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What matters more: customer acquisition or customer loyalty?
If you’ve ever browsed the business section of a bookstore, you know what the gurus think — customer loyalty is tops. Most of the (thousands of) books about customer loyalty rehash the same two arguments:
Existing customers spend more than new customers.
It’s cheaper to keep an existing customer than to acquire a new customer.
Are both of those statements true?
Absolutely, but…they oversimplify some important points.
Without question, existing customers tend to spend more money than new customers. Plus, existing customers are definitely more loyal than new customers. However — and this is the idea that’s often overlooked — existing customers will (1) spend more, and (2) demonstrate greater loyalty regardless of your marketing activity. Instead of wondering, “which customers are most valuable,” here’s the question we should really be asking — “which marketing activities increase total customer value the most?”
Customer acquisition marketing, by definition, involves the acquiring of customers that your business would not otherwise interact with. Customer loyalty marketing, again by definition, attempts to motivate your existing customers to spend more (either right away, or over time by reducing churn).
If your customer acquisition strategies are not working, the signs are obvious — you stop attracting new customers. If, on the other hand, your customer loyalty marketing is flawed, the results are much less apparent — those “old” customers will continue to be your most loyal and most valuable customers. In order to truly understand the effectiveness of your marketing plans, you need to examine changes to the spend and loyalty for each customer category.
And therein lies the crux.
I think that it’s very difficult to improve customer loyalty through marketing activities. Loyalty is driven by many things, but a surprising amount of customer behavior is dictated by factors like “convenience” (i.e., how close is the grocery store to the customer’s house) and “meeting needs” (i.e., is the airline flying to the required destination at the required date and time?). No level of discount will entice me to drive two hours to a Whole Foods Market. Likewise, no amount of VIP pampering will incentivize me to fly with Delta if the airline doesn’t offer any flights to my destination.
I know what you’re probably thinking — “shouldn’t that pampering help keep me with Delta on the margin?”
The simple answer: absolutely.
The more complete answer: there is an inherent challenge with loyalty marketing — you need to spend money pampering ALL of your old/loyal customers, just to influence a handful of those customers to stick around on the margin.
What about improving your company's level of “convenience” and “meeting needs”? For example, suppose an out-of-the-way grocery store launched a delivery service. Or imagine that an airline determined which routes would benefit customers. Could those ideas drive loyalty?
Yes, of course. Moreover, strategies to enhance “convenience” and “meeting needs” would ALSO drive customer acquisition.
The bottom line: the best way to gain more loyal customers is by attracting as many customers as you can, period. Some of your new customers will end up becoming loyal enthusiasts of your brand. Customer heterogeneity is underrated by most marketers — to their detriment.
How Do You Attract More Customers?
“How do you attract more customers?” is a question on every marketer’s mind. For a few years, there was a pretty popular method: spend money on Facebook and Google. But as I shared in a previous post, that strategy is getting more and more difficult, because customer acquisition costs have increased more than 20% in the last two years.
An alternative to paid digital spend is something as traditional as "new product innovation."
When you think “new product innovation,” your brain probably conjures images of new smartphones, not pizzas. But product innovation is not limited to new technology companies. Let’s use the fast food industry to reflect on the impact of innovation.
On October 25, Mark Dent wrote an excellent piece on the history of Pizza Hut (I recommend reading the whole thing). Here is Dent describing Pizza Hut's product innovation in the 1990s:
The idea for pizza reinvention came from David Novak, who was hired in the 1980s as the head of marketing to block the growth of Domino’s and Little Caesars.
Novak reasoned that new products drove top-line sales, that they enticed more people to purchase the pizza and would keep many of them coming back. …
His edict was that Pizza Hut needed to release a new invention approximately every six to eight weeks… Most ideas — pizza in a cone, waffle crust pizza — fizzled long before the general public got a taste. [Emphasis mine]
Pizza Hut invested heavily in new product innovation. Their development team grew from 3 employees to a team of 60. And in 1995, Pizza Hut introduced one of their most popular creations: Stuffed Crust Pizza.
At one of the [focus groups], an odd middle-aged man kept talking about pizza bones: He would eat the pizza and leave behind the “bones” for his dog. Asked for clarification, he said the bones were the crust. Nobody ate the crust.
The idea came so fast that [food scientist Patty] Scheibmeir had to jot it down on the paper plate sitting in front of her. Later at the grocery store, she bought packets of string cheese that she placed in the crust in the test kitchen the next day.
During the next couple years the food scientists had to patent a new recipe for a crust that wouldn’t split open, and anxious management, Scheibmeir says, temporarily killed the experiment 13 times, including three months before the proposed rollout.
But the Stuffed Crust proved so popular that its first limited six-week trial sold out in four weeks, Scheibmeir says. Sales of Stuffed Crust reached $1B in the first year, helped in part by a commercial featuring Donald Trump and his first ex-wife, Ivana. [Emphasis mine]
(For more background about Pizza Hut, Stuffed Crust, and Donald and Ivana Trump, check out this delightful episode of Business Insider’s “Household Name” podcast)
Not everyone at Pizza Hut supported the emphasis on new product innovation. In the early ‘90s — before successes like Stuffed Crust, Sicilian Pizza, and the Bigfoot Pizza — the COO argued that, “everything there is to do with pizza, it’s now been done.” Of course, no industry ever reaches the “end” of innovation. At Pizza Hut, a continuing quest to introduce new products led to more than $1 billion in sales.
I think the $1 billion sales number actually understates the impact of the company’s innovations. The novelty of Stuffed Crust grabbed headlines and attracted people to “trial” Pizza Hut. You can probably guess what happened to some of those new Pizza Hut customers — they stuck around, becoming loyal patrons who bought all sorts of non-stuffed pizza over the years.
Moral of the story: product innovation leads to customer acquisition leads to customer loyalty.
What happened to Pizza Hut?
Over time, Pizza Hut directed their innovation resources toward the wrong things. Case in point: while archrival Domino’s figured out how to optimize online delivery, Pizza Hut experimented with the design of circular pizza boxes. Product innovation is not always about what a customer will consume, but also how it will be consumed (e.g., online delivery convenience).
One important idea: I don’t think Pizza Hut needed to shift their attention to things like delivery methods only because innovation on the actual pizzas had hit the point of diminishing returns. I suspect Pizza Hut’s struggles were not caused by the decision to launch new products, but rather the quality of their recent innovations: Skinny Slice, Pretzel Piggy, and the Cheeseburger Crust products all failed dismally.
Notice, though, that other fast food chains managed to capture headlines and customers with some outlandish offerings:
KFC’s Double Down sandwich broke company records as their most successful new product launch (especially overseas).
Burger King’s Impossible Burger drove an 18% growth in store traffic.
Popeye’s chicken sandwich sparked a frenzy with shortages across the country.
Product innovation is not dead. It’s just hard. There is no guarantee that any given attempt (or series of attempts) will succeed. But if you don’t try and devise something new and interesting, you will be left with traditional customer acquisition techniques like paid search and paid social. And those strategies will continue to get more and more difficult to pencil out every year.
When to Launch a New Product
Once you look at product innovation through the lens of customer acquisition, you can quickly see which businesses are better positioned for success.
Think about Pizza Hut: when new customers walked into their restaurant to try Stuffed Crust, the company had a solid opportunity to convert those people into regular customers who would return for all of the other items on the menu. On one level, those customers decided to visit Pizza Hut to sample a novelty food; on a broader level, though, they were choosing “stuffed crust by Pizza Hut at a specific location xx miles from their house.”
The flow from trial customer to regular consumer is less clear with Anheuser-Busch’s new product innovation. Budweiser’s parent company is losing ground to competitors from not only the microbrew and premium beer space, but also new categories for alcoholic beverages, like hard seltzers. As noted in The Wall Street Journal, the mega-brewer is responding to those trends by launching some experimental new products:
[Anheuser Busch] devoted one of its Super Bowl ad slots this year to a pair of mermaids who pitched Bon & Viv Spiked Seltzer by talking up “fruit botanicals” and zero sugar. And yes, it now sells Kombrewcha, a carbonated tea with 4.4% alcohol by volume.
Will these new products succeed?
Only time will tell. BUT…even if cases of “fruit botanicals” fly off the shelves, I wouldn’t expect those products to drive growth in Anheuser-Busch’s core business the way that Stuffed Crust boosted sales volume across the Pizza Hut brand. Even if a new customer tries Kombrewcha and becomes a loyal drinker, I don’t think it would influence their future consumption of Anheuser-Busch’s flagship product — Bud Lite. For Budweiser, each new product innovation lives and dies on its own, without the leverage that comes from acquiring a new customer who will purchase your other products.
In stark contrast to Anheuser-Busch are the companies with subscription products. With a subscription bundle, you can “join” for product A, and then stick around for products B, C, and D. No one exploits this concept better than Amazon.
As I explained in “Happy Double Prime Day,” discounts at Amazon are an effective way to persuade customers to subscribe for Prime. But Amazon discovered an even better method to lure customers: restrict the availability of certain new products to members only. For a great example of this tactic, let’s look at Amazon Prime, the company’s movie/television service. Last year, internal documents about Amazon Prime were leaked. As you would expect, the documents revealed viewership numbers for each show. Even more interesting were the core metrics being tracked:
...their cost, their viewership and the number of people they helped lure to Prime. Known as Prime Originals, the shows account for as much as a quarter of what analysts estimate to be total Prime sign-ups from late 2014 to early 2017, the period covered by the documents. [Emphasis mine]
A sizable number of Amazon’s new Prime customers did not subscribe for the benefit of free shipping. No, a QUARTER of those people joined for “Man in High Castle” and “Transparent.” Of course, many of the customers who joined for TV shows probably went on to purchase items from Amazon’s extensive online marketplace. In the words of Jeff Bezos, “When we win a Golden Globe, it helps us sell more shoes.”
For similar reasons, streaming giant Spotify recently acquired Gimlet Media, a podcast network. From their origins in 2014, Gimlet positioned themselves as the “HBO of audio.” Spotify is the world’s largest streaming service. Securing a catalogue of “must listen” podcasts should help Spotify acquire subscribers — many of whom will stick around and listen to the Beatles.
In many companies’ organizational structures, product innovation falls outside the purview of the marketing department. As a result, marketers often “take what they are given,” and then do their best to promote the products. But as I argued in my first Marketing BS newsletter, “Everything is marketing.” As CMO, you need to regularly review your company’s product innovation roadmap. If you aren’t confident in the quality and scheduling of products coming down the line, you should consider allocating some of your branding budget to support your company’s innovations.
Keep it simple,
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Edward Nevraumont is a Senior Advisor with Warburg Pincus. The former CMO of General Assembly and A Place for Mom, Edward previously worked at Expedia and McKinsey & Company. For more information, including details about his latest book, check out Marketing BS.