The optimal ratio of acquisition and retention costs

Abstract

It is often said that the cost to acquire a new customer is five times (5X) the cost of retaining an existing one, and therefore firms should spend more money on customer retention. The purpose of this paper is explore whether, in fact, a firm should spend more money on customer retention if its cost to acquire a new customer is 5X the cost of retaining an existing one. Under the assumptions of the Blattberg and Deighton model, the answer depends on whether the costs in question are average or marginal. If the 5X ratio refers to average costs, then a 5X ratio does not necessarily imply the firm should spend more on retention. If the 5X ratio refers to marginal costs, the firm should either spend more on retention, less on acquisition or both. The optimality conditions of the Blattberg and Deighton model require that the marginal cost to acquire a customer equal the marginal cost to retain a customer and that both will equal the expected customer lifetime value. ABSTRACT FROM AUTHOR Copyright of Journal of Targeting, Measurement & Analysis for Marketing is the property of Palgrave Macmillan Ltd. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts)