An old adage states that it is much more expensive to acquire a new customer than to retain an existing one. The question then becomes: How much more expensive?
Studies indicate that it is somewhere between six and 10 times more expensive to acquire a new customer, says Chris Wagner, vice president of marketing at InfoCision Management Corp. Smart Business asked Wagner why companies spend so much on the arduous task of acquiring new customers while taking such a rudimentary, reactive approach to retention.
What is your approach to retention?
Our focus is on ‘total life cycle management,’ thus we have the opportunity to work with many customers on both retention and acquisition strategies. To make the case for a powerful, proactive retention campaign, let’s look at an ongoing retention program with a large wireless provider. Annual churn for this company was 7.08 percent and the cost to acquire a customer was $305. The average annual revenue per customer was around $630 and the net income per customer was about $90. With these costly new customer acquisition activities only able to keep pace with the rate of attrition, the overall marketing costs were on the rise.
What did you do?
The first step in developing a retention program was to analyze the database to find statistically valid indicators of a customer’s likelihood to leave. Some key indicators were:
- At contract expiration
- Three months after contract expiration
- Six months after contract expiration
- Nine months after contract expiration
- Customer just received a bill
- Customer received a bill within the last
90 days that was 20 percent above average
- Customer complained to call center
about service and/or cost
- Age of customer hardware (phone, wireless access device)
Based on this scoring model, 5 percent of the active customer base could be earmarked as likely to leave. With 10 million active customers, this client had around a half-million customers that were likely to churn at any given point. The second step was to identify, within that half-million, which customers were worth retaining, allowing us to concentrate on customers who provided a good margin of profitability.
How did it work out?
We were able to identify 360,000 customers per quarter that we wanted to actively retain. We were able to retain these customers at a rate of about 32 percent at a cost of $28 per customer. This strategy cut overall churn in half, and the net income-to-program cost was 10-to-1. Over the course of a year, an additional 473,250 customers were retained at $28 a person, for a total cost of $13,251,000. To acquire this many customers at $305 acquisition cost would have cost $144,341,250, resulting in a cost savings of $131,090,250. By focusing on customers who had greater margins and offering plan and equipment upgrades, the average revenue per retained customer grew by $11 a month, adding an additional $5 million in revenue. The addition of a telemarketing component to the overall retention strategy proved to be an integral part of the overall retention effort and is much more cost effective than making up for those sales lost to attrition by increasing new customer acquisition activities. The superior results earned InfoCision the majority of this business as this wireless provider’s cost per customer decreased substantially.
CHRIS WAGNER is vice president of marketing at InfoCision Management Corp. Reach him at (330) 668-1400. In business for 25 years, InfoCision Management Corporation is the second largest privately held teleservices company and a leading provider of customer care services, commercial sales and marketing for a variety of Fortune 100 companies and smaller businesses. InfoCision is also a leader of inbound and outbound marketing for nonprofit, religious and political organizations. InfoCision operates 32 call centers at 13 locations throughout Ohio, Pennsylvania and West Virginia. For more information, visit www.infocision.com.