Acquisition or Retention? That is the question.
Should you put more money or less money in retention next year? A recent
survey claims that this year more companies have spent additional money in
the retention arena – a swing from previous years when acquisition spending
The problem faced by many marketing managers is that,
traditionally, marketing budgets are based on a percentage of last year's
revenues or budget, which ignores the relationship between marketing
spending to profitability effectiveness and has a short-term focus leading
to limited success. While marketing and database executives may
concentrate on optimizing databases and lists, few, if any, optimize the
total marketing budget.
Yet optimizing the marketing budget can be a valuable
strategic tool that will improve long-term success. With less than a dozen
statistics, the optimal marketing budget can be determined through computer
modeling. Once the total budget is calculated, the division between
acquisition and retention is optimized.
While executives guess and try to figure out the best
marketing budget and how to split it between acquisition and retention,
computer models are pointing the way. There are several basic principles
that provide the foundation for optimizing the marketing budget: diminishing
return market response curve, customer lifetime value and customer equity.
The diminishing return market response curve is based
on a commonly accepted principle that no matter how much money is spent, not
every prospect will be converted to a customer. As spending reaches this
“ceiling rate,” the next dollar spent will have less impact than the last
dollar spent. Using historical data, executives can calculate their market
Customer lifetime value is the net present value of a
today’s customer’s current and future contributions to profit. Customer
equity is the net present value of contribution of all current and future
While certain executives are still calculating return
on investment (ROI) for marketing spend, others are not focusing on campaign
ROI, but rather on customer equity. For example, you offer a promotion on a
product and you generate two times the amount spent, which appears to have a
very positive ROI. However, let’s say that not one of those customers buys
again. You have not retained one customer for a second purchase. Your
customer lifetime value is low, there is little contribution to your
customer equity and your retention rate is in the pits with this group of
On the other hand, you offer another promotion in which
you only break-even. However, every one of those customers orders again and
again. And these customers continue to order for years to come. The
result: your retention rate is high, your customer lifetime value increases
and your customer equity is high as well. However, your ROI is very low.
Which is the better scenario? Most executives
probably would opt for the high ROI; however, that metric is not optimal.
The better metric is to optimize customer equity, which will increase
long-term revenues and profits. The short-term view might be to focus on
immediate ROI; however, the long-term value of the firm is diminished.
Optimizing on customer equity will dictate how much
budget should be spent on acquisition compared to the amount that should be
spent on retention. This figure can be statistically calculated, rather
than using a guestimate. The shift of budgets between acquisition and
retention should not be the result of the economy or the campaign ROI or
popular trends. The shift should occur when maximum customer equity can be
achieved by reallocating the budget.
Prior to computer modeling, it would be nearly
impossible to calculate the optimal marketing budget and the optimal amount
for acquisition and for retention. However, using the three basic
principles of diminishing return market response curve, customer lifetime
value and customer equity as the foundation for calculation, the marketing
budget with its acquisition and retention allocations can be optimized.
After the acquisition and retention budgets are
optimized, the cross-sell, segment and channel marketing budgets can be
optimized, as well. Requiring additional inputs and using more
sophisticated concepts, these optimizations can help firms maximize their
No longer are marketing budgets left in the realm of
guesswork or percentages of dollar figures or target amounts. Marketing
budgets can and should be optimized to increase revenues and profits, as
well as customer equity. For executives focused on long-term value,
customer equity optimized marketing budget allocations are a must.
Barbara Lewis MBA and Dan Otto MBA are partners in
MarQuant Analytics, which develops analytical tools to optimize marketing
performance. They can be reached through their web site at