Acquisition vs Retention Costs in the CLV Calculation
As you can probably gather from the articles on customer acquisition and retention costs, the challenge for most companies would be to split and proportion their various marketing costs between customer acquisition and customer retention activities to customers. The task facing a marketing area to try and estimate the proportion of expenditure allocated to each area.
Three Main Marketing Objectives
Typically the majority of a marketing budget would be allocated with three main intentions, namely:
- Costs to attract new customers
- Costs to retain existing customers
- Costs to up-sell/cross sell to existing customers (increase average customer revenue)
While the marketing budget would be executed across the full marketing mix – product development, pricing incentives, people, process, promotion, and so on – the intention of all of these strategic and tactical decisions is to create and build a large customer base that provides ongoing value to the firm.
Therefore, to effectively and accurately measure customer lifetime value, the overall marketing investment (which may even fall outside of the marketing budget) needs to be allocated across the goals of customer attraction, customer retention and customer up-selling.
In a large firm/brand, it is likely that the same marketing tactic could have multiple intentions. For example, a short-term discount (that is, a sales promotion) would have the effect of attracting first-time customers, increasing the loyalty/retaining existing customers, as well as getting existing customers to buy more. Therefore, in this case, it would be necessary to allocate the costs of this sales promotion to both new/first-time customers (which feeds into customer acquisition costs) and to retention and up selling (which is also necessary to measure in the more complex customer lifetime value formula).
Potential marketing investment area
This will need to be proportioned between acquisition and retention/up selling costs. Advertising will impact existing customers, as well as attract new customers. Basic reminder advertising is probably mostly a customer retention cost, whereas special offers and new products tend to have more of a balance between new and existing customers.
Sales promotions should be considered a mix of acquisition and retention costs. Existing customers are attracted purchasing more of a brand/product that they normally buy because of the deal/offer provided. Likewise, non-customers of the brand are also more likely to purchase because the product represents increased value during the sales promotion period.
Sponsorships are typically a retention cost as they are designed to help build the brand’s likeability and its association with the event/venue/team. However, it is likely to have a slight impact in reaching hard to reach markets and increasing awareness to some market segments – as a result, a proportion of sponsorship should be allocated customer acquisition costs.
Direct marketing is relatively easy to allocate as the intended customer is known – whether they are new or an existing customer.
Like sponsorships above – media relations, publicity, newsletters and hospitality – all tend to primarily have an existing customer focus and would often be male considered a retention expense. But like sponsorships, a proportion of this expenditure should be allocated to customer acquisition.
Depending on upon the focus of the event, it should be relatively easy to allocate the cost of events between customer acquisition and customer retention. Some events are primarily for existing/loyal customers, whereas others are primarily designed to attract new business.
New products give the opportunity to firms to sell more products to their existing customer base. A firm with a strong brand (that is, customer following) will often target existing customers with their new products. However, new products are also designed take business away from competitors and to grow market share and/or expand market coverage. As a result, a proportion of new product expenditure should also be allocated to customer acquisition costs.
Social media campaigns
As with advertising discussed above, the cost of social media campaigns needs to be allocated between customer acquisition and customer retention, depending upon its intended purpose. Google Analytics can be quite helpful in identifying the impact of social media between new and returning users to the firm’s website.
New stores or retailers
If a company opens a new store, or expands into new retailers, then it is likely that they will attract new customers as a result. Therefore, a significant proportion of this cost can be considered to be a customer acquisition cost.
Sales force costs
Sales force expenditure costs and commissions (either internal to the company or through third party suppliers) should be relatively easy to allocate. Often companies structure their sales force into new business and existing clients. And usually the commission structure clearly identifies new business sales versus repeat business sales.
Customer service staff
The majority of customer service staff costs should be allocated to retention and up-selling. Customer service staff help facilitate the service and provide information and are less likely to be involved in initial selling. On occasion, say in a retail setting, customer service staff would have a dual role of service and selling and this needs to be taken into account in calculating customer acquisition costs to feed into the overall customer lifetime value formula.
Website and online costs
Depending on the company, some websites are predominantly designed for existing customers – an example here would be a banking internet site- whereas other websites are predominantly sales sites, such as online retailers. Again Google Analytics can assist in this regard, as it measures first-time and repeat users (visitors). This can provide a guide to the allocation of website/online costs between customer acquisition and customer retention.
Supply and installation of equipment
Obviously the majority of equipment supplied and installed would be for new customers.
However, a small proportion could also be for existing customers as they increase their relationship with the firm. An example would be an office adding an additional water cooler (from a water delivery company) as they have expanded their staff numbers – thus requiring additional equipment.
The vast majority of proposals and tenders would be targeted at winning new business. However, on occasion, the firm may be required to “pitch” to an existing customer/client. An example here would be an advertising agency trying to re-win the business of a business client.
Market research and database analysis
To accurately determine customer lifetime value, it is necessary to consider all costs associated with the customer, including information and software costs. The majority of analysis is associated with existing customers and should be allocated to retention costs, with a minority being allocated to new business – particularly for research into new market segments.