If you spent a few minutes thinking about how you can grow your business, what would you say?
You are probably thinking something along these lines:
- Treat my current clientele with even better customer service.
- Provide a membership program to my most loyal customers.
- Create an exceptional in-store experience
- Get my most loyal customers to buy more of my stuff.
- It’s way cheaper to treat your customers right than to go and get new ones.
- Reduce the number of customers switching brands. Make more loyal ones!
- New truck 🙂
Many business people believe that it’s more expensive to find a new customer than it is to treat a current customer rightly. Though the sentiment is correct and you should treat everyone with respect, this is simply not true when you are growing your business. Let me explain.
First, I am going to assume you are past the advertising inflection point and now need to experience the kind of growth that isn’t produced by friends and family.
Here’s the math.
Let’s use an example outlined by Ehrenberg-Bass Institute, one of the most reputable market research firms in the world.
In table 3.2, you will see a number of known brands within the automobile category in the UK. This was the result of a 25,000 customer survey of new car buyers in the UK recording what car brand they bought in that time period and what they owned previously.
In the middle column you have the penetration percentage and on the right the defection percentage. Penetration percentage is how many people bought the brand at least once in a particular time period. Defection measures the number of people switching brands or “jump ship.”
Each year, about 50% of a car brand’s sales are generated from new customers and the rest from returning customers. We should also note there are about 50 market share points up for grabs each year because 50% of customers within the market are looking to switch. If all car brands lose 50% of their customers that means about 50% of the market is looking to switch brands.
Let’s use Honda as our example. How do you think Honda should grow their brand? Maybe their goal is to decrease their defection rate from 53% (average within the industry) to 40% (better than average). This seems like an attainable goal- only about a 13% difference. If Honda does, in fact, achieve its goal, did it grow?
The answer is no. Let’s say the market holds 25,000 new car buyers. 6,750 of them went to Ford, 4,000 bought Rover, 3,500 bought a GM, and so on. 250 new buyers chose Honda in this time period. Theoretically, Honda decreased their defection rate from 53% to 40%, which means it increased customer loyalty. However, they only had 250 or so to begin with, which means about 60% stayed (around 150 customers or .6% of the market).
Now let’s say Honda wanted to try a different approach. Their new goal is to increase penetration from 1% to 2%. Say Honda achieves their goal. They go from acquiring 250 new buyers to acquiring 500 new buyers. They now have more customers than the previous year and have increased their share of the market, or pie of the market.
The math is this. Your customer base is and will always be a fraction of the entire market, which means increased loyalty is only affecting a fraction of the market. Looking towards the acquisition, you see the entire market and the scalability required for growth.
If you assume that building stronger loyalty and decreasing your defection percentage is the way to grow, you will attempt to decrease something that even the largest brand in the marketplace can’t do.. Usually, that means you need some additional investment. It isn’t necessarily cheap, but let’s actually do the math.
Customer retention isn’t cheaper than acquisition. It’s more costly.
The easy fruit to pick would be to go after the 50% of the market already up for grabs instead of attempting to decrease a metric that nobody else in the industry has managed to do.
Let’s build a marketing strategy together that not only captures market share but keeps it.