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Is it better to attract new customers or retain existing ones?

07.27.2013
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When it comes to whether to focus attention on attracting new customers vs retaining existing ones, the marketplace seems undecided.  My local supermarket for instance goes to great lengths to offer me targeted deals in an attempt to stop me shopping at a rival firm.  Mobile companies however seem to spend their money on attracting people through the door with special tariffs and introductory rates.

Which is the correct approach?  The logic seems to fall on the retention side of the fence.  After all, mature customers are more familiar with your product and processes so are likely to require less customer service.  As (presumably) happier customers, they are also likely to buy more.

An alternative approach however is typified by sports clubs.  They believe that once you’re a fan of the club, then you’ll always be a fan, so they can charge you more because they are confident in your loyalty.  The investment therefore goes in attracting new fans rather than retaining existing ones, who become the cash cow.

As with most things, one suspects the answer is far from black or white.  The rise of big data has for instance given us much greater insight into our customers, and has showed us that the best customers often outspend the mean by some distance.  American Express have revealed that this ratio can be as high as 16 to 1 in retail, 13 to 1 in restaurants and 12 to 1 in air travel.

So it’s quite possible that attracting one of those high value customers is going to be more valuable for your company than retaining customers of lower value.  Even with such data however, and its subsequent support for microsegmentation, the issue of whether to offer the best prices to your own customers or those of your competitors remains a difficult one.

An important issue to consider is that of shopper flexibility.  For instance, if I move house to somewhere that isn’t served by my favourite supermarket, no matter how tempting their efforts to lure me back, it’s unlikely that I’ll continue shopping with them.  That such a decision is both frequent and no reflection on the company itself raises important questions around the sense in trying to retain me as a customer.

The key therefore is to understand both your particular market, and your customers very well.  If for instance your market has a high degree of both flexibility and value concentration then it makes perfect sense to invest heavily in retaining your best customers.

If either flexibility or value concentration are low however, it is probable that you will achieve better results by focusing attention on luring customers away from your competitors.

An example of this kind of market is with media subscriptions.  I subscribe to the Economist, and my value concentration and flexibility are both low.  I only subscribe to the Economist (low concentration), and my subscription with them is for one year (low flexibility), so there is little value in the Economist going overboard to retain me with special offers.  The value for them comes from attracting new customers to their publication.

In areas like mobile phones, there is far higher choice available, but flexibility is not so high as switching is not particularly easy, so once again it makes sense for them to focus on new customers rather than existing ones, which goes a long way to explaining the plethora of introductory deals on the market in this industry.

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