Acquiring new customers Vs Retaining old customers

In this month's strategy debate, industry leaders discuss which is more important...

Janak Dave
Business Head, Arrow,
Arvind Brands

The dilemma of acquisition and retention occurs in a new industry such as telecom or credit cards where the initial focus is on acquisition and later changes to retention.

In relatively mature industries such as retail, both acquisition and retention need to be addressed. In my opinion, it is a chicken-and-egg situation. The biggest challenge we face with the apparel industry is the lack of databases, so there's precious little the industry knows of its customers. Consequently, customer retention is a big challenge.

Even then, we have been able to track customer behaviour at our exclusive showrooms. The task is not too difficult since 60 per cent of our customers are repeat buyers and close to 80 per cent of our sales came from our exclusive stores. But it was important to have a formal approach to analysing customer behaviour and retaining them.

Our first formal step towards retention was when we launched the Arrow Aristocracy Club in 2003. The programme is backed with software that maintains a database of our 14,000 loyal customers. So now we have a structured way of profiling our repeat customers. We have also been able to personalise our promotions as a result.

For instance, our data showed that 400 members were women. So on Women's Day, we send them special bouquets. Then a few months ago we delivered mishti doi to all our Bengali customers who stay outside the state. It's difficult to quantify the result of such retention initiatives, but they do help in building a good rapport with the customer.

It has become easier to focus on specific customer profiles and also cross-sell between our own sub-brands, too, based on the customer information we possess.In the past year and a half we launched several initiatives to cross-sell and upgrade customers to higher spends.

Admittedly, our costs on retention per customer have gone up by 50 per cent in the last year, but I am convinced they are paying off. In FY 2004, the Aristocracy Club members brought in Rs 5.5 crore of business. But we cannot afford to ignore new customers.

Our acquisition cost per customer has gone up by 70 per cent "" and acquisitions have gone up by 81 per cent. So it's only fair to say that though we have upped the ante on retaining customers with the help of technology, acquisition remains as important.

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Ajoy Misra
Senior Vice President,
Taj Hotel, Resorts and Palaces

Traditionally, in the hotel industry, we need to have a balance between acquisition of new customers and retention of regular guests. It is this approach that is used to maximise revenue. At the Taj across our 70 properties approximately half our business comes from regular and repeat customers. This is especially so for our room business.

For the food and beverage-related revenues our city hotels have a much higher dependence on repeat customers. In the past couple of years the focus has intensified on retention of customers and consequently, greater emphasis is being placed on CRM activities.

With over 70 properties across the globe and over a million regular guests, the task of getting to know our guests well enough to build meaningful relationships is daunting, but all the more necessary.

Clearly the old methods "" caring for our guests with unfailing courtesy and hospitality "" still work for us, but to be competitive today, more is required. And so we have invested heavily in both relationship programmes and customer-facing technologies to help us build and maintain relationships with our guests from all over the world.

In the past two years, we've upped the ante on retention activities. That's partly because there's been a 50 per cent increase in bookings, year on year, since 2002. As a result of intensified reach and acquisitions through electronic channels, the occupancy levels have gone up by 15 to 20 per cent since 2002.

Our acquisition strategy depends on an aggressive sales push backed up by supporting marketing activities. On the sales front, we have 12 regional sales offices across India with a field force of about 130 people who call on key customers. This is supplemented by seven international sales offices in the key source markets of North America, Europe, West Asia and Australasia.

Our marketing efforts are also tuned to drive more and more revenues through electronic channels such as Global Distribution Systems and web bookings primarily through our own website. The global benchmark is for approximately 15 per cent of the revenues to come through these online channels.

We find there is a higher percentage of repeat customers from the domestic market compared to the international market. Which is why our retention activities are geared more towards this direction. This is also a key strategy for the Taj in view of the entry of international hotel companies into India.

As India opens up and globalises we will have to gear up for a fair share of new travellers. Here again, while acquisition will be a constant activity, retention of regular business travellers will also be an important focus area.

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Frederick Divecha
Vice President, sales
and marketing, SOTC

Travel companies have always been engaged in acquiring customers rather than retaining older customers over a long term. Which is why you will find few loyalty programmes being launched by tour companies, other than discounts or promotions for customers who've availed packages before.

There's a good reason for that. We have observed that people don't really book package tours every year, so it's difficult to keep them loyal to a particular scheme for a long period of time, say, five years.

After they have travelled to other countries once as part of a package tour, most customers prefer to travel on their own, rather than holidaying as a group.

Acquisitions in the travel industry differ from that in other industries.When the customer books a holiday package, he is buying an intangible product. There's a risk consideration playing in his mind before he makes the decision to buy. That is why luring the customer to book a holiday package has always been a challenge.

I believe the focus on acquisition is justified, given that retention programmes are not effective over the long term. In fact, close to 95 per cent of SOTC's marketing budget is earmarked for acquiring new customers. We do have a CRM database of 2 lakh customers, to whom we send mailers. But that's the only retention channel we use on a regular basis.

In 2000, SOTC experimented with a long-term retention programme "" it launched the SOTC Let's Go Holiday Club. Customers who booked a package tour that year got two- to four-day, all-expenses-paid tour to a new destination every year, for the next five years.

But we had an option of add-on holiday destinations, for which the customer had to pay. We thought this strategy would attract new customers with the bait of free tours every year, and would also retain them for several years.

The programme served the purpose "" at least on the acquisition front. In 2000, over 12,000 people signed on for the Holiday Club. But the next year, only 6,000 of those people availed of the free destination offer, of which just 1,680 opted for the add-on destinations. By 2004, the number dwindled to 1,200.

We have realised that you can't retain customers for too long with package tours. A customer will choose group holidays for up to three years in succession, but after that we lose him. Since then, we haven't really launched a retention programme of that magnitude.

Importantly, Internet bookings have reduced the cost of acquisition per customer. Since online bookings eliminate paperwork and initial transaction costs, overall acquisition costs have dropped 20 per cent over the last two years.

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Krishna Angara
Executive Vice President,
BPL Mobile

The telecom paradigm is perceptibly changing. As the focus shifts from increasing the customer base to growing the share of revenue, mobile phone service providers are focusing on a model where customer retention becomes the key focus area.

In India, significant changes in the telecom scenario have influenced the strategy shift. To start with, we had two operators in every circle. Now six or even seven operators compete in the same service area. Then telecom costs have been consistently sliding, leading to the cheapest telecom rates in the world. All this has led to an explosion in subscriber numbers. But they also increased customer churn.

Even acquisition costs per subscriber were going down (from between Rs 5,000 and Rs 10,000 in the late 1990s, it is now about Rs 1,000 per customer). But break-even on new customers still takes 18 to 24 months. Given these dynamics, it is more profitable to retain an existing customer than fighting for a new customer.

Today, non-portability of numbers in India acts as one of the biggest retention devices but this could be a temporary benefit. During the early stages of mobile telephony, customer retention typically meant providing basic customer services.

But when new entrants were actively wooing our customers, we recognised the need to focus on customer retention. We formed the Customer Asset Management (CAM) team, the business division parallel to our sales business unit. This team has a single-minded focus on retention activities with a direct say in all aspects of the business.

We also started to focus on attracting the right quality of customers. Towards this, we fine-tuned our acquisition strategy. We are exploring alternative channels for selling.

It is important for a service brand to create differentiation which is an experential sum of all its interactions with the customer.

The total experience is our ability to deliver advanced products first in the market, providing an impeccable network quality and rounding off the product experience with a memorable service experience every time the customer interacts with us.