...because I believe brands should only invest in marketing communications through existing users of their brand
The principal assertion of my IPA final essay is that any brand should focus their efforts through their existing customers. It is so obvious that most revenues, and therefore most profits, are derived from existing customers that we have forgotten – it would seem – its fundamental importance.
But that is only the start of existing customers’ importance. Fred Reichheld – who pioneered loyalty research at Boston’s Bain Consultancy – observed that in most businesses the profit earned from customers increases over time. Furthermore it generally costs more money to service a new customer than an established one; some businesses lose money on a customer in their first year (see note #1).
Accenture have demonstrated the extent to which it is within the control of businesses to increase customer profitability. They suggest that a typical $1 billion business could add $40 million in profit by enhancing Customer Relationship Management capabilities by ten percent (see note #2).
It’s also more expensive to attract rather than keep a customer; a repeat sale is generally accepted to be between a quarter and a third the cost of a new customer. Julian Saunders observes that “the economics of winning a new customer versus keeping an existing one is generally well known. A healthy and mature service should get most of its business from existing customers; it costs less” (see note #3).
Case study: magazine subscriptions
Let’s take the example of magazine subscriptions. The profit on a typical annual magazine subscription is around £15 per customer (see note #4), but the cost to acquire that customer is in the region of £34. The acquisition cost doesn’t begin to be recouped until the third financial year.
Compare this to a retention strategy. Utilisation of the customer (subscriber) database reduces – on average – retention cost to around £1, which generates a profit of £14 in year one. Average retention rate in the magazine industry is around 45-50% in year one, but – significantly – this increases to 75-80% in year two and a massive 98% in third and subsequent years. The fiscal benefit of retaining your existing customers as opposed to the acquisition of new ones is clear.
1 Frederick F Reichheld. The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value.
3. Julian Saunders. A market leader exclusive report: What is really changing in marketing communications?
4. Based on a typical annual subscription cost to the reader of £36, less £21 fulfilment cost on the part of the publisher. Source: Milivres Prowler Group.
Tomorrow: Our addiction to the heroin of customer acqusition
Thursday: The loyalty debate