It costs five times less to keep a customer than it does to acquire a new one. But is this oft-quoted truism actually true?
I well remember the day I first heard this amazing claim. It was a crisp Thursday morning in November 1990. My boss gestured for me to come into his office, where a fresh copy of the Harvard Business Review was placed on his desk.
It was open at an article by two authors called Reichheld and Sasser. Their piece was called Zero Defections and it made its case with the kind of missionary zeal that would make the Jesuit founder Ignatius Loyola blush.
Just as the doctrine of zero defect manufacturing was transforming the world of making things, Reichheld and Sasser argued that the philosophy of zero defection marketing would transform the world of selling things.
Their killer punch was the claim that companies could boost profits by almost 100% by retaining just 5% more of their customers. Heady stuff indeed.
However, in a highly provocative new book How Brands Grow: What Marketers Don’t Know, academic Byron Sharp dares to challenge modern marketing’s preference for retention at the expense of acquisition.
Professor Sharp’s clinical demolition of Reichheld and Sasser’s argument is almost embarrassing to read. It’s a little like watching a constant replay of that England v. Germany match, with Sharp wearing a shirt with an eagle on it.
He gleefully points out that Reichheld and Sasser’s rhetorically modest 5% drop in defection is actually a drop of five percentage points – from 10% to 5%, which is a 50% decrease, or a halving of customer defection.
This is hardly the kind of quick win you can get under your belt before your next quarterly board meeting. Especially given the fact that Reichheld and Sasser have conveniently assumed that this halving of defection will be achieved at zero cost.
The defence has barely regrouped and Sharp is already lining up his next shot at goal. For this attack, he deploys his secret weapon – the law of double jeopardy.
Double jeopardy basically means that a brand’s defection rate is a function of its market share, so that despite investment in retention programmes, defection rates rarely differ markedly between competing brands. Plentiful tables are provided for those who dare to doubt.
For those who, like me, need things such as this explained with plastic tiddlywink counters on the kitchen table, here’s a simple worked example: Imagine you’re a car company. You have an 8% market share. Each year you lose 50% of your customers through defection. What’s your most attractive business opportunity? Trying to retain half of those defecting customers and potentially gaining a meagre two share points? Or making a play for the vastly bigger gains possible by appealing to the 50% of the market that’s disloyal to your competitors?
Sharp’s clinical demolition of Reichheld and Sasser’s argument is almost embarrassing to read… He gleefully points out that Reichheld and Sasser’s rhetorically modest 5% drop in defection is actually a drop of five percentage points – from 10% to 5%, which is a 50% decrease, or a halving of customer defection
The book is littered with wake-up calls like this. And it’s not just loyalty marketers who get it in the neck. Sharp also has a go at the worship of passion brands like Apple and Harley-Davidson. And wait until you hear what he has to say about segmented communication strategies.
Having plugged his book, I’m fully expecting a dinner invitation from Professor Sharp. However, I think I’d be in two minds about accepting. His contrarian assault on accepted wisdom is unrelenting. And behind the sledgehammer prose, there’s more than a slight sneer of academic superiority.
More than anything else, however, I’m just plain envious. It’s a book I wish I had the intelligence to write. Reading Sharp’s critique of the cult of differentiation made me smile. And I laughed out loud at his characterisation of supposedly committed consumers as “uncaring cognitive misers”.
And yet Sharp risks over-stating his case by attacking extreme examples like Reichheld and Sasser. Take his assault on loyalty programmes. To make his point, he assumes that all such programmes attract and reward all customers equally, including those who would exhibit loyal behaviour anyway. Hence they lack the capacity to deliver genuinely incremental sales and profits.
Most practitioners know that today’s “smart” loyalty programmes circumvent this problem by targeting “at risk” customers and those with known headroom. Furthermore, despite the obligatory genuflection at the altar of Tesco, Sharp understates the contribution of loyalty programmes to customer insight and advocacy.
His use of evidence is occasionally more than a little partial. To add weight to his point that acquisition is a more fruitful marketing objective than retention, Sharp quotes Peter Field and Les Binet’s 2007 study of IPA Effectiveness Award winners. This shows that 82% of winners reported large penetration growth, whereas only 2% of winning cases concerned themselves with loyalty.
To Sharp, this is clear evidence that acquisition is the true path to business success. However, he fails to spot that this preponderance of penetration cases on the winners’ podium could be due to the fact that the IPA competition has historically attracted entries from advertising agencies, rather than from direct marketers and others who are more likely to have loyalty as an objective.
Like a bracing shot of something strong and intoxicating, How Brands Grow is a wonderful stimulant, a fascinating corrective to our tendency to follow fashion and let received wisdom go unchallenged. But it’s not a perfectly refined spirit. Treat it with healthy caution. Otherwise you might just wake up with a headache.