Aggressive customer acquisition versus defensive retention:
Seeking the right balance in direct marketing
1. Introduction
Direct marketing consists of an interactive marketing technique that utilizes advertising media for creating measurable response and /or transactions at any location as per the definition of the Direct Marketing Association (Kotler, 2000). In as much as the profitability of firms relies on building successful interactive relationships with customers, it makes sense to develop long term relationships with the customers, and also customer relationship management assumes critical significance in overcoming traditional transactional marketing approaches. The transactional marketing approach follows the path of aggressive customer acquisition and is itself grounded in the product-focused 4-Ps approach. In contrast, modern relationship marketing attempts to improve firm profitability through better customer retention and attaining appropriate balance of retention and acquisition strategies. The approach is based on the premise of cost-effectiveness of retaining existing customers and profitability of cultivating long-term customer relationships. This paper examines the concepts of customer retention and customer acquisition and tries to find out how recent marketing efforts seek to balance retention and acquisition strategies for deriving optimum firm profitability.
2. Customer retention and firm profitability
Customer retention may be defined as the probability of being alive of a customer or his/her propensity for repeat purchase of products or services from the firm (Gupta et al, 2006). Studies indicate that customer retention is cheaper than acquiring new customers; Customer retention is driven by two basic strategies. One is the putting up of an effective barrier by way of higher costs to the customer for switching from the firm to another. Another way -and a better one-consists of providing the customer higher satisfaction with the firm’s products or services. Reichheld (1996) observes that acquiring new customers can be five times costlier than satisfying and retaining existing customers. Estimating that a firm loses around 10 percent customers per annum, he avers that customer profit rates tend to increase with increasing life value of the customer. And, since customer defection rates adversely affect customer retention rates, he also assesses, in the same study, a profit enhancement of 25 to 85 percent in case of even a small reduction in defection rates by 5 percent. This was also based on an earlier research by Reichheld and Sasser (1990) while another by Clutterbuck and Dearlove (1993) also observed similar effect based on a study by Bain and Company. Also, Bolton (1998) observed that customer satisfaction significantly impacts the relationship tenure, while more recently and significantly Gupta and Zeithaml (2006) also found a strong correlation of customer satisfaction with customer retention. It has also been observed (Reichheld and Sasser, 1990) that increased customer retention mean broader customer bases comprising customers who buy more products, which serves to improve revenues, lower marketing costs and better word-of-mouth sales. In evaluating economy derived from using customer acquisition and retention strategies at a firm, Electro plc. Payne (2002) also observes that improving customer retention in firms can have a dramatic improvement in business profitability although a more structured approach than what organizations currently adopt could possible enhance both customer retention and firm profitability levels. Payne recommends a three step approach to such structuring viz., measuring customer retention levels, identifying what makes customers defect, and the development of methods to tackle such defection and hence improve customer retention levels. He also stresses on the importance of customer lifetime value – which is the net current value of any future profit flows over the lifetime of the customer (Payne, 2002)- whose analysis, he feels, are critical for arriving at the correct balancing of customer retention and acquisition by the firm in improving profitability. However, Anderson and Mittal (2000) advice caution in adopting customer retention strategies, since it may also lead to overspending.
3. Customer retention as first line of defence
Kotler and others (1999) even aver that customer retention is the first line of defence for a firm. The authors maintain that a firm needs to be outstanding in its field, owing to the changing demographics, economic slowdown, above capacity industries, globalization, fast pace technological changes, increased and intense competition, and the consequent division of customers among several close competitors. While a customer’s demand for products traditionally translated into more customers for the firm and marketing strategy in the past was affected by means of aggressive acquisition, in the current marketing environment, the modern firm is driven by the need to retain more and more customers and ensure that fewer customers defect to other firms. It has hence become a question of the very existence of the firm in the present competitive market environment. Hence, building stronger customer relationships appear a necessary core business activity for the firm which it seeks to affect through improved customer satisfaction and service or product quality. Also, in contrast with earlier market situations, firms are actually fighting to retain and corner more customer shares and this also serves to increase customer acquisition costs, over that of existing customer retention costs.
A customer focused approach to marketing strategy also means that firms try and improve customer lifetime values through achieving long-term beneficial relationships with existing customers. Kotler and others (1999) also point out that the key to retaining more customers is in improving customer satisfaction and customer value. In as much as modern marketing concepts are grounded in the need for a firm to arrive at a better understanding of its target markets and then providing its customers differentiated value and satisfaction for deriving it competitive advantage over rival firms, a stronger customer focus and better customer retention strategy appear very crucial in the aforesaid circumstances. This implies that the modern firm needs to be defensive in respect of its existing customers; its close rival may well steal them and no amount of fresh acquisition can offset such loss. Under the circumstances, it is quite crucial in satisfying the firm’s existing customers so that that such satisfied customers buy the firm’s products repeatedly, recommends the same to others, and also pays little attention to similar products from the firm’s competitors. Also, offensive marketing generally costs more than defensive marketing does, since this generally means enticing the existing customers of rival firms through successful persuasion and higher costs. The value of customers is also scarcely reflected in accounting terms so that firms are often misled into false strategy positions. Customer retention therefore appears to be the first line of defence for the business firm, which it can successfully adopt by means of suitable long-term customer relationship management strategies.
4. Customer acquisition and firm profitability
Gupta and others (2006) define customer acquisition as the first time purchase of products or services by new or lapsed customers of a firm. Traditional approaches of firms in evolving customer focused marketing strategies have been mostly transactional by nature; they target improved sales and market share. Obviously, need for improved firm profitability does drive various customer acquisition strategies that firms adopt from time to time. Many such acquisition efforts are affected through loyalty programs, price discounts, marketing campaigns and the like. Among authors who have studied customer acquisitions in firms, Villanueva, Yoo and Hanssens (2006) view marketing-induced client acquisitions as being better profitable in the short terms. However, these authors also observe that external word of mouth driven acquisitions appear to be profitable only in the long term, although they may ultimately be the more valuable. Customer acquisition can be quite profitable in a fresh and growing economy through higher market share for the firm. However, it is also observed (Lewis, 2003) that marketing-induced programs that drive customer shares via acquisition strategies can be quite counterproductive in the long term.
What particular stage in its life cycle a firm is an important consideration having impact on its choice of customer retention or acquisition. Thus, start-up firms do need to acquire new customers so that they can become viable business entities. The firm then uses various promotions, advertisements, etc. in order to achieve this end. In general, however, costs of customer acquisition are higher than that for customer retention (Rosenberg and Czepiel, 1984; Reichheld and Sasser, 1990) and it would make best sense to choose retention over acquisition. Nonetheless, acquisition is the first step for building a customer base that can impact future firm profitability and can also be risky and costly (Bolton and Tarasi, 2006) although it does determine customer portfolio diversity and hence multiplies business risk which is not as widely studied as part of customer relationship management as desirable Johnson and Selnes, 2005).
5. Customer retention and customer acquisition
Customer acquisition attempts to gain more attractive customers at lower costs and has been the traditional way by which businesses have attempted to improve profitability. Customer retention has not been attempted until recently. Also, only recently have attempts been made to research and compare benefits of customer retention as against that of customer acquisition. However, customer retention does play a critical role in the firm’s customer relationship management strategy. Also customer retention employs much less funds of the firm than customer acquisition and this reflects the disproportionate allocation of funds between retention and acquisition strategies among most firms. While studies indicate the relationship of customer retention and acquisition with customer value (Gupta and Zeithaml, 2006), others also relate to asset allocation among retention and acquisition (Blattberg and Deighton, 1996). The latter indicate no obvious link between acquisition and retention as such, although they do express a greater need to balance resource allocation amongst retention and acquisition as marketing strategies. On the other hand, Gupta and others (2006) even view acquisition and retention as being independent processes. Perhaps, a most significant effort in the field is that of Thomas (2001) who assumes both the processes to be heterogeneous and related and whose model of correlating acquisition and retention is further developed by Reinartz, Thomas and Kumar (2005) who link up profitability, retention and acquisition. These authors view retention and acquisition as equally significant for marketing.
6. Balancing between retention and acquisition
While the modern trend is to follow customer retention strategies to the fullest, experts underline the need to adopt a right mix of acquisition and retention strategies. This also implies the adoption of correct balance between retention and acquisition for optimum balancing of resource allocation. In this respect, various models for determining the relation between acquisition and retention as well as the correct proportion of resources to be allocated amongst each have been propounded. The earliest by Blattberg and Deighton (1996) used a decision calculus based model of calculating optimum acquisition levels and costs as well as optimum retention levels and costs. Other models include the Customer Equity model that focuses on cost outgoes between acquisition and retention. Again, Payne and Rickard (1996) outline another mathematical model for allocating resources optimally between acquisition and retention marketing strategies. In their model, several factors related to acquisition and retention is studied, viz., the customer retention rates, customer base, desired acquisition levels, acquisition cost per customer and the per customer profits. Focussing on customer retention rates alone indicates that fixed costs decrease and related profits go up. During the start-up phase, companies obviously have to acquire more and more customers; the need to retain customers through quality and satisfaction levels arises only in later years of the company in operation. But under similar circumstances, whereas Reichheld (1996) argues for stressing overall customer retention rate increase, Ryals and Knox (2005) support the view of several others that customer retention policy needs to focus on customers having greater lifetime value. Likewise, Gupta, Lehman and Stuart (2001) aver on the basis of a detailed study that although customer retention is one of the most significant factors affecting customer lifetime value and firm profits, customer retention should not be always improved. But these authors also observe that mature businesses do need to improve customer retention rates while in growing markets, acquisition of new customers makes better sense. Again, Gupta and Lehman (2005) also support the view that organizations also need to emphasize customer retention when it follows a policy of low discount rates. Firms that overly stress customer retention to customer acquisition also may face the problem of an aging customer base and flight of customers. In normal situations, also, firms are found to have a predominantly fixed cost structure which means that they need to focus on low value customers who still retain value for them.
Pfeifer (2005) uses a numeric model and discounts Blattberg and Deighton’s views on optimal spending between acquisition and retention. While the latter uses a simple dynamic model based on customer behaviour, Pfeifer uses a longer term model for deriving and assessing gains used for optimising acquisition values. Indeed, Pfeifer’s model is one of neutralizing risks.
7. Conclusion
Customer retention is currently an emerging topic area among companies and business organizations. While firms appear to be diverting resources somewhat towards retaining existing customers rather than concentrating on aggressive customer acquisition or expansion marketing strategies, it is also true that they are not as much emphasising on retention in lieu of acquisition strategy as can be desired. Customer relationship management has emerged as a significant field of marketing that considers issues like customer expansion, retention and acquisition. It also studies and attaches importance to such new concepts like customer lifetime value, customer equity, customer loyalty and customer satisfaction. In a global environment in which technological innovations, intense competition, economic slowdowns, lower profit margins, increasing costs, and saturated customer shares are the order of the day, it is very difficult for the firm to continue with existing revenue levels, let alone improve its profitability. A structured growth plan necessitates a strong customer focus across the organizational hierarchy at the very least. Although firms are adopting such customer focus at the core of their marketing and management strategy, nonetheless, further studies are essential in order to understand metrics relating to customer retention and customer acquisition. Additionally, the relationship between customer retention and acquisition as also the need to better balance between them as per the changing market and internal environment appears essential for the modern firm to even survive let alone record growth. Kotler’s (1999) observation that a defensive strategy by adopting customer retention is important can not be questioned under such circumstances. However, acquisition of customer is also to be pursued continuously in order to expand on the customer base of the firm, although a better balance in selecting resources for retention and acquisition may well mean a sustainable long term customer management strategy at the core of a business strategy.
Finally, the exact choice of retention and acquisition as a proportion of overall marketing strategies is significant. The question of choosing appropriate levels of resource allocation is primarily a cost minimizing effort that holds vital significance in determining current and future profitability of any firm. While the various experts have propounded different theories linking retention and acquisition, as well as evolved some similar and not so similar models for assessing the relative utility of acquisition and retention as part of the overall marketing strategy for the firm, nonetheless, it is difficult to arrive at the same acquisition and retention combination for two different firms, industries, environmental conditions, etc.
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