The optimal ratio of acquisition and retention costs

Author: Pfeifer, Phillip E

Source: Journal of Targeting, Measurement and Analysis for Marketing, Volume 13, Number 2, 1 January 2005 , pp. 179-188(10)

Publisher: Palgrave Macmillan

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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.Journal of Targeting, Measurement and Analysis for Marketing (2005) 13, 179-188; doi:10.1057/palgrave.jt.5740142

Document Type: Research article

DOI: http://dx.doi.org/10.1057/palgrave.jt.5740142

Publication date: 2005-01-01