It costs 6-7 times more to acquire new customers over retaining existing ones …

No my account was not hacked (not yet, at least). I deliberately let this commonly repeated statement be the title without qualifying it.  Of course statements like these, (this particular one made famous by Loyalty Effect) cannot stand by themselves regardless of how popular the Guru who said this is.

Let us look at this closely

  1. Let us assume this statement is true. So shall we fire our sales team, shut down all marketing spend, stop product innovations and get rid of business development?  After all this statement indicates new customers are far more expensive. Then why bother?
  2. Let us take it to the extreme. Shall we stop after the first customer?
  3. Extending this even further, say you acquired the first customer at a cost of $1 and second at the cost of $7. Then by this logic does it cost $49, $343 etc to acquire third and fourth customer?
  4. What if you are essentially in a transactional business where you really need new customers every day because the current ones won’t be there tomorrow?
  5. How do you know it is 6-7 times or only 6-7 times? What are the data and metrics used? Was it based on experimental study?
  6. How generally applicable is this to your businesses – small and large, early stage vs. mature? Is the cost the same to all businesses?
  7. What about profits from new customers, is that 6-7 times as well?

You can see how ridiculous the statement sounds now. Here is a further breakdown of problem with this retention vs. acquisition costs statement.

First it is framed around cost and does not base it on marginal benefit and opportunity cost. I also doubt that the proponents know how cost accounting is done and most likely are allocating all kinds of fixed cost share to new customers. You need to have a costing system that can correctly capture only truly incremental costs for both acquiring and retaining. Simply distributing all costs to all customers won’t cut it.

Second it suffers from sunk cost bias. The fact that you spent some money to acquire a customer in the past does not matter in the decision to do everything to retain them. If you cannot recover the acquisition cost it is sunk. You should only look at future unearned marginal profit from each customer – existing or new. At decision time of spending capital on retention vs. acquisition you need to compute the opportunity cost and truly incremental profit from each path, not encumbered by the money you have already spent on existing customers.

Third, if the cost of acquisition is indeed high don’t you think you have a marketing problem? Is it likely that you are targeting wrong customers in wrong places with wrong product, versions, messaging and prices and hence wrong low value customers are self-selecting themselves to your service? Don’t you want to spend your resources fixing this strategic problem vs. worrying about retention?

Lastly the Innovator’s Dilemma.  What if the current customers are NOT the representation of future?  By choosing to focus your resources on them instead of new customers do you lose sight of new market opportunities, how the customer needs are evolving and how their choices for the job to be done are impacted by market trends and innovations?

Does the retention vs. acquisition pronouncement sound as profound as it did before?  I hope not.

How do you make business decisions?

What is worse than a meaningless Social Media metric?

The answer is, meaningless social media metric presented in the form of a infographic. And it comes to us via MediaBistro from, not Social Media Gurus, no not witch doctors, and if you guessed Social Media Scientist that would be a good guess  but not correct, because it comes from SocialBakers.

If you have not figured out the flaw in the metric (shown left) or you are one of those 311 people who tweeted the link, I will try to point out the problems with bakers’ recipe.

The bakers give us a simplistic formula for what they arbitrarily define as Average Engagement Rate. This is not a model derived based on theory, data collection and experimentation but simply a formula thrown together with a mix of arithmetic operations. Disregard for a minute how it is computed (which is beyond ridiculous) and ask the following questions:

  1. What does this really mean in the context of your marketing spend?
  2. Why is this important?
  3. What is the marginal benefit from a change in this metric?
  4. More broadly, what does the curve look like ( Revenue = f(Average Engagement Rate))
  5. What is the cost of moving the AER, if at all one could?
  6. Are the AERs of Facebook, twitter etc additive?

Well keep asking as you are not going to find any such answers from the eye candy infographic.

Now to the computation.

First the units of this metric. It is stated as a percentage. And percentages are? Dimension less. The numerator at best is a dimensionless ratio and at worse has a complicated unit of Interaction/Activity. The denominator has units of number of people – fans, followers etc.  In other words the ratio is not a dimensionless quantity because you are dividing  a quantity that is NOT number of people by a quantity that is number of people. So how can anyone simply multiply this number by 100 to state this as a percentage? Like Baker’s Dozen, they should call this Baker’s percentage.

Second the ratio is specifically designed to show as low a value as possible and hence the possibility for improvement and potential sales. The numerator is divided by total number of followers (or fans) a brand has. So larger the number of followers, smaller the magical AER. The thermometer in the infographic tells us the maximum any brand currently has is 0.7%. This also explains why they chose to multiply by 100 and call it a percentage. Otherwise, 0.007 would look too awful for anyone to pay attention.

Third, this is indeed genius move in targeting, after all those brands with millions of followers likely have higher marketing spend and hence are likely to divert some of it to improve their measly AER.

There you have it, yet another pointless and wrong Social Media engagement metric, presented as a stunning infographic that not surprisingly found many takers.

Final note, if you are tempted by any of the social media engagement metrics that talk about anything except dollar values you can cure that temptation by reading Ron Shevlin‘s book Snarketing 2.0.

One right price is better than three wrong prices: SurveyGizmo Simplifies Pricing

This post is my interview with CEO of SurveyGizmo, Christian Vanek on their pricing strategy.

A few weeks back I wrote about the continuing changes to SurveyGizmo pricing. It turned out they have been A/B testing their pricing for a while and I had slipped through the crack, finding both the offers. Last week I sat down (over phone) with SurveyGizmo CEO, Christian Vanek and their web marketing lead Kipp Chambers for a conversation on their new pricing.  Christian happily shared with me  the genesis and details of this simplified pricing.

The details are sure to add new dimension to the thinking of most startups that see pricing as simple freemium model or do it as tactical afterthought. Their analytical process, understanding of customer mix and their willingness to go against the conventional wisdom are exceptional traits that need to be commended.

Pricing is lot more than an eye-candy pricing page!

What was their pricing before the change?

Take a look at their previous pricing page. Their pricing options and the pricing page design look not much different from numerous other webapps out there. In fact there are wordpress templates available to show this classic three column design with the “suggested version” highlighted.

One glaring difference is, while most webapps include their free version as one of the three presented, SurveyGizmo showed their free version as a footnote.
Otherwise this is nothing more than a  instance of what Hal Varian described as Goldilocks pricing.

What is the change?

Gone are the multiple editions and the pricing page eye candy to nudge customers to a specific edition. There is just one edition with all the features including the advanced features that used to be available only in the higher priced versions. Most importantly, they used to limit the number of responses per month and now they eliminated that limit as well.

In the past they had a cheaper $19 plan even though it was not prominently featured in the pricing page. Now that is gone along with the $159 Enterprise Plan that was prominently featured and highlighted in the middle of the pricing page.

After this pruning, all is left is just one version – no name  for it (like the new iPad)- offered at $50 for the first user and a flat fee of $20 per additional user.
Another point to note is there is no non-linear pricing built into the price list. Whether it is 100 additional user of 1 additional user, the price is the same, $20 per additional user.

To discuss this change, the drivers behind it and how they arrived at it, I talked to SurveyGizmo’s Christian Vanek, their CEO, and Kipp Chambers. Here is what they had to say.

Why are you open to sharing this information? Isn’t pricing strategy meant to add to your competitive advantage?

“We have a company policy of no secrets”, said Vanek. He stayed true to this policy even when I later asked him about SurveyGizmo’s future product roadmap.  “Regarding SurveyGizmo’s pricing there is nothing really to be protective about. As soon as  the pricing page went up our competitors likely saw it. Or they will know when your article goes up. Even before this, people were copying the pricing plans and the pricing page down to the name of our plans and their feature set. Once they had comparable plans they were competing on price”. Vanek adds he could either spend all his energy protecting ideas or spend his energy on better execution and coming up with newer ideas. The choice is clear to him.

What are the drivers for this major pricing change?

We had our $19 plan, the $49 plan and the $159 plan. We found several key things from our analysis of our customers.

  1. Very people were opting for the $19 plan. Some of those who chose it for price realized they did not have all the features they needed and were calling us about that. In most cases we ended up enabling the additional features for them. We are not going to tell our customer, ‘you need to pay additional just for that feature’. Some upgraded to higher priced plan just for a brief period to use the advanced features and downgraded right away when their job was done.
  2. Those who picked the $159 plan were using only 10% of all possible features they get with it. We were taking lot more money from our customers who were not taking full advantage of what they were paying for.
  3. What if a customer wants only one of the feature offered in higher priced version and that is the only one they want? Why should they pay more just for that? We tried for a time some kind of a la carte pricing but it was not the best of experience for our customers.
  4. Surprisingly, customer satisfaction was low among those who chose the lowest priced plan and high among those who chose the higher priced plans. You could argue this is because their purchasing decision itself may have something to do with satisfaction rating.

Considering all these we thought, there is really only plan that served customer needs and presenting three options is likely aggravating customer choice by adding to their cognitive costs. So we decided to test this hypothesis.

This is so different from what every other webapp startup is doing.

Presenting  three plans, any three plans, at different price points and hoping customer will pick the one they want is shotgun approach to customer segmentation. It came apparent to us to retire the shotgun and get sniper”. (Vanek calls this his Call of Duty metaphor, “almost any business lesson can be learned from Call of Duty”, and adds The Lord of The Rings after my prompting*. )

“I think we are seeing now the end of the freemium model, signing up for free and then trying to up-sell. Our value is in providing both a great product and great service to go with it to customers who need and value our product”.

So you are giving up those customers who are willing to pay $20?

These customers were never ours to begin with. Customers who want free survey or want to pay $10 or $20 a month have always been SurveyMonkey’s customers. We are okay with that. If a customer is happy with a competitor we are okay with that. These were the customers who anyway ended up getting the features from higher priced plan because we did not want to say to them, that is extra.

What about profits lost by eliminating $159 plan?

“This was our fear as well and we discussed this internally. It would seem silly to give up on the higher priced plan. In essence you have to bring in 3 new customers at $50 level for every $159 customer we are giving up by eliminating this plan. We asked internally, can we do this? Happy to say we are doing very well after we moved to single price plan.”

“When we discuss our features with customers showing them how we compare feature for feature with competitors and then show them the price, they ask, ‘okay, why such a low price? What is the catch?’. There is no catch. We don’t have to overcharge for the product.”

About the change process?

“We did lots of A/B testing. We found that customer decision was easier with just one pricing option. In fact when we presented the simplified plan in split testing  that charged $50 for first user and  $20 for each additional user we found customers were signing up more than one user than they did with three pricing options.  We are serving marketing research field, we should be doing our homework before such change. Only after a lengthy testing process and data analysis we decided to go with this change.”

It is acceptable for a pricing geek like myself to say cognitive cost, how is that you are thinking about it?

For this Vanek seems to believe this is common sense. A customer who has to weigh multiple plans, the features it has and the price points suffers significant cognitive cost. “We work with lots of researchers who work on cognitive research and we understand the cost to customer from choice.”

Final words?

By eliminating the three plans and going to a single plan we have narrowed the field. We are targeting only those customers who want and value the advanced features.


*Talking of The Lord of The Rings, Vanek says his super power is he has the voice of Saruman.

What would you do? A Business Case Study

Your product takes 8 years to build. You do have your pipeline full so you produce units to sell every year. But it takes 8 years from the very first step to shipping it. You are innovating, introducing changes and features that fit the times and customer segments. But any innovation or changes you want to introduce will take 8 years to hit the market.

Your customers are changing and the macroeconomy has its effect on customer buying behavior. The core customer group you used to sell has no need for your product. The newer crop is not interested because their taste, needs, lifestyle, business process etc are changing. In fact, over the past 30 years your addressable market reduced from 40% of  total market to just 23%. Your market share comes from this addressable market, you are not the only player in the same product category and there is excess supply as well.

Those customers who continue to buy your product prefer the cheaper version of the product,  the version that isn’t as profitable to you as your premium version.

You are seeing competition from alternatives. While these are priced at 75% premium over your product, these last 6 years while your product lasts just 1 year.

Your product is not without its value. Most of the value comes from non-utilitarian reasons while the competition is mainly competing on convenience. You have not done much in communicating this value differentiation to your customers.

Competition has different and more elaborate Go-To-Marketing strategy. They are available in more places while your channels are disjointed and limited.

Competition also has advantages on marketing while you hardly have any marketing.

How would you fix this? Where would you start first?

Fix marketing (messaging etc)?
Fix Go-To-Marketing along with Segmentation strategy?
Fix Product Strategy?
Fix Product Development?
Fix Pricing?
Or instead of fixing, just fold?

Think this is an unrealistic case? See here.

Gurus Selling Old Knowledge Under New Brands

This is a long quote from a 1967 article published in Journal of Industrial Economics. This paper was written as a response to Galbraith’s theory of Consumer Sovereignty.

The sensible manufacturer works with the environment, not against it. He tries to satisfy desires, latent and patent, the consumer already has; it is much cheaper than creating new ones.

First, he tries to identify these desires. To do this he now has all the aids of marketing research. If he only researches into which detergent the consumer considers to wash cleanest, he may miss the fact that the consumer now also wants her detergent to be pleasantly perfumed.

That is why so many of the new products even of the biggest firms fail miserably in test market. It is rarely because they are poor products technically. It is because there is something in their mix of qualities that fails to appeal to the consumer.

Once the manufacturer has found out what he thinks the public wants, he has to embody it in a product.

When the manufacturer does find an answer at a reasonable price, he still has to sell it to the public. He may think the answer will work; he may feel the price to be reasonable. He does not know whether the public will see it as he does.

If you go further back you most likely will find yet another article saying the same thing in more arcane language.

Fast forward to present day and you have exactly the same concepts stated above packaged in so many different ways. Every Guru has a name for it, they want us to believe none of the existing methods work. They brand these as their own, e.g., “Trade-off“, “Customer Development”, “Freemium”, etc.

Unfortunately, when the audience suspends its skepticism or if the Gurus are popular enough, their re-packaged ideas take roots as original thesis. Worse, the original ideas these new brands represent are cast aside as anachronisms.

There really is nothing new in marketing. Only new catch-phrases that fit the language of the time.

Segmentation – The Taboo Word

Customers, at least those who take to twitter, do not like to think of themselves as one of many in a segment. Definitely they do not want to be “targeted”. Some even want to believe that they are a segment of one, with unique preferences.

Big established companies (other than CPG/FMCG) do not like it as well. There are no issues in accepting the simple static segmentation – Geography based, customer size based, or industry type based (NACIS).  Even then, they do not use the word segmentation to describe the classification.   Anything more, like psychographic or need-based segmentation is lost on them.

Start-ups see segmentation as theory and not as something one can use the next day to move things in their business. It helps their case to believe that their product is relevant to everyone out there and creating segments seem to cut that addressable market to a fraction. They insist on using “Product-Market fit” over  “Segment – Version Fit“.

Evidence based marketing managers, pushing for segmentation are not helping their own case with how they communicate segmentation.  The fact that the method for finding customer segments rely on advanced statistical methods do not help.

For sure they do not want to rub it in on customers face that they fit a psychographic profile. Second, they should understand the mindset of the senior executives in big companies and that of the founders at startup before trying to push for segmentation.

Senior executives or startup founders, have formed an intuitive feel, right or wrong,  for what their target segment is. They may not use the word segmentation and they may not define it narrowly but it is there. So when a evidence based marketer starts rattling about the use of statistical methods to define segments and segment sizes, they risk being treated as an academic spewing “tons of theories that are not worth an ounce of action”.

The reality is, segmentation is not an academic exercise. Big or  small, companies cannot afford to cast it aside (and yes, even startups need to worry about segmentation).

How does one evangelize segmentation? Be it in a big corporation or a small startup, here is a three step process

  1. Start with the goal and not segmentation for its own sake. What is the key business challenge the decision maker is trying to solve? What do they stand to gain by finding the segmentation? Do not bother with the how until much later. Definitely do not try to highlight your statistical expertise before you sell segmentation as an absolute necessity.
  2. Position it as resource allocation problem. No business can be all things to all people. We all have only limited resources. Position segmentation exercise as the need to find the best way to allocate limited resources.
  3. Present a template of what the results of segmentation will be. Do a mock-up with plausible segment variables. Present customer profiles as defined by these and present possible segment sizes. Talk about how the business can now, “put all its wood behind an arrow”, with an attractive segment.
Once you sell the need, the how is under your control and expertise.
Startup founders, want to talk about segmentation for your start-up?