The authors of the book Loyalty Myths, Timothy Keiningham, Terry Varva, Lerzan Aksoy, and Henri Wallard, argue against the myth that strategies based on attracting new customers lead to financial disaster.

The origin of this theory is hard to find, but the first sources are found in a study conducted by the Technical Assistance Research Project (TARP), carried out in the 80s in Washington. Soon, the myth was picked up by famous newspapers and books.

In 1990, the president of the Total Quality Management group, Christopher Hart, along with professors James Heskett and Earl Sasser, made this theory even more credible by publishing the article The Profitable Art of Service Recovery in the Harvard Business Review.

The myth was also published in the bestseller by well-known business strategist Tom Peters, Thriving on Chaos. This myth was so widely believed and seemed so intuitive that it has stood for more than 20 years.

Currently, there is enough information to combat this myth, based on its three major shortcomings:

Financial arguments are either wrong in terms of acquisition and retention, or the financial effects attributed to retention are false.

The core argument—the fact that acquiring a new customer is much more expensive than retaining an existing one—depends on a flow of interdependent factors. Regarding current customers, it is assumed that they will:

1. Increase their spending level at an ever-increasing rate.
2. Buy at the full price rather than the discounts offered.
3. Increase the operating efficiency of companies.

Unfortunately, studies have shown that none of these cases are true.

Regarding new customers, it is assumed that acquisition prices increase because the customer must learn the companies’ procedures, and companies must analyze the needs of new customers. Even if these things were true, most companies do not conduct studies or allocate time to analyzing new customers.

Discrepanțele devin evidente când ne gândim la propria experiență pe post de noi clienți.

The discrepancies become obvious when we think about our own experience as new customers.

What is the extra cost companies pay when we buy from a new supplier or dine at a new restaurant? For industries where there is an obvious cost associated with registering new customers, these costs are incurred regardless of whether the consumer remains loyal to the firm or not. How much simpler is it to buy a new car or a new TV from the same brand you already use?

The reason this myth seems plausible is the costs associated with advertising and promotional expenses.

These are estimated to be much higher than customer retention costs. The error in this assumption lies in the fact that advertising and promotions are considered methods implemented only for customers’ first purchases. However, many advertising methods are used to strengthen brand image and maintain awareness among current customers.

When companies use price discounts to attract new customers in the short term, both potential and current customers enjoy these types of promotions. Therefore, the cost of customer acquisition versus the cost of customer retention associated with advertising and promotions is miscalculated.

The statement ignores the life cycle of products and services.

When a new product is in the growth phase, the company’s costs for acquiring customers are substantial. Naturally, these will be higher than those for retaining existing customers.

On the other hand, when the product enters the decline phase, the costs associated with customer retention increase.

In the maturity phase of a product, the costs dedicated to either acquisition or retention can be similar. This myth ignores the fact that every company has a different customer base, which does not represent the same expenses for the company, whether it’s about acquisition or retention.

For most companies, profit is not earned equally from all customers (think about your customers for a moment!).

Most of the time, the customers who cost the most to retain are those who bring the highest profit to the company. For obvious reasons, these types of customers are also desired by the competition, so there is a much higher chance that they will receive offers from other companies.

Customers know that their relationship with companies is important, so they expect high-level services. The cost of retaining this type of customer can be very high, but at the same time, profitable for the firm.

In conclusion, although the theory of higher costs when it comes to customer acquisition seems plausible, to the detriment of retention, the reality is much more complex.

Even if it is sufficient motivation for management to give greater importance to customer retention, adopting a strategy based on this loyalty myth can lead to financial disaster.

In the book Loyalty Myths, its authors reveal the truth about customer loyalty:

Almost everything we have heard so far is wrong. If we implement the knowledge of these theories, we risk following, in the worst case, a recipe for disaster.

Pursuing customer loyalty can be a profitable strategy, but not by taking into account the myths developed so far.

Our current knowledge has advanced to the point where we can identify the mistakes in conventional theories. More importantly, we can now establish and prove the truths about customer loyalty associated with profitable loyalty strategies.

Keep these things in mind the next time the marketer you work with urges you not to focus on attracting new customers!