Premiums

If you’re willing to pay them, you should know what you’re getting

There’s a claim in marketing that sits somewhere between cliche and truism: It’s cheaper to retain an existing customer than it is to acquire a new one.

While this may be intuitively true, it’s neither interesting or helpful.

If you build your business with LTV models (of which we can debate the merits), a new customer should cost more, because a new customer has the potential to be worth more in the future. An existing customer has less potential future revenue to give your brand, because you’ve already realized a portion of that customer’s lifetime value.

Through this lens, retention has diminishing returns. Through this lens, it makes sense that a brand’s investment allocations are more heavily weighted toward acquisition.

We’d argue this is an improper view.

While acquisition costs are prepaying a premium to access a potential, that potential can’t be achieved without proper investment in retention.

This is, though, hard for many brands to accept. Part of that is attributable to how we measure acquisition and retention.

While acquisition may be more expensive, it’s often easier to track. The feedback loop on acquisition levers is nearly immediate in DTC, which means paying a premium isn’t all that challenging of a decision to make.

If things aren’t going well, there are a series of questions that get asked: Are we attracting the right traffic? Are we making the right offer? Are we timing those offers correctly? Are we weighting our channels appropriately?

When things are going well, the questions simplify to one, overarching question: If we do more of X, will it deliver more customers?

Retention, on the other hand, is far more tricky to understand.

When things aren’t going well, the questions overlap with acquisition: Are we attracting the right traffic? Are we making the right offer? Are we timing those offers correctly? Are we weighting our channels appropriately?

But when things are going well, those very same questions about offers, timing, channels, etc. all end up being questioned again. In this case, though, the question is far more difficult to answer: Wouldn’t the customer have just bought again, anyway?

In many ways, this is one of the reasons brands outsourcing the bulk of their retention efforts to subscription. Subscription is measurable (monthly churn is easily monitored), each new subscriber has the potential to be one of the few who stick around for six months or more, and—hey, let’s be honest with ourselves here—investors like it.

It feels worth the premium.

Further, because subscription is often tied to acquisition, subscription skips the cannabilization question.

Still, we’d argue it’s worth asking.

Here’s why: If you subscribe to an LTV model, subscription more often than not accelerates the diminishing returns of an existing customer.

When factoring in churn rates, less new product trials, and lower average order values, aggressive subscription acquisition actually reduces the future value of a customer faster.

For the majority of customers, then, subscription takes more opportunities off the table than it creates.

The trick, then, is to start asking questions about how much that’s happening in your business and with which customers it’s happening.

While you may choose to pay the premium for the potential subscription creates, it’s better to pay the premium when you have a feedback loop that’s more in line with acquisition. You can get that with the right questions.