Measuring the Return on Investing in Customer Acquisition and Retention
50 Pages Posted: 6 Feb 2019
Date Written: October 12, 2018
Marketers often compare the lifetime value of a customer (CLV) to the spending necessary to acquire the customer to project Return on Investment. This approach, CLV minus acquisition costs all divided by acquisition costs, which we call simple marketing ROI (SMROI), is incorrect wherever retention spending occurs. By omitting retention spend (in its investment portion) SMROI understates the commitment, overstating ROI. We detail two main problems arising with SMROI:
• Firstly, acquisition campaigns with relatively high retention costs may be funded at the expense of more profitable investments.
• Secondly, the same formula cannot assess both investments in acquisition and retention and switching formulas creates inconsistency. A firm may acquire customers then immediately decide not to retain them using the same information.
This research shows how to correctly combine CLV with acquisition and retention spending: MROI equals CLV minus acquisition costs all divided by the sum of acquisition costs and discounted retention spend.
We detail the implications in complex business models – e.g., when a marketer assesses cross-selling and referral values showing that SMROI leads to incorrect marketing decisions.
Keywords: CLV, ROI, Acquisition, Retention, Marketing Strategy
JEL Classification: M31
Suggested Citation: Suggested Citation