Study reveals: SMBs should focus on net new customers for growth, not loyalty

You probably heard this one before: “acquiring new customers is five times more expensive than keeping existing customers”. I have too (many times!) but according to a recent study*, companies that wish to grow should focus on customer acquisition rather than loyalty.

The study published by the Ehrenberg-Bass Institute contradicts previous research that encourages companies to focus on customer retention above all else. The author of the study, Professor Jenni Romaniuk, found a correlation between market penetration and customer loyalty which shows that companies with a larger market share tend to have more loyal customers. Conversely, companies with a smaller market share tend to have lower loyalty and their customers are more likely to defect them. Romaniuk coined the term “Double Jeopardy Law” to describe the trend. She has tested her theory in a variety of industries, focusing especially on B2B.

“We can’t engineer loyalty”

Romaniuk believes that loyalty cannot be engineered and is a byproduct of trust. According to her study, companies with a bigger market share are better known in the market and inspire more trust than smaller brands. She claims that if a company focuses on expanding their market share, loyalty will follow.

There are two potential exceptions to this rule:

  • niche brands, that appeal to a small but targeted audience and experience high loyalty
  • seasonal brands, that appeal to a mass market but don’t usually get repeat purchases (mince pies or Easter eggs, for example).

The author is not advocating that companies completely neglect customer retention, she is just saying that “money doesn’t buy happiness” and that investing your marketing budget on existing customers won’t guarantee their loyalty. Instead, loyalty will come naturally if they are happy with your products and services and trust your reputation.

The power of word-of-mouth

The study suggests that focusing your marketing plan on customer acquisition is the only path for growth. To that point, I slightly disagree. Although the study is well conducted and has been promoted by reputable sources, I believe it failed to acknowledge the power of word-of-mouth when it comes to customer acquisition.

Loyal and happy customers can help attract net new customers when they recommend a business. A fantastic example of the impact of word-of-mouth and recommendation on growth is the audio-only social media platform Clubhouse, that despite being invite-only has grown to millions of users in record time.

On the other hand, a bad customer experience can spread like wildfire on social media and ruin a company’s reputation, hurting any chances of fast growth. So when it comes to your marketing strategy, there needs to be a balanced investment between net new and existing customers.

So here’s my marketing tip: reserve your marketing dollars for customer acquisition and attracting net new customers, but spend part of your time and resources on relationship marketing, such as email marketing campaigns to existing customers or interacting with customers on social media. This way you can get that growth boost from net new customers without neglecting your existing customer base.


References

Published by Carolina Marino Sargeant

I’m Carolina Marino Sargeant. I am a British/ Brazilian professional with 15 years’ experience in Marketing and Corporate Communications. I have been at both ends of the spectrum, having worked for very small businesses with no marketing budget and for Fortune 100 tech giants with hundreds of marketing professionals. My website howtogrowmybusiness.co.uk offers marketing ideas and tips for small businesses and self-employed professionals who would like to grow their revenue or income with little to no marketing budget.

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