We all know it is much more expensive to acquire a new customer than to retain an existing one. In fact, studies indicate that it is somewhere between six and ten times more expensive. Companies that are fortunate enough to have a strong base of profitable customers should focus on a proactive approach to retention first with strong acquisition efforts as a second tier strategy. This approach to total lifecycle management brings out the best of both worlds - a healthy growth rate combined with sustained and predictable profitability.

Acquisition: a costly proposition

A good example of the cost of acquisition and the effect of churn comes from the cell phone industry. The annual churn for this company is 7.08 percent and the cost to acquire a customer is $305. The average annual revenue for each new customer is around $630 and the net income is $90. Without a strong retention strategy, this margin is highly unpredictable and strong growth rates become nearly impossible. The challenge is to create a lucrative stream of revenue without incurring the high costs of acquisition. Customer retention strategies can do this, as well as increase satisfaction and loyalty.

Retention: how to build a successful program

The first step to developing a retention program is to analyze the database to find statistically valid indicators of customer churn. Some key timing indicators in the case of the wireless industry are:

* At contract expiration

* Three months after contract expiration

* Six months after contract expiration

* Nine months after contract expiration

* Customer just received a "high" (over their minutes) bill

* Customer received a bill within the last 90 days that was 20 percent above average

* Customer complained to call center about service/cost

* Age of customer hardware (phone, wireless device)

Based on diese indicators approximately 5 percent of the customer base for this provider are indicated for churn at any given point in time. In the case of this provider, that means a half-million customers. The next step in the process would be to identify the customers in that half-million who would be worth retaining, allowing you to concentrate on customers who provide a good margin of profitability.

We are able to identify 360,000 customers per quarter that present enough margin opportunity to proactively save. We retain at a rate of 32 percent at a cost of $28 per customer. Using this strategy, we cut overall churn in half. This means we run an ROI compared to acquisition of over 10 to one. Over the course of a year an additional 473,250 customers are retained at $28 a person, for a total cost of $13,251,000. To acquire this many customers at the $305 acquisition cost would have cost $144,341,250, resulting in a cost savings of $131,090,250.

By concentrating on customers who have greater margins and offering plan and equipment upgrades, the average revenue per customer also grows by $ 11 a month, adding additional revenue of $5 million (at an 18 percent margin). The addition of a telemarketing component to the overall retention strategy has proven to be an essential part of the overall retention effort and is much more cost effective than making up for those sales lost to attrition by increasing new customer acquisition activities.

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