It is More Cost-Effective to Keep Existing Customers Than to Acquire Them Anew. Is it?

There is a common trope in academic and advisory circles, before you ask why, ask if. I was reminded of that conventional wisdom when flooded with a series of questions recently, about how and why it was better, than seeking to customers, to keep existing customers happy.

Before you ask why, ask if.

In early startups, customers can be dangerous.

Not so sure? Here’s just a smattering of perspective…

• The secret to how many customers you need to have to get funded? Zero.
• Nagesh Belludi’s great look at Herb Kelleher’s approach to great customer service; by saying goodbye to the bad customers.
• Baishali Mukherjee’s exploration with Entrepreneur, 5 Reasons Why the Customer is Not Always Right.
• Alexander Kjerulf’s Top 5 Reasons Why ‘The Customer Is Always Right’ Is Wrong.
• How are startups getting funded without revenue??

This common business wisdom is dangerously misleading to founders. The customer is often wrong. The customer usually has no idea what you’re doing. And the cost of keeping a bad customer happy, as a startup, can be the end of what you’re doing.

Most businesses start out acquiring familiar customers, favoring their needs, and even closing business at massive discounts (even free), to get early traction.

This is the right thing to do but these are often bad customers.

They become a burden. They mislead. It’s easy to think what they want is evidence of what all want, neglecting that your relationship with them is unusual and therefore influenced. Friendly customers often make more demands of you, they’re comfortable doing so; granted often too, they’re less inclined to ask more of you because they know you and the relationship.

Point being, don’t presume it’s more cost effective to keep existing customers.

Existing customers demanding services or features you don’t intend to, or can’t, provide, aren’t ideal customers.

All that said, having found your ideal customer, they’re more cost effective for a few reasons:

• You have costs associated with acquiring new customers. You no longer have those costs.
• Delighted existing customers bring new customers, at no cost. That increases their value further, reduces the cost of acquiring new, and as such, can be more cost effective overall. Granted, this depends on your being able to delight as cost effectively or better than acquiring new. Many businesses struggle to do this; most startups can’t.
• Switching costs… once acquired, customers prefer not to leave unless you’re falling short of something they *need.* You may not be the best solution or provider available but once we’re in business, I’m inclined to only leave IF I need something you’re not providing. Customers tend not to switch because of *wants.* This is referred to as the switching cost; their cost of switching. As long as the value your provide exceeds their switching cost, you retain them… and appreciate that since acquiring new often requires accommodating both needs and wants, your cost to overcome their switching cost is LOWER than your cost of overcoming their needs AND wants.

It is usually more cost effective to retain existing customers. Unless they’re customers less than ideal to your business.