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?