Wednesday, August 1, 2007

Cost of Retention Vs cost of Acquisition

Ron Shevlin has an interesting post on the same topic. He has attacked the myth these in and around these topics. I am excited about the post and I want to add something more to it.

Cost of Acquisition and Cost of Retention are two abstract concepts. They can neither be calculated nor be compared against each other. One may use or disuse a medium of advertising or a particular service offering in a fair way but varying it for retention or aquisiting prospective can be done only in an unfair way. Let me explain it with an example.

Suppose ICICI bank offers Gold Credit Card with certain benefits. (list taken just as an example)

1. No membership fee.
2. Cash withdrawal upto the overall card usage limit.
3. Balance transfer interest free for upto 50 days.
4. One reward point for each Rs. 50 spent from the card.
5. Interest free shopping for upto 50 days.
6. Various holiday packages and gifts for different reward points.

ICICI uses various mode of advertising like TV, Radio, Internet, Daily New paper, Business Magazine and display boards.

Now there are two catagories of information here. One the card attributes and other the medium which reaches customer. These both are primarily targetted for acquisition and not retention, but in actual is it true?

Secondly, ICICI has one of the best customer care service in India and an excellent online terminal (amonst the best in the world). This is their expenditure on retention, fair enough?

I challenge both myths. These both are complimentary. There can hardly be any expenditure that can be fully retention focussed, even if something is done for that cause it compliments the acquisition. Word of mouth and customer feedback of product and aftersales service are the two major sales drivers. And this comes from the combination of both.

Seperate acquisition and retention cost can be incurred in a scenerio when a customer is about to migrate and bank gives some benefit to him to retain. Or a customer asks for an extra benefit while taking the card. I would call these types of extra efforts unfair and may be they are not practised by bigger companies. Business should run in values and not in favor. And this is paid in the medium to long run for sure.

Now, let me come to the point of cost of acquisition and retention. The acquisition cost can be the marketing cost and the retention cost can be the operational costs. If we compare these two, the difference depends highly on company structure and the portfolio type. Any component can be high.

The surprising thing is people tend to attach loss given default to the acquisition cost and make it high for which I see no sense.

I agree with Ron on all his points and would like to add that we would better call Marketing cost, operations cost, loss given default, product X to Y cross-sell cost etc. and compare these cost across various market segments like existing customer vs new customers, old age group vs young age group, New York vs Washington etc. Here we can say marketing cost in Washington for product A for industry D is twice than that of New York, where A and D are variables. The variables are important and mention of specific cost also is.

One thing can be done. If someone prefer to call acquisition cost and retention cost, he needs to give his definition of these costs, industry vertical he is talking about and also the portfolio within the vertical.

I am done with all these. What do you think? Please share your feedback in comments.

1 comment:

Bhavin said...

hi, how do you apply this while making a business plan for a web portal. where i am spending say rs100 every month to get 10 consumers churn rate say 20% total retain 8 which is carry forwarded to next month
next month im spending rs100 again to get 10 customer
so will my extra cost of retaining 8 not be the marketing cost?

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