The Cost Of Retention Versus Acquisition

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Chief Marketer conducted a survey of more than 1,000 marketers across a range of industries and company sizes. I found the following comment — in response to the finding that nearly half of respondents plan to focus on acquiring new customers versus 26% that will concentrate on retaining and reactivating customers — particularly interesting:

“Customer retention and reactivation are less costly, but marketers may redouble efforts to reach new potential buyers”

This notion was recently echoed in an article in Insurance & Technology magazine:

“While the cost of retaining an existing customer is usually far less than the cost of acquiring a new one, all customers are not equal and different customers tend to have a different “cost of ownership.”

My take: Damn. It’s 2010, and this myth about the costs of acquisition versus retention still hasn’t been exploded. People, listen up: This notion that “it costs 5 (or 6 or 7) times more to acquire a customer than to retain one” is bunk.

If you’re in the banking world, put up a website, offer a 5% rate on a savings account, do some online advertising, bring on board an ex-Twitter exec, and you’ll acquire a bazillion customers. Very cheap (except, maybe, for the equity you’ll have to give to the Twitter dude).

Keeping those customers is another thing.

You’re going to have to build a damn good customer service delivery capability. Oh, and you’ll need to provide account access, and transaction support in what, like ten different customer-facing channels? Don’t forget the money you’ll need to invest in security and fraud protection.

And when the next genius comes along and offers 6% on a savings account, you’ll have to raise your rate. And the additional interest you have to pay out is a cost of retention, my friends, not a cost of acquisition.

Here’s the issue: There is no defined standard for what costs to include and which ones to exclude when calculating customer retention. Or acquisition for that matter.

The point is moot, of course. Why “of course”?

Because it doesn’t matter what the cost of acquiring a customer or retaining a customer is. The only thing that matters is how profitable the customer is. If you have a customer that will produce $100 of profit per year (that’s ongoing + incremental revenue less the cost of marketing to that customer and the cost of servicing her), wouldn’t you be willing to spend more to acquire her than a customer that will only produce $50 of profit per year?

Sure you would. But if you’re like many of the marketers surveyed, you can’t figure any of this out.

Among the Chief Marketer’s survey respondents, 63% don’t track customer lifetime value by channel. Now, that’s OK if those firms only interact with customers in one channel. But that’s unlikely. Bottom line: Those marketers have no clue what their real customer lifetime value/profitability numbers really are.

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