Acquisition & Retention

An introduction

Friends,

I hope that you and yours are all well this Friday morning.

First off, I want to apologize for the tardiness of the book club email; it did not go out as originally intended but will today. Without boring you with the details, the short version is that a bug in an integral plug-in caused my server to develop a critical failure. For some reason, this also had an effect on my email client.

The good news, I guess, is that the looks of jpcastlin.com now are significantly improved. In addition to writing and posting a short essay on naturalized strategy-making, I also took the normally unheard of route of actually providing price information regarding my services both as a consultant and a speaker. So hop on in, have a look, and feel free to book me for your next event.

Further, I want to thank Sera Holland for her amazing work in taking over my Twitter feed this past Tuesday for International Women’s Day. As expected, she absolutely knocked it out of the park. I also want to give kudos to Vikki Ross, who was the brain behind the entire affair.

Lastly, Substack has informed me that they have just released their new iOS app. It may definitely be worth checking out if you are on mobile; if nothing else, it should make reading my incoherent ramblings easier.

Le plat du jour

As previously mentioned, today will mark the start of our foray into customer acquisition and retention. Given that the topic is one of the most fundamental in strategy in general and marketing strategy in particular, it is indisputably far too large for one newsletter.

While this means that we will see a new theme of sorts evolve, it also means that there is ample opportunity to join in on the conversation. If you feel that there is something I am missing or a particular aspect that I should include, just reach out to me and I will do my best to address it.

With that in mind, let us begin.

An introduction

On the surface, the difference between acquiring a customer and retaining a customer already acquired appears clear and easy enough to understand. This distinction allows for follow-up reasoning that everyone can casually nod along to. But look closer and you will soon realize that there is a lot more to the conversation that initially surmised; in some instances, the discrepancy between acquisition and retention is obvious, in others, it is anything but.

To illustrate, when I posed the above question on Twitter, the replies I received were as consistently brilliant as they were inconsistent in argument. Few appeared to agree on where and how one should draw the line.

For example, if we define acquisition as a customer buying you the first time, retention as them buying you every time, and re-acquisition as them buying you once again after having bought someone else, duplication of purchase law ensures that many marketers will end up spending more time thinking about what label to put on a customer action than actually making them take said action in the first place. All brands within a category share their customer base with other brands in line with their penetration; depending on your share, they will either buy a little from you and a lot from everyone else or, if you are very lucky, vice versa. Although there are exceptions and partitions, the pattern has been proven to hold time and again across categories and countries for more than 40 years.

Similarly, if we define an arbitrary point in time after which it no longer is retention but re-acquisition, there is a risk of clearly nonsensical distinctions where, effectively, a customer can fall into either category depending on how long the line is at the till.

Some might hope solve the problem by using tools such as recency-frequency-monetary (RFM) tracking. In simple terms, this means assigning scores based on

1. whether the customer bought something in a given window (e.g., within six months, between six months and a year, a year plus and so on),

2. how often the customer made purchases within it, and

3. how much money they spent on each purchase.

Each score is typically given a certain weight (as a company may favor one kind of customer behavior above others), and they are then subsequently added together.

As one might expect, the RFM argument (originally put forth by Bult and Wansbeek in Optimal Selection for Direct Mail (1995)) centers around finding the best customers; a supposed common-sense approach particularly popular among CRM enthusiasts. The issue is that it leads to a heavy buyer fallacy.

Purchase patterns are by and large predictable. In any given time period, most customers will be non-buyers. Among those that did make purchases, the majority will have done so very infrequently. Only a select few will be the kind of heavy buyers that score high in RFM.

Given that customers move between groups – non-buyers become buyers, buyers become non-buyers – focusing on those that are best today is a great way to ignore those who will be best tomorrow. A follow-up study by Reinartz and Kumar unsurprisingly saw that the scores had led to significant overinvestment in lapsed customers and the company had incurred losses on them as a result.

If one relies too heavily on RFM, there is thus a danger of ignoring the majority of one’s customer base as it scores too low to be considered noteworthy. To illustrate, in two studies by Charles Graham covering more than 200 brands over six years, 80% of buyers purchased the brands tracked at a rate of once a year or less – and this contributed to over 40% of sales. Even a supposedly highly differentiated brand (from which should logically follow higher repurchase rates) such as Dove experienced the same pattern, albeit to the tune of an even higher percentage (50+) contribution to overall sales. And one might note that this was during a time in which the brand grew its share by more than 50% and ran its award-winning ‘Dove for real beauty’ campaign.

In other words, the baseline rule is this: in any given time period, most buyers will buy you sparsely or not at all. The bigger you are, the likelier it is that people will purchase you more, but becoming big in the first place is predominantly a matter of acquiring more customers of all kinds. While acquisition is easily defined, subsequent purchase actions are not.

The road ahead

Consequently, the only way to do the conversation justice is to break it down into parts. A week from now, we will therefore focus exclusively on customer acquisition and it associated topics (such as CAC). The newsletter after that will give customer retention the same treatment. Three weeks on, we will close the loop and tie it all together in a paying subscriber exclusive on practical nuance.

So stay tuned, because this is going to be good one.

Until next time, have the loveliest of weekends.

Onwards and upwards,
JP