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

The three quarters we misspend

In yesterday’s post I identified the value that existing
customers hold for marketers.  Yet despite
this, most brands seem addicted to investment in marketing with the sole
purpose of attracting new customers.  Brands
are determined to talk to those who don’t love them.  Think about the last dozen briefs you wrote
or received.  How many were instigated to
recruit new customers?

A survey conducted for my IPA essay asked eighteen major
brands, who between July ’07 and June ’08 collectively invested £380m in
communications; “What proportion of your marketing budget is spent with the
specific intention of acquiring new customers?” 
The average – weighted by spend – across those brands was 78% (see note
one).  Over three quarters of their
marketing investment is deployed to communicate to those with whom their brands
have no proven relationship, and from whom no immediate profits will derive.

Hooked on an immediate fix

It’s not difficult to identify the sources of our
addiction.  We measure ourselves and are
judged by immediate-term sales metrics. 
Peter Doyle observes that “marketers have often allowed themselves to be
trapped by accounting-orientated management into seeking to justify their
marketing strategies in terms of improving immediate earnings” (see note two).

Weekly and even daily acquisition is what drives personal
and departmental targets.  One senior
agency figure commented to me that “this is part of the trap that most
businesses find themselves in: uncertain economic environments and hyper-competition in commoditised markets mean that most estimations of a company’s
success are based on evidence of growth ie headline sales”.

It’s also Google’s fault. 
One consequence of the emergence of the internet has been the precision
with which we can track online behaviours. 
The granularity of information around acquisition of new customers in
particular means that marketers who know they are focusing on the wrong
measures are nevertheless hooked on the heroin of CPAs and CPRs that drive
targets.

Notes

1. Collectively between July 2007 and June 2008 the brands
surveyed spent in the region of £380m on media and direct marketing (direct
mail and door drops); 78% of this – £294m – on acquisition.  If this were representative of the spend of
the top 200 brands across the same period it would amount to £4.6billion being
invested purely to communicate to non-users of their brands.  All spend figures sourced from Billetts.

2. Peter Doyle. 
Value-Based Marketing: Marketing Strategies for Corporate Growth and
Shareholder Value.

Tomorrow: The loyalty debate
Friday: Advocacy and the power of word of mouth

…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

brands are wasting budgets on luring new customers.  that a far better tack is to get faithful brand stalwarts to spread the word is something that Mediation believes quite strongly in.

some other people agreed, and a piece I wrote for the IPA Excellence Diploma on the subject has been published in Campaign today.

but it's a starting point not an end point.  it raises more questions than it answers about what we do and how we do it; about how we value customers, plan communications, and measure success.

from Tuesday next week on this blog I'll be – over ten days – taking one section from my essay at a time and publishing it.  I hope that you'll enjoy the read, but more importantly I hope that you'll join in the debate; because I believe that most marketing in the early 21st century is excessively wasteful.  I want to believe that we'll look back at how we embraced change…  and I hope you'll come along for the ride…