The fallacy of the hunt for new customers

17 Feb

Finding new customers is something everybody wants, right? New customers means more business and that is a good thing. While in essence this is true, there is a deep risk embedded in going after new customers. The risk, a very obvious one, is that you forget to pay attention to your existing customers.

It’s  a trap every company can fall into. Obviously, when you are a startup you need to find new customers more than anything else. But even in a startup the risk is always there that you are ignoring your existing customers. This maybe even more an issue because, as a startup, your existing customers need to be kept even closer abreast because they believed in your new company and took a risk themselves. In a startup the impact of neglecting your first customers can put you out of business very quickly. In a larger company, or one that has been around longer, the impact may take some more time but the risk of neglecting customers is inherently higher here than in a startup because customers tend to become anonymous revenue streams that just seem to happen. So why focus on them, let’s go find us some new customers!

Just turn on the television or browse the internet and you will see what I mean. Companies offering all kinds of products or discounts in the hunt for you as a new customer. These offers and discounts can be split into two types of purchases;

  1. Transactional purchases: you are buying a new TV and the retailer is offering you an Xbox with it for free in order to win your business
  2. Subscription purchases: you are buying an insurance/mortgage and so on or Phone/Internet/TV/ etc. subscription and the company offering the service will offer you a discount and/or a free product with it.

Number one is a relatively harmless phenomenon because of the transactional nature. There is no after-effect as there will be no direct follow up. You may return to this retailer in the future but that is not relevant for now.  Number two is  the risky piece. Essentially, you are entering a longer term relationship with the company offering you the discount and/or free product for the service you are subscribing to. In other words, after you subscribe to the service you are turning into an anonymous revenue stream. Every month/quarter or year, money flows from you to the company. Just like that.

For a while, things are just fine. You have had your welcome gift and slowly you are fading to the background from the company perspective.  Once they have you established as a regular revenue stream – they will want to move on to find more like you. So, the company throws out more free products and discounts to attract new customers and you will start to pay the premium. tumblr_lwerjg7Cg91qfzjwwo1_500_jpg(imagenJPEG,467×700píxeles)After a while you’ll feel you may be paying too much as you will see the free products and discounts from competitors of the company you are purchasing a service from. And so you jump from one company to another. And the story begins again. If companies and customers keep doing this dance and switching partners it will result in focus on the lowest price and biggest give-away only and all meaningful connections between customers and companies will have been annihilated.

All this is awfully inefficient and only drives short term satisfaction for the customer and short term revenue predictability for the company. Why does this happen? In essence, because companies know customers are lazy. We may have better things to do than check whether we are getting enough value out of our subscription. So we leave it. And companies make money like this. Not being taken advantage of like this takes time and effort from customers.

One example I had myself was with American Express. I had a credit card (so I had the kind of service subscription as described above) and did not have to pay for this in the first year (the discount). After that I paid the premium price. A couple of years later I realized I did not need the credit card since I had another one and I called them to cancel. Then something funny happened. The customer service rep told me: ‘oh, so you want to cancel the credit card? Why don’t I just give it to you for free for the next year?’. Basically, I became a new customer to them. They offered me the disc0unt I had in the first year. Obviously, they would hope I would forget about it again and start paying the premium again the next year. The bad thing about this is that if I would not have called to cancel my credit card nothing would have happened. Nobody inside that company would have called me and offered me to cancel my subscription fee for a year. So I told the customer service rep that I was insulted by the offer and cancelled my credit card. I felt I was being treated like crap and it seriously impacted my view of American Express. For years now, I keep getting mail and direct marketing emails to sign me up as a customer again. Offering free products and discounts….. And there is no way I will sign up with them. I think there is something fundamentally wrong about this picture.

Why not do this differently? Why not invest in existing customers more and keep their long term business? The concepts of Customer Lifetime Value and Customer Attrition are well understood and everyone seems to agree with the theory that it is harder to get new customers than to make money from existing ones.

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However, this seems to be one of these things that companies talk about but don’t really embed in how they do business. Because they are too busy getting new customers while their existing customers are too lazy to run out the back door. But more and more are starting to find their way out. Some will say this mobility is a sign of healthy competition and I say they are wrong. I say it is much more healthy that customers stay with companies longer without being exploited.

In this time of crisis and downturn I think it is good for companies to really embrace customer lifetime value. The short term focus that has led to the current crisis has all cost us dearly. It is time to invest in long term. To invest in loyalty. The end result will be better for customers and companies.

A good example of how small things can increase loyalty is Nespresso. As you may well know, they track all coffee purchases through a membership card. Because of this, they know exactly when and how much coffee I bought, or the last time I used a cleaning pack for the coffee machine. This means they know what the right moments are to show me that they care about me as a customer. So they call me proactively to tell me that my coffee machine may be up for another cleaning pack. Or they give me a box of cookies, completely unannounced, as a token of gratitude for my loyalty to them. Nice work. These are great examples of how to retain customers. And as a result, I am spreading the word about how much I like Nespresso and thus helping them find customers for them.

Another company that seems to have gotten the point is Obvion in the Netherlands (you can auto-translate the page if you need). They provide mortgages and do so with a focus on customer loyalty and long term relationships. Their setup is based on certain principles like Interest rates should not be set to lure in new customers’. And also existing customers are more valuable to us than new customers’. They actually call this out.

Founded in 2002 and bought by Rabobank in 2012, they have worked their way, slowly but surely, to servicing 5% of all mortgages in the Netherlands. Ha! You may say – so they are focused on new customers! Well, yes and no. They get new customers because they are not fixated on getting new customers. This may sound like a paradox but the incoming new customers are attracted by the fact that they go for a long term approach. And thus, the back door stays shut, resulting in healthy long term growth. For Obvion and its customers.

I’d like to see more of that.

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