…because I believe brands should only invest in marketing communications through existing users of their brand

The principal assertion of my IPA final essay is that any
brand should focus their efforts through their existing customers.  It is so obvious that most revenues, and therefore
most profits, are derived from existing customers that we have forgotten – it would
seem – its fundamental importance.

But that is only the start of existing customers’
importance.  Fred Reichheld – who
pioneered loyalty research at Boston’s Bain Consultancy – observed that in most
businesses the profit earned from customers increases over time.  Furthermore it generally costs more money to
service a new customer than an established one; some businesses lose money on a
customer in their first year (see note #1).

Accenture have demonstrated the extent to which it is within
the control of businesses to increase customer profitability.  They suggest that a typical $1 billion
business could add $40 million in profit by enhancing Customer Relationship
Management capabilities by ten percent (see note #2).

It’s also more expensive to attract rather than keep a
customer; a repeat sale is generally accepted to be between a quarter and a
third the cost of a new customer.  Julian
Saunders observes that “the economics of winning a new customer versus keeping
an existing one is generally well known. 
A healthy and mature service should get most of its business from
existing customers; it costs less” (see note #3).

Case study: magazine subscriptions

Let’s take the example of magazine subscriptions.  The profit on a typical annual magazine
subscription is around £15 per customer (see note #4), but the cost to acquire
that customer is in the region of £34. 
The acquisition cost doesn’t begin to be recouped until the third
financial year.

Compare this to a retention strategy.  Utilisation of the customer (subscriber)
database reduces – on average – retention cost to around £1, which generates a
profit of £14 in year one.  Average
retention rate in the magazine industry is around 45-50% in year one, but – significantly
– this increases to 75-80% in year two and a massive 98% in third and
subsequent years.  The fiscal benefit of
retaining your existing customers as opposed to the acquisition of new ones is
clear.

Notes

1 Frederick F Reichheld. The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting
Value.

2. Customer Relationship Management: Divide and Conquer, an
Accenture report by Mark T. Wolfe, Stephen F. Dull and Timothy Stephens

3. Julian Saunders.  A
market leader exclusive report: What is really changing in marketing
communications?

4. Based on a typical annual subscription cost to the reader
of £36, less £21 fulfilment cost on the part of the publisher.  Source: Milivres Prowler Group.

Tomorrow: Our addiction to the heroin of customer acqusition
Thursday: The loyalty debate