Acquisition is the primary growth driver, not retention
Apart from the startlingly obvious fact that a company must first acquire users to retain them, there is little easily available evidence that acquisition has a bigger impact on growth than retention. Instead, search surfaces a morass of self-serving content that uses assertion, hypothetical calculations, and anecdotal case studies to argue the opposite.
Retention drives acquisition? In your dreams.
Here is one egregious example of someone making an unsubstantiated claim for the power of retention,
"Retention drives acquisition" (sic)
"For many products, especially those that grow through virality or user-generated content (UGC), retention has a double effect. As you retain more users, those additional users take more of the key actions that accelerate acquisition, either through sharing, inviting, word-of-mouth, or creating content."
This might be true for freely available digital apps if they are radically better than the existing alternatives, but for most products and services it is complete bollocks (translation, it's complete nonsense).
The viral video myth reincarnated
The idea that you can accelerate acquisition through recommendation is the old viral video myth reincarnated. To be truly viral, you need RO to be greater than 1. The problem is that this almost never happens in the case of sharing online videos. Most viral campaigns have a RO of far less than 1 and so sharing rapidly slows and dies out. The best viral campaigns are not only inherently compelling, but they also get a substantial boost from paid advertising and subsequent media coverage.
To grow new customers must exceed lost ones
For a brand to grow through recommendations each new user must convince more people to buy than are lost by churn. Because there will be churn. No brand retains 100% of its users, because churn is often out of the brand's control. If nothing else, users die off, move jobs, marry, have kids, and as a result, their needs change and they no longer need your brand. If the customer is a company, it might decide to consolidate its vendor roster, it might be acquired and be forced to change suppliers, or it might go bust.
Unless your product is more contagious than COVID, at some point you will burn through all the fan boys and girls willing to recommend your brand and end up having to go out and acquire new users. Without new users no amount of improved retention is going to stave off a plateau and eventual slow decline. Yes, with the right tactics (and products) you can encourage people to come back and buy again, but for most products and services they will only do so when the time is right for them. Again, the problem is that the typical purchase cycle may be too long to sustain revenues, never mind grow them.
To be clear, I am not saying that improving retention does not help growth. What I am saying is that it does not offer the same growth leverage that acquisition does. And whether one or the other strategy is more profitable than the other is a whole different ballgame, largely decided by how well the strategy is executed. Given that the easily available content is largely biased and self-serving, what does academic research have to say about whether acquisition or retention is most important for growth?
Academics also seems unduly focused on retention
The strange thing is that academic research appears biased to studying the impact retention rather than acquisition. A paper titled, Managing For Successful Customer Acquisition: An Exploration, by Lawrence Ang and Francis Buttle reports that between 1983 and 2010, customer retention has been the focus of 45 scholarly papers, but customer acquisition only 7. Another paper by Erica Riebe, Malcolm Wright, Byron Sharp (yes, that Byron Sharp), and Philip Stern, comes to a similar conclusion. My suspicion? It is easier to get data on retention than acquisition. It is the old drunk under a lamppost problem.
Acquisition has five times the revenue impact?
"It is clear that without a well-developed, focused and successful customer acquisition strategy, customer retention and development is irrelevant."
They provide little evidence to justify the assertion beyond the following reference,
"Goodwin and Ball (2003) indicate that there may be considerable economic gain from focusing on customer acquisition. They compute that a firm having a 16.7% share of market enjoys 5 times the revenue impact from a 1% increase in acquisition than from a 1% increase in retention."
(I have emailed the authors to see if I can get a copy. Long shot, I know.).
Erica Riebe, Malcolm Wright, Byron Sharp, and Philip Stern to the rescue
Don't despair, Professor Byron Sharp and friends provide us with some real evidence in their paper, which for once is not just based on looking at cross-sectional analysis. Instead, they examine the relative contribution of unusual acquisition and defection to changes in brand share for pharmaceutical prescribing and retail financial services.
To do so, they calculate an expected degree of acquisition and retention for each category and examine the relationship between excess acquisition and retention and changes in market share. They present two key findings,
The Mastering Momentum findings supports the importance of acquisition
Now, some of you are probably thinking to yourselves, "But I sell products, I'm not a doctor or a banker." Well, let me reference a very different, but much more representative data set. Kantar's BrandZ captures data on a wide variety of product and service brands every year. Back when I worked for Kantar I conducted an analysis to identify how much growth different stages of the buyer cycle delivered: exposure, activation, and experience. Given an increase or decrease in the proportion of people at each stage over three years, how much did the percentage claiming to have bought last change? (Bought last was chosen because it is easy for readers to understand and closely parallels market share.) The initial report, titled Mastering Momentum was published in 2019 based on 3,907 brands and has since been updated to include 5,334 brands.
Based on this data set, the evidence overwhelmingly favors acquisition as a growth driver compared to retention. Strong changes in acquisition (exposure and activation) accounted for nearly 90% of the change in the percentage claiming to have bought last over three years. Now there are reasons to believe that this is an overstatement. First, it is based on users not revenue, so if repeat users bought more rather than simply buying again, the data would not capture that effect. Second, the average purchase cycle for the category may be longer than three years and so not capture the full impact of repeat purchase. That said, it is highly unlikely that the findings would change significantly even if we did address these two shortcomings. Acquisition is more important to brand growth than retention.
So where should a brand invest its overall marketing budget?
For years Les Binet and Peter Field have been telling us that on average brands should invest 60% of their advertising budget in brand advertising and 40% in sales activation (the Mastering Momentum findings point to a similar conclusion). Their subsequent work has suggested that different brands and categories require a different balance. For new brands, they find the optimal split to be more like 35% brand and 65% activation. The trouble is that many brands ignore brand advertising altogether and invest single-mindedly in performance marketing, which eventually leads to stagnation as the cost of acquisition skyrockets. However, while brand advertising and sales activation do influence existing buyers purchasing behavior, their primary objective is acquisition. What might the optimal budget look like if we also include retention marketing into the mix?
Small brands get most of their customers from other brands in the category, usually proportionate to the size of the competitor. By contrast, the biggest brands in the category obtain a lower proportion of customers by stealing share and more from encouraging existing customers to buy again and from capturing buyers new to the category. Data from the Europanel, Kantar BG20 study found on page 100 of Kantar's excellent Blueprint for Brand Growth shows how as penetration grows, a greater share of purchase occasions are accounted for by existing buyers, around 50% for the highest penetration brands. Given Double Jeopardy, this is probably what we should expect to see, but it does highlight the importance of retention and upselling for bigger brands and, while the data is based on packaged goods brands, there is little reason to believe that it differs dramatically for other categories.
Retention drives acquisition? In your dreams.
Here is one egregious example of someone making an unsubstantiated claim for the power of retention,
"Retention drives acquisition" (sic)
"For many products, especially those that grow through virality or user-generated content (UGC), retention has a double effect. As you retain more users, those additional users take more of the key actions that accelerate acquisition, either through sharing, inviting, word-of-mouth, or creating content."
This might be true for freely available digital apps if they are radically better than the existing alternatives, but for most products and services it is complete bollocks (translation, it's complete nonsense).
The viral video myth reincarnated
The idea that you can accelerate acquisition through recommendation is the old viral video myth reincarnated. To be truly viral, you need RO to be greater than 1. The problem is that this almost never happens in the case of sharing online videos. Most viral campaigns have a RO of far less than 1 and so sharing rapidly slows and dies out. The best viral campaigns are not only inherently compelling, but they also get a substantial boost from paid advertising and subsequent media coverage.
To grow new customers must exceed lost ones
For a brand to grow through recommendations each new user must convince more people to buy than are lost by churn. Because there will be churn. No brand retains 100% of its users, because churn is often out of the brand's control. If nothing else, users die off, move jobs, marry, have kids, and as a result, their needs change and they no longer need your brand. If the customer is a company, it might decide to consolidate its vendor roster, it might be acquired and be forced to change suppliers, or it might go bust.
Unless your product is more contagious than COVID, at some point you will burn through all the fan boys and girls willing to recommend your brand and end up having to go out and acquire new users. Without new users no amount of improved retention is going to stave off a plateau and eventual slow decline. Yes, with the right tactics (and products) you can encourage people to come back and buy again, but for most products and services they will only do so when the time is right for them. Again, the problem is that the typical purchase cycle may be too long to sustain revenues, never mind grow them.
To be clear, I am not saying that improving retention does not help growth. What I am saying is that it does not offer the same growth leverage that acquisition does. And whether one or the other strategy is more profitable than the other is a whole different ballgame, largely decided by how well the strategy is executed. Given that the easily available content is largely biased and self-serving, what does academic research have to say about whether acquisition or retention is most important for growth?
Academics also seems unduly focused on retention
The strange thing is that academic research appears biased to studying the impact retention rather than acquisition. A paper titled, Managing For Successful Customer Acquisition: An Exploration, by Lawrence Ang and Francis Buttle reports that between 1983 and 2010, customer retention has been the focus of 45 scholarly papers, but customer acquisition only 7. Another paper by Erica Riebe, Malcolm Wright, Byron Sharp (yes, that Byron Sharp), and Philip Stern, comes to a similar conclusion. My suspicion? It is easier to get data on retention than acquisition. It is the old drunk under a lamppost problem.
Acquisition has five times the revenue impact?
Much as I love Ang and Buttle's statement,
"It is clear that without a well-developed, focused and successful customer acquisition strategy, customer retention and development is irrelevant."
They provide little evidence to justify the assertion beyond the following reference,
"Goodwin and Ball (2003) indicate that there may be considerable economic gain from focusing on customer acquisition. They compute that a firm having a 16.7% share of market enjoys 5 times the revenue impact from a 1% increase in acquisition than from a 1% increase in retention."
(I have emailed the authors to see if I can get a copy. Long shot, I know.).
Erica Riebe, Malcolm Wright, Byron Sharp, and Philip Stern to the rescue
Don't despair, Professor Byron Sharp and friends provide us with some real evidence in their paper, which for once is not just based on looking at cross-sectional analysis. Instead, they examine the relative contribution of unusual acquisition and defection to changes in brand share for pharmaceutical prescribing and retail financial services.
- First, growth in brands' customer bases depend more on exemplary performance in customer acquisition than retention (in both pharmaceutical prescribing and banking). Across the two data sets, acquisition explains roughly twice the changes in market share that defection does (and given that retention is the flip side of defection, acquisition has twice the effect of retention).
- Second, simulation shows that: (i) while changes in defection rates are marginally more profitable than equivalent magnitude changes in acquisition rates, (ii) due to the greater variation in acquisition rates, defection nonetheless plays a secondary role in explaining changes in profitability.
The Mastering Momentum findings supports the importance of acquisition
Now, some of you are probably thinking to yourselves, "But I sell products, I'm not a doctor or a banker." Well, let me reference a very different, but much more representative data set. Kantar's BrandZ captures data on a wide variety of product and service brands every year. Back when I worked for Kantar I conducted an analysis to identify how much growth different stages of the buyer cycle delivered: exposure, activation, and experience. Given an increase or decrease in the proportion of people at each stage over three years, how much did the percentage claiming to have bought last change? (Bought last was chosen because it is easy for readers to understand and closely parallels market share.) The initial report, titled Mastering Momentum was published in 2019 based on 3,907 brands and has since been updated to include 5,334 brands.
Based on this data set, the evidence overwhelmingly favors acquisition as a growth driver compared to retention. Strong changes in acquisition (exposure and activation) accounted for nearly 90% of the change in the percentage claiming to have bought last over three years. Now there are reasons to believe that this is an overstatement. First, it is based on users not revenue, so if repeat users bought more rather than simply buying again, the data would not capture that effect. Second, the average purchase cycle for the category may be longer than three years and so not capture the full impact of repeat purchase. That said, it is highly unlikely that the findings would change significantly even if we did address these two shortcomings. Acquisition is more important to brand growth than retention.
So where should a brand invest its overall marketing budget?
For years Les Binet and Peter Field have been telling us that on average brands should invest 60% of their advertising budget in brand advertising and 40% in sales activation (the Mastering Momentum findings point to a similar conclusion). Their subsequent work has suggested that different brands and categories require a different balance. For new brands, they find the optimal split to be more like 35% brand and 65% activation. The trouble is that many brands ignore brand advertising altogether and invest single-mindedly in performance marketing, which eventually leads to stagnation as the cost of acquisition skyrockets. However, while brand advertising and sales activation do influence existing buyers purchasing behavior, their primary objective is acquisition. What might the optimal budget look like if we also include retention marketing into the mix?
Given the results reported in this post, then in my opinion between 15 and 30% of the budget should go toward retention marketing, with the rest going to brand advertising and sales activation. However, I would recommend that smaller brands invest on the low end of the scale and larger brands on the high end. Why? Because Double Jeopardy finds that small brands retain less customers than big brands. Small brands are destined to have higher churn rates, simply because they are small (which is why it is called Double Jeopardy). So, do you really think it is worth spending a large percentage of your marketing budget to turn back the tide?
Small brands get most of their customers from other brands in the category, usually proportionate to the size of the competitor. By contrast, the biggest brands in the category obtain a lower proportion of customers by stealing share and more from encouraging existing customers to buy again and from capturing buyers new to the category. Data from the Europanel, Kantar BG20 study found on page 100 of Kantar's excellent Blueprint for Brand Growth shows how as penetration grows, a greater share of purchase occasions are accounted for by existing buyers, around 50% for the highest penetration brands. Given Double Jeopardy, this is probably what we should expect to see, but it does highlight the importance of retention and upselling for bigger brands and, while the data is based on packaged goods brands, there is little reason to believe that it differs dramatically for other categories.
So, my recommendation for investing across the buyer cycle, based on a qualitative assessment, looks something like this.
| Small Brand | Big Brand | |
| Brand advertising intended to predispose people to buy the brand | 30% | 42% |
| Performance marketing/sales activation intended to capture in-market shoppers | 55% | 28% |
| CRM intended to retain and upsell existing buyers | 15% | 30% |
Obviously, the balance of investment needs to flex depending on the length of the purchase cycle (longer implies a more important role for brand building), and whether your brand is a product or service (CRM will likely be more important in service industries which large subscriber bases). And, unfortunately, I am willing to bet that most small brands, particularly DTC, have an investment profile that looks nothing like my recommendation. Ang and Buttle found that only 47% of companies had developed specific customer acquisition plans, and, even though the presence of a customer acquisition budget was the best predictor of acquisition rates that exceeded expectations, only 34% of companies had such a budget. I doubt it is much different today.
Don't drink the Kool-Aid, balance your marketing investment
Blindly following the advice of companies that sell solutions designed to improve customer retention is likely to lead to stagnation unless you balance your investment in those services with a focused campaign designed to increase acquisitions. It is highly unlikely that conversions due to recommendation will outweigh customers lost to churn.
Don't drink the Kool-Aid, balance your marketing investment
Blindly following the advice of companies that sell solutions designed to improve customer retention is likely to lead to stagnation unless you balance your investment in those services with a focused campaign designed to increase acquisitions. It is highly unlikely that conversions due to recommendation will outweigh customers lost to churn.
However, the findings reported above do not support a single-minded drive for acquisition, because there is a flywheel effect at work. As acquisition grows the customer base, the leverage offered by raising the retention rate increases, and when that happens subsequent acquisitions are more likely to be incremental to the customer base, not replacements. And yes, there might be a nice little boost from recommendations if your product is obviously better than its competition, but think of it as a bonus, not the primary growth mechanism.
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