Customer Retention vs Customer Acqusition in B2B – What is More Expensive?
In this article, you will learn about an interesting B2B practice in which customer retention is contrasted with customer acquisition. What is more expensive?
In detail, distribution costs naturally differ from company to company. However, there are two steep theses in the generalization, which also appear again and again in the literature:
1. Acquiring a new customer is ten times as expensive as retaining an existing one.
2. In most cases (in B2B sales), the initial order from a new customer does not cover costs.
Interestingly, there are many citations for both theses in the literature on sales and marketing, but hardly any scientific studies.
We cannot provide you with scientific research either. However, we can provide a case study of a company that took the time a few years ago to compare the actual sales costs incurred with the sales price and the result of a high-priced capital good over a period of one year.
Practical example: cold calling versus customer retention
The company sold copiers in all price and performance categories, from small, inexpensive devices for the home office to high-volume devices that already approached the performance of a printing press. Sales were made through specialist dealers and by direct deals with the company’s field sales staff.
The company sold the high-volume devices as well as provided them via rental or leasing contracts. As a rule, a maintenance contract was concluded for these devices, usually based on a click contract, i.e. a specific price per sheet of paper. In general, the machines were only with the customer for 36 to 48 months.
There were two cold-calling procedures, one with upstream mailing followed by telemarketing and one without mailing, direct cold calling via telemarketing. Otherwise, the two processes were identical:
1. purchase/rent of addresses
4. handover to the sales force in the form of a fixed appointment
5. visit the customer
In the case of existing customer care, the sales department acted without external telemarketing and made the appointments on its own.
The results were shocking and unexpected for both sales management and marketing management.
The upstream mailing led neither to a higher appointment rate nor to more sales, so it was a waste of money. In some cases, it was even counterproductive: “If I didn’t respond to your letter, it must have been uninteresting” and hung up.
In a small test, the company even approached people about the mailing, who initially were not part of the group with upstream mailing. It was amazing how many could remember a mailing they never received.
The average selling price of one of these high-volume units was 30,000 euros. The selling costs in cold calling to acquire a new customer were the same as the selling price. In the case of acquisition with upstream mailing, costs were somewhat higher than with pure telemarketing since the costs for the mailing were also added.
The sales costs in existing customer care for selling a new device were between 2,000 and 3,000 euros.
Practical example: Conclusions.
1. The statement that acquiring a new customer is about ten times more expensive than retaining an existing customer is about right.
2. In this area (copiers), initial sales do not cover sales costs. The maintenance contracts somewhat mitigate the situation.
3. Acquiring a new customer is only profitable if you can retain the customer for several years or sell additional equipment (cross-selling or upselling).
4. Good support for existing customers is therefore crucial to the success of the company. However, if you look at some industries, you get the impression that companies are unaware of this. Particularly reasonable offers are often only available to new customers while neglecting existing customers (e.g., mobile telephony). For the customer, it then pays to be very willing to switch.
Practical example: What were the sticking points?
In cold calling, the quality of the address is the decisive factor. Carefully narrowing down the target group reduces the number of addresses to be processed. At the same time, the closing rate is increased, and thus sales costs are reduced.
In existing customer care, it is crucial to have information about the customer that shows their overall potential and willingness to switch. Information from service must also be included here, as service plays a significant role in whether or not a customer churns.
As you could already see from the selection of the product sold, the campaign described was several years ago. The possibilities for qualifying customers and potential customers were limited compared to today.
CRM systems were available, database matching was possible and performed, but analysis and estimation of closing probabilities were essentially limited to the experience of sales and marketing staff. Today’s modern tools, especially artificial intelligence (AI) and predictive analytics, were not yet available to the same extent.
What are the opportunities for b2b sales improvement today?
Tools from the field of AI today offer possibilities that would have been relegated to the realm of science fiction just a few years ago. Today, we encounter AI systems in many areas. In the case of Android phones, just mention the apps Swiftkey and Gboard, often in use and rarely recognized as AI systems. So these are no longer science fiction and create very concrete significant advantages in competition.
With predictive analytics, you can now recognize whether an existing customer is about to switch to the competition or a new customer to you. You, therefore, gain time for (counter-) measures. A retained existing customer means decreasing sales costs for you, increasing sales costs for your competition. However, predictive analytics can tell you which and when to best target existing customers for cross-selling or upselling campaigns and what to sell there. Predictive analytics also offers assistance in determining the best (highest) selling price per customer. You no longer have to rely on “gut feeling”.
With other tools from the AI toolbox, you can match addresses with your CRM’s data in the area of cold calling and thus filter out duplicates quite reliably that simple database matching would not have detected. At the same time, these tools can also tell you with which potential customers you have the most significant sales opportunities. After finalizing the contract, predictive analytics kicks in again.
Will AI replace sales?
Clearly not. Just as CRM systems cannot maintain a customer relationship, AI or predictive analytics are tools humans can/must use. It can make sales more efficient and effective, thus reducing your sales costs, but it cannot replace sales. However, these tools are so powerful that they offer a real competitive advantage. In the long run, the companies that work with these tools will displace the others.
Or, to put it more succinctly: The devil takes the hindmost.