In marketing there is a seemingly eternal debate, that often draws claims of objective truth: Which strategy is king, customer retention or acquisition?
Naturally, in a sharp economic downturn, brands will be forced to look at where cuts can be made, and marketing is an obvious budget to raid. This adds another dimension to the debate — is it worth marketing at all?
Of course, critical operations must be maintained so businesses survive. But lessons from history suggest those who are quick to dispose of marketing suffer the consequences by taking longer to bounce back in the recovery.
Let’s explore the following key points:
- Brands that market through a downturn come out stronger
- Aim to increase your market share
- Focus on solving problems, not selling
In the Global Financial Crisis of 2008, it is estimated businesses that chose to protect their brand recovered nine times faster, according to data from Kantar and BrandZ.
In fact, there is evidence to suggest brands who opt to increase market share during a recession are more successful in the long run.
This flies in the face of the popular argument in marketing which dictates that retention is the more profitable path and the evidence available can be compelling.
Of course, the argument for retention exists in a context outside of a recession, but the case for acquisition is stronger in all climates.
So where then did the retention bandwagon first emerge?
It originates from research done by Frederick Reichheld of Bain & Company, which asserts that increasing customer retention rates by 5% boosts profits by 25% to 95%.
Indeed, Reichheld goes further, arguing it can be “five times more expensive to acquire a new customer as it is to retain an existing one”.
Taken at face value the numbers are persuasive but pierce the surface and the study is misleading.
In Byron Sharp’s book How Brands Grow, essential reading for all marketers and communicators, the University of South Australia professor lambasts Reichheld’s figures, labelling them “pure fantasy”.
That is because Reichheld’s findings are merely based on a thought experiment:
Suppose a credit card company loses 10% of its customers each year, then the average customer life would be 10 years. Now if that firm was able to reduce its annual customer defection to 5% then the average customer tenure would double to 20 years. Given that a customer delivers a certain amount of profit each year, when they stay for more years, they will deliver more profit (25-95%) in total.
As Sharp argues, their logic is misleading because:
- Their 5% in defection is actually a drop of five percentage points, i.e. from 10% to 5%.
- Their thought experiment wasn’t about company profitability, it was about customer profitability, which is different.
Regarding the maxim that it is five times more expensive to acquire a new customer than it is to retain an existing one, Sharp is even more scathing, calling it “wishful fantasy” based on the empirical evidence.
Sharp points to the double-jeopardy law, an empirical law in marketing where a brand’s defection rate is essentially a function of its market share, and the category it is in.
In other words, how many customers a brand loses is dependent on how many it has to lose in the first place. In normal circumstances, a larger brand will lose more customers, but it will also gain more, which means its defection rate is lower than a smaller brand’s.
Therefore, what is the praxis? Well simply put, if you increase your market share, your defection rate will drop.
This isn’t to suggest you neglect retention altogether. Indeed, in some industries it carries more weight than others.
One should also exercise caution during a crisis when executing a strategy based on increasing market share, particularly during the COVID-19 crisis.
The focus should not be on selling but solving societal problems and ensuring you strike the right tone.
Our suggested communication principles for marketing during the pandemic:
- Be the solution — speak to people’s needs and solve their problems
- Be generous — don’t focus on profits
- Be contactable — make sure your channels indicate you are always ready to assist
- Be concise — People have been bombarded with information; communications should be restricted to no more than three key points, which are highlighted in short, sharp sentences
- Be uplifting — avoid negativity and be light-hearted or inspiring rather than humorous
- Be multi-channel — with people working from home, you must not neglect any channel
- Be aligned to experts — promote credible voices and sources of information
Small and medium businesses and startups have never needed credible, independent journalism and information more than now.
That’s our job at SmartCompany: to keep you informed with the news, interviews and analysis you need to manage your way through this unprecedented crisis.
Now, there’s a way you can help us keep doing this: by becoming a SmartCompany supporter.
Even a small contribution will help us to keep doing the journalism that keeps Australia’s entrepreneurs informed.