for that. Maybe your competitors already have them. We can help you check that.

 

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About the Author

Igor Pauletič

Founder and CEO of FrodX, who uses his rich experience to assist customers to transfer the latest technological, operational, and social trends into their business operations. He mostly focuses on new product development, omnichannel sales architectures, and go-to-market strategies. As a team member, he fills the role of the idea generator and constantly challenges the status quo and established decision making patterns.