To focus on acquisition or retention? That is the question. With John Dawes, Associate Director at Ehrenberg-Bass Institute for Marketing Science
B2B tech marketers are often wondering how much of their activities should be aimed at retaining existing customers or acquiring net new ones.
This podcast episode has all the answers. Professor John Dawes, Associate Director at Ehrenberg Bass Institute for Marketing Science shares his research-backed evidence on whether acquisition or retention aids B2B growth more.
This episode covers:
- Can B2B marketers build loyalty? Or is loyalty innate?
- Does customer marketing sustain a B2B business?
- Is customer churn driven by dissatisfaction?
- Why should B2B companies be physically and mentally available to their audiences?
- Does mental and physical availability translate to brand marketing?
- Is word-of-mouth marketing valuable to B2B tech companies?
- Are loyal customers more or less sensitive to price changes?
- Is cross selling and up-selling a reliable tool for growth?
- How difficult is acquisition marketing?
Listen to the full episode here:
And check out more of the FINITE B2B marketing podcast here!
Full Transcript
Alex (00:06):
Hello everyone and welcome back to the FINITE Podcast, where today I’m delighted to be welcoming leading marketing academic Professor John Dawes onto the show. John is Associate Director at the Ehrenberg-Bass Institute for Marketing Science, joining us all the way from Australia.
I’m really excited because John’s going to share his insights from many years of experience, exploring the topic of acquisition and retention and where B2B businesses, B2B marketers should be focusing more on one or the other over time. We’ve seen more traditionally in B2B environments, particularly in the enterprise end of the spectrum, that retention has really been the focus.
I think in the technology and SaaS world, where everything’s fast growing and it’s really about growth and scale, we probably see a bit more of an acquisition focus and there’s a number of businesses who sit somewhere in the middle, but John’s going to shine a light on what works, what doesn’t, and how to think about the two. I’m excited for this one. Happy listening.
FINITE (01:01):
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Alex (01:20):
Hello, John, and welcome to The FINITE Podcast.
John (01:23):
Thanks. Thanks for having me.
Alex (01:25):
I’m looking forward to talking. These episodes are some of my favourite, when we get some good research driven academic insights into the marketing world, which I think we don’t have enough of a lot of the time. So I’m grateful for you giving up your time and the chance to talk, to dive into the topic. I will let you introduce yourself. Tell us a little bit about your background and what you focus on at the moment.
John (01:46):
Sure. So yeah, I’m one of the associate directors of Ehrenberg-Bass Institute and I’ve been with the institution and its predecessors since the nineties. So it’s been built over many years, and we have a big suite of corporations around the world that support the Institute’s research. And they provide us with some money each year.
We pull that money and then feed into long term research programs on buy behaviour, brand performance, how advertising works, good meaty topics. So, looking forward to talking about some B2B marketing topics with you today.
Alex (02:25):
Yeah, likewise. So I think we’ve touched on bits of your research at various points on different episodes. I know you did some work with B2B Institute, and we’ve been fortunate enough to talk through some of your insights in the past. I know today, we’re talking about the balance between retention and acquisition.
I guess in more enterprise traditional B2B environments there’s been a bit more of a focus maybe on large accounts and retention and maybe less on acquisition, but I’ll let you set the scene and tell us a bit about how marketing has looked at these two things and I guess two sides of the same coin over the years.
Can B2B marketers build loyalty or loyalty innate?
John (03:05):
Yes. Perhaps we can start off by taking the opportunity to clarify a bit of a misconception in that for some reason, I don’t know why, but some commentators will say Ehrenberg Bass or Byron Sharp says loyalty doesn’t exist, loyalty’s not important and so on. And we’ve never said that, what we say is actually loyalty is actually a reasonably natural human behaviour.
We tend to confine our purchases to a small subset of total options available, but loyalty for a B2B firm just as it is for a B2C firm, loyalty is important in the sense that your revenue is how many customers you’ve got multiplied by how much they’re buying from you. And so loyalty is in the sales equation. So it is important, but the research tells that competing firms in an industry, whether they be B2B or B2C or whatever, they don’t differ that much in the loyalty that they get from their client base.
What we do see is the big difference between the market leaders and the brands that are the 20th biggest, the 30th biggest, the size of the customer base, not the loyalty of the customer base. So loyalty doesn’t differ that much and the difference that we see is strongly correlated with market share. Bigger firms get a little bit more of it. The small firms get a little bit less.
So yeah, we think both are important, but for growth it’s new customers and consider that all B2B firms, regardless of how careful they are about it, they’re gonna lose some of their clients each year. It’s unavoidable, nobody has a hundred percent retention rate. And so what that means is even if you just aim to stay still from last year to this year, if you lose accounts just due to circumstances, you’ve got to win 5 new ones just to stay still, let alone to grow. So acquisition is not not an option even if firms aren’t particularly interested in growth.
Alex (05:19):
Maybe I’m playing devil’s advocate slightly, but this idea that I feel like in the last years there’s been more of a trend and focus on this idea that if you focus on loyalty, that in itself leads to new customers. And we can maybe talk about this, we talked about this when we first spoke about NPS scores and all this stuff that we like to measure or almost fool ourselves into thinking how happy clients are, how loyal they are, how much they’re loving everything that we do.
As you say, loyalty does strike me as a relatively human, natural phenomenon rather than maybe one that we think we actively work on more than we possibly do. But yeah, I think we’ve done episodes on it too, around this idea of customer marketing, just focusing on customers, focusing on retention, focusing on referrals to in turn drive acquisition of customers. And I guess it doesn’t have to be one or the other, but what’s your perspective on that side?
Can customer marketing sustain a B2B business?
John (06:11):
Yeah. Well perhaps to frame the argument, there’s been this really wide spread belief for over 20 years that, if you can do better at loyalty, in other words, if you can reduce your defection rate, then you’ll be wildly more profitable. Cause the argument is if you can get defection down, then you’ll earn more money over time from each client.
And there’s a quote saying just 5% less defection means a hundred percent increase in profits, which sounded great, evidence-free suggestion by him. There’s absolutely no empirical evidence about that. And it’s quite misleading in the sense that it gets business’ hopes up. They say, so 5% reduction in defection, surely we could do that and there would be this huge payoff.
But when you look at what he said, what he was saying was you take a firm that is losing 15% of its customers a year, and you could drop that to 10, which is not a 5% reduction. It’s actually a 33% proportional reduction. And he also assumed that you could do that with no costs, you could just do it by making the organisation more customer friendly or whatever. So yeah, that belief is unfortunately prevalent but misleading.
So we would say, make the most of your customer base, you want to look after your customers, you wanna try and sell more to them, but don’t have too much of a fixation on the customers. You’ve got to think more broadly than that, because if you’re planning on being a small brand, but with high loyalty, the evidence is just, we tend to not see them. It’s like swimming against the tide. So go with what the research says, which is if you want to grow, the main gain is customer acquisition
Alex (08:09):
Makes sense. And that’s a great anecdote on the percentage drop of 15% to 10%. I’m always just constantly baffled at how, I’m sure you see it all the time, how easily people get simple percentage maths incorrect. I think particularly during COVID, I feel like during COVID with all the case numbers and everything else, there was some shocking maths happening amongst press and journalists and on Twitter and some scary gaps.
John (08:35):
Well, cause people sort of don’t remember the detail of the scenario, which was, you start with 15, you get down to 10. The line has just been a 5% reduction in affection, which sounds innocuous until you peel between the surface.
Alex (08:53):
Absolutely. What about this idea around, and I think you referenced it in your notes, it costs X times more to win a new customer than it does to keep an existing one. Is that part of the argument behind make more money if you just simply lower your churn rate?
John (09:12):
Yes. The thing about ‘it costs five times as much’, again it’s funny when you try and find out the origin of these. In the late eighties it was pretty much based on, again a thought experiment, but in which a business was saying, I’m really just gonna allocate my advertising costs to new customers.
I’m gonna just assume that none of the advertising that I’m any effect on customer retention, so if you just arbitrarily allocate all of your advertising costs to the customers, then obviously you’re gonna get some weird algorithm or belief that somehow it’s the new ones that cost so much to acquire just because you’re pushing costs towards them.
Is customer churn driven by dissatisfaction?
Alex (10:16):
Makes sense. What about this idea that churn is driven by dissatisfaction? What does the evidence say about that?
John (10:22):
Yeah. So it seems intuitive, cause we all know it ourselves at an individual level, you go to a restaurant and you get poor service, and then you think I’m not going to go back there. So it seems intuitive that in a B2B context, firms are going to struggle. If they have dissatisfied customers, those customers are more likely to leave, but there’s actually a lot of evidence.
So some institute researchers some time ago, talked to B2B clients and said, have you ceased dealing with a particular supplier in the last six months or year? If so, why? And what they found was that most of it isn’t due to dissatisfaction. It’s just things getting in the way, so some change occurring at the client end which means they’re consolidating a supplier list or it could be head office has just told them to do it. Or a new manager has replaced an old one and they’ve ordered a review of suppliers.
And so of course in those instances, presumably if you are proactive, you’d still try and do something about it. Can we get in front of you? Can we give you a new proposal? But often the case you lose a client and there’s nothing you can do about it. What that means is, some reasonably high proportion of customer loss or defection that B2B clients have is outside their control.
So again, harkening back to the idea that if I could reduce my defection from 15 to 10, it’s assumed that it’s all controllable when in actual fact, a lot of it isn’t. So we would say having satisfied customers is important. We’ve got a large group of international corporate sponsors and we work very hard to try and keep them happy with what we’re doing for them.
So getting satisfied customers is important, and in a sense, it’s reasonably efficient, in a sense your marketing activity is more efficient. If your account managers are doing good things, they’re not just putting fires out and trying to like deal with grumpy customers. And indeed yes, you should get feedback from your customers and figure out, are there pain points in dealing with us? Are there things that we have to do better? You should always do that.
But we found, for instance, if you line up all of the competitors in an industry, and you look at the satisfaction scores that they’re getting, it’s typically in the range of somewhere between 75% and 85% or seven and a half out of 10, eight and a half out of 10. Nobody’s getting nine or nine and a half outta 10. So it’s difficult to reconcile the idea that if you’re getting 82%, somehow even if you’ve got a plan to get into 95, nobody gets it.
And secondly, when you look at the correlation between these satisfaction scores and how big they are, there’s no correlation. In fact, we’ve actually often found seemingly the opposite, that often its smaller firms are getting high satisfaction scores, but that’s not actually helping them to grow.
So satisfied customers is useful, but obviously there are other things that will drive growth. And what we say is what that is is building mental availability, building physical availability. If you’re just predicating growth on satisfaction, it’s not enough you have to look for these other factors and try to figure out a way to push on them to get growth happening.
Why should B2b companies be physically and mentally available to their audience?
Alex (14:12):
Maybe you can touch on those physical availability and mental availability points and what those mean?
John (14:17):
So mental availability, what we say is, in consumer markets, but also in B2B, memory plays a role in buyer’s decisions. It’s rare for a B2B organisation to sign up with a supplier that they know almost nothing about. So building mental availability, and what we mean by that is the extent to which a firm or a brand is linked in its buyers or its potential buyers’ mind to a range of purchase and consumption situations. So in other words, how prominent are you in your prospective buyer’s heads.
And then physical availability is how easy is it for people to notice you, or to purchase from you in a buying situation. So we would say, in B2B, if you’ve a really good account management function, and your reps are out talking to clients on a reasonably regular basis, or it’s easy to get on the phone or contact a rep and have someone talk to you about your needs and wants, that’s a manifestation of physical availability.
It’s not just about premises, it’s about all sorts of ways that people can notice you in a buying situation, but also make yourself easy to inquire from, and deal with inquiries and get purchasing happening.
Does mental and physical availability translate to brand marketing?
Alex (15:42):
Interesting. And so in the B2B context, I think that feeds a lot of the debate that’s had at the moment around how much B2B company you should invest in a brand and in particular the mental availability piece, which as you know, we’re always having this brand versus performance marketing debate.
B2B businesses are not investing enough in brands. I think yourselves did some research around only 5% of buyers being in market for a solution at any one time. And that also fed that argument. So on that mental availability piece, is that the direction that you end up including? That a lot of businesses need to add more in, in terms of investing more in building a brand and not just capturing short term demand?
John (16:19):
Yeah, I think so. Because if all that you’re doing is trying to hit people when you’re getting some signal they’re in the market, then it’s because there’s probably other alternatives other competitors who have done a better job at reaching them and building some level of familiarity before people get into a buying situation.
So in B2B, it is often a case that there are a lot of potential clients out there who aren’t in the market now, but they’re your source of revenue next year or the year after. So it’s worthwhile investing some money, priming their minds if you like, so that when they come into the market and perhaps they do see some coms for you, that they’re more predisposed towards you because you’ve built some familiarity with them.
In B2B, building some favorable impressions and familiarity is still important. People still like the idea of dealing with a company that they’ve heard of before. It gives a very favorable and trustworthy impression.
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Is word-of-mouth marketing still valuable to B2B tech companies?
Alex (17:42):
And we touched on near the start about how much benefit people saying good things about you, customer marketing, happy customers, actually plays a role in spreading word of mouth marketing. There’s so many different terms we use to describe this concept, but from your perspective, are we saying that’s still valuable or only to a certain degree or only in certain environments?
John (18:04):
Yeah, that’s a good question. So, if somebody is saying good things about you to prospective clients, they’re more likely to give you a positive recommendation than somebody who’s not happy, right? That almost goes without saying, it’s almost a truism.
But the big thing is the opportunity. Because we don’t randomly go around recommending firms or brands that we use to other people. It has to come up in a conversation or there has to be some opportunity. I need to sense that this person that I’m gonna talk to about a law firm or an accounting firm or a piece of technology, that I’m gonna recommend to them, I have to get some sense from them that they would be interested in that recommendation.
So it should be coming up in conversation. So this is the problem with the most prevalent tool that’s used to measure this stuff in B2B and B2C, which is the net promoter score. Everybody’s heard of it, but of course what that is is people ask how willing would you be to recommend us? And then there’s a score derived.
And so the hype that’s given to this in industry and the legion of consultants that sell the idea that word of mouth will drive growth, will give the impression amongst marketers that a big part of my job is to do things that will promulgate positive word of mouth.
The problem is that willingness to recommend is not the same thing as actual recommendation. If somebody asked me would I recommend my internet service provider? I could easily go, well yes they’re quite good. Well I’ve never recommended them. And what is the actual probability that I ever recommend them? Probably low because I’m not gonna talk to people about my internet service provider.
John (20:23):
So, the issue is what people say in a net promoter survey is not what they’d do. Some people have done follow up studies and they’ve found that most of the people who said I’m highly willing to recommend, don’t actually wind up recommending because the opportunity to do it doesn’t doesn’t come up with people. So what that says is word of mouth is probably gonna come more so from actually newer customers.
So if you’re a new client, have just signed up with a phone provider or a new insurance company or a new bank or whatever, then that’s a little bit more topical for me. It’s a little bit top of mind, and it could be that you happen to mention it in conversation, or maybe a bit more alert to people who might be interested in my point of view. So course what that means is it’s actually growth that could drive the word of mouth, not the word of mouth driving the growth.
So I think there’s too much hype about word of mouth, but I think in B2B, it would be useful to get a handle on how many of my new clients were influenced by word of mouth. So I would probably be interested in asking how you came to be accustomed, that would be useful to know. Cause then you could say 10%, 20%, 30% of our business is actually coming from recommendations and you could figure out, how can we get more of that to happen? But don’t just surrender to the hype around stuff like net promoter score.
Are loyal customers more or less sensitive to price changes?
Alex (22:03):
Good perspective. What about price sensitivity? I guess there’s the perspective that you build long term relationships with clients, as you say, have great account management, keep people happy over time, they become less price sensitive if the prices go up. Is that true? Any evidence?
John (22:19):
Yeah. I mean, it’s meant to be a reward if you do good things, you develop trust and relationships amongst a client base. They learn about you, you learn about them. We’re not even quite so supplier and client anymore. Maybe we develop interpersonal relationships. And the reward for that is meant to be loyalty and sense of long term repeat purchase, but also price sensitivity.
But the answer to how well that works depends on what exactly we mean by price sensitivity, right? So it could be right for arguments, like, do my clients get a little bit less likely to be actively shopping around and could it be that I’m maybe less likely to be tipped out of the business if some new unknown comes and offers them a 10% lower price? Possibly.
But the overall idea about lowered price sensitivity is actually again, funnily enough, overstated, once you look at the evidence. And so there has been evidence on this and indeed what the researchers found was that marketing firms with quite long term established relationships with clients weren’t less price sensitive, they were actually more price sensitive.
And the reason was these long term clients felt like, ‘we have been loyal to you for a long time. We’ve given you a lot of business. So we want a really good deal. We want our loyalty to pay off by you giving us the absolute best prices you can. And furthermore, we remember what you did last year or the year before, we know about your cost structure or actually our new purchasing manager used to work for one of your competitors and so we know a lot about what you do.’
And so on actual fact, you have to be quite wary about the idea that it could build long term relationships and somehow get prices up. It seems to be actually a lot more difficult than what you would think. Your long term customers could actually be quite demanding in terms of price.
Is cross-selling and up-selling a reliable tool for B2B growth?
Alex (24:33):
Yeah. Interesting. That definitely resonates. What about within this and related to this retention side of things, this idea of cross sell and you’ve got a great relationship, you’ve got the account, strong account management, but the cost of acquisition might rely on future cross sell upsell of different things. Is it possible to do that really well in terms of cross sell?
John (24:54):
Yes, the answer is yes, but again, unfortunately. So, there are a lot of cases where you work hard to get a customer and they give you a small piece of their business and it’s often the case in B2B, you’ve got like some minor suppliers, you’ve got some second tier and then there’s maybe a major one and the major one might get 10 times the amount of business that the smaller ones get around get.
And so what that could mean is that you’ve invested some amount of rep or account management effort to bring this client in, but you’re not getting much from them. So you go, well to make it pay off I’ve got to cross sell. I’ve got to sell them some more things or get more of their business.
So what that means is you need to have the skills of cross selling. You need to make it easy for clients to know the other options they can buy from you. So you have to work hard at that, but then again, all the competitors are working hard at it as well. So what we’ve found is it’s very difficult for one firm to be markedly better at cross selling than their competitors.
And so when we’ve looked at this, either in academic research, we find that competitors in an industry, again, the big difference between them is size of the customer base, their ability to cross sell is reasonably similar. So what that means is you have to work hard at cross sell but have realistic expectations about how much growth can come from it.
We had an Institute sponsor back not last year, but in 2020 who told us they prided themselves on cross sell. They said ‘our entire business model is built around cross sell, and we do it all around the globe. And partly we’re good at it cause we have global clients and we can get into a client in one continent and then we can sort of sell into them in another continent and then cross sell and sell goods and services.’
And so they’re actually dubious about our marketing laws and saying that growth comes from acquisition. And we said, well you need to show us the data. And let’s see actually how good you are at cross selling. And actually when we showed them and we assembled the data in the right way, we said you’re actually no better at cross selling than any of your large rivals, which was a bit of a wake up call.
And we said, “well, you know, if you look at this market, why are you number three here? And you’re number seven over here?” The answer is, it’s not cause your client base is less loyal. You haven’t not been able to cross sell to them you just don’t have enough clients. So the focus here is sure maintain your cross-sell skills, you need to get out and sell and get into more prospects offices and sign up some more clients.” So it was a little bit of a wake up call for them to actually realise that their marketing information systems weren’t actually helping them enough to figure out what sort of things they should be emphasising.
How difficult is acquisition marketing?
Alex (28:03):
Which sets me up for my question, which is it’s difficult, right? Winning new customers is challenging. Acquisition can feel tough. I think in many environments in B2B, it can feel easier to focus on what you’ve already got than to go out and find new stuff.
Although I think in general, particularly in the technology environment where a lot of our lessons are in tech and SaaS, maybe they’re a bit more towards the acquisition end of the spectrum. But by the way, it can be tough. Do you have any evidence based advice on how to go out and acquire customers as well?
John (28:33):
Yes. I think it’s worth just reflecting that this is something that I think non marketing people should appreciate more about what’s going on in the marketing department and account management. This is really hard. It’s very competitive because you take any market, any competitive context in the world.
I’ve done some work in corporate banking, so you’ve got this bank, and they’ve got a B2B marketing team of 20 or 30 very smart people with MBAs and they’ve got a big budget. They’ve got a competitor, and another and another one. They’ve all got skillful people. They’ve all got funds. They’ve all got ad agencies. They’re all competing against each other. So it’s like competitive sports, it’s very difficult to win and climb the ranks.
So I think this is useful for non marketers to realise. It really is important to get your metrics right. Know how much overall effort you’re putting into prospecting versus spending time with existing customers. And I know that sometimes that time spent with existing customers is I’m trying to sell them the next thing, fine, but how much effort are we really putting into prospecting?
I think it’s really important to track what we call reach. Track the reach in the sense that let’s look at all the activities that we’re doing, leaving aside what the reps are doing, what the account management are doing, but how many activities are we doing from our, holding events, social media, mass media advertising. How many of those activities are we doing? What proportion of that effort is putting us in front of non-current buyers?
People who perhaps don’t have a probability of coming a buyer maybe for another year or more, but are we putting the hard yards in investing upfront? It sounds trite, but the selling effort is more effective if you are also advertising in other forms of communication that predispose clients towards you. In other words, they’ve heard of you before they actually get the call from the rep or the account manager.
And of course, everybody says, well I can’t afford to hit everybody and nobody does so you’ve got limited funds. So spend the funds wisely. We know the biggest impact on a potential customer’s purchase propensity is if we take them from seeing nothing from us in a time period to seeing one thing, one message.
So be efficient, work with a media agency or work with your comms to say, ‘if we are hitting people for the second, third, fourth, fifth time, it’s wasteful, we want to dial that money back, find people who we haven’t hit at all yet in a time period. Whatever it is in a week, in a month, in a quarter and push funds to take them from exposures to one exposure in a time period. That’s where we have the greatest growth incrementally. So yeah, it’s hard work. It requires patience and investment, but also efficiency in spend.
Alex (31:49):
Interesting. That’s some great advice on which to wrap up. We are pretty much out of time, so thank you John. It’s been a pleasure. I just love talking through this stuff when it’s underpinned by solid research so thank you. It’s been a pleasure talking and thank you for sharing everything.
John (32:06):
My pleasure.
FINITE (32:08):
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