Monday, May 5, 2008

Client Acquisition Versus Retention

You hear a wide range of numbers tossed around regarding the costs associated with acquiring new clients versus retaining and growing the ones you have. In a blog post at Profitable Marketing where the author challenged the commonly quoted 5 to 1 ratio, I actually found a comment that explained this familiar axiom.

Jim Novo noted, "The general truism 'it costs 5x more to acquire a customer than retain one' is from Fred Reichheld's (yes, he of NPS fame) earlier book, The Loyalty Effect (1996). It's based on his study of 25 different companies across many different industries - State Farm, Toyota, John Deere, Leo Burnett, Enterprise Rent-a-Car, MBNA, Chic-Fil-A, etc. when he was at Bain & Co. This book is also the source of the '5-point increase in retention lifts per-customer profit by more than 125 percent' type of idea.

"To clarify, this '5 to 1' phrase has been hacked up and taken out of context for more than a decade. The original meaning is the yield on a dollar spent is 5x higher for retention than acquisition; the ROI is 5x higher for retention than acquisition..." (Visit either link above for the complete comment).

Consider how much time, effort, and expense it takes to pitch a prospect. Depending on how elaborate the review process, even if you win the business, it can take months to achieve a breakeven position. So if it's more profitable to retain clients than find new ones, then why aren't we as a profession focusing more of our efforts on retention? On client service excellence.

I answered a question on Linkedin today regarding industry practices for rewarding agency employees who bring in new business. Here's my paraphrased response:

Your employee should be well compensated for the myriad services to be delivered here, but I would not set a precedent for rewarding employees for bringing in new business. I think you should reward the team based on overall agency growth rather than try to compensate individuals for specific new client wins.

What do you think?


  1. Just don't fall into the trap of thinking that service excellence can be quantified by the number of goodies an agencies delivers to clients.

    I had an agency send flowers, candies, novelty items, etc., using any event or milestone as an excuse to show off how "creative" they were.

    Yet when it counted, instead of several creative options we would get a presentation showing a passable idea, along with a really bad idea to force us to pick the other option.

    I don't hire an agency based on their promo items or their coy self promotions. I look for their ability to deliver the goods.

  2. Eric, I couldn't agree more! The flowers and candy help only when you have everything else running on all cylinders. Not even the sweet smell of flowers or the fine taste of a great chocolate will mask client service mediocrity at the core.



Blog Widget by LinkWithin