Are existing customers eight times more valuable than new customers?
It’s conventional wisdom that it is “six to seven times more expensive to gain a new customer than to retain an existing customer.” Given today’s economic uncertainty, could the inverse also be true? Could existing customers be six, seven or even eight times more valuable in terms of revenue and growth than new ones?
Frederick Reichheld of Bain & Company coined the phrase based on his research on customer retention and acquisition in a study published in the Harvard Business Review in 2001. He would later go on to develop the Net Promoter score, measuring the impact and importance of “loyal enthusiasts” on a company’s performance.
For many companies, existing customers are a bellwether investment, such as gold, in times of instability and uncertainty. But what the research does not address is the potential existing customers represent. Many are a goldmine of opportunity for incremental revenue growth that is often missed.
For example, a financial services company found that because it focused on promoting and selling new products, the majority of new customers acquired in the last two years had high penetration of new products (75 percent) and low penetration of older products (40 percent).
The inverse was also true: Customers for more than 10 years had high penetration rates of products older than 10 years, at 65 percent, while new customers had penetration of 37 percent for those same products.
Marketing promotions and sales compensation served as incentives for behaviors that led to new customers being exposed only to new products. With existing customers, the company focused on retention and spent little time on trying to sell new products. As a result, the company discovered a host of cross-selling and upselling opportunities because of this segmentation … opportunities that may exist in many other organizations. I would recommend segmenting your customers by date acquired, and the age of the product they own or use, to discover your own goldmine.
This incremental revenue potential, combined with the value a customer represents as a brand advocate (Reichheld’s Net Promoter System) powered by social media raises the stakes even further. It is a solid argument for suggesting that existing customers are, in fact, even more valuable than Bain originally suggested 10 years ago.
Don’t get me wrong; new products, markets and customers are critical for growth. I’m not advocating that a company abandon these pursuits; however, I am suggesting that given the current situation, there might be an overlooked, low-cost opportunity for growth right in the backyard.
You just need to mine it.
Need another reason? At this writing, an ounce of gold is trading at about $1,700. Two years ago, it traded at $1,014, appreciating 68 percent over this period.
Treat customers like gold and you might see the same kind of return.
by Scott Gillum
President gyro Washington, D.C. and Head of gyro’s Channel Marketing Practice
Follow Scott on Twitter @SGillum
Cross-posted at Ignite Something on the Forbes CMO Network