Measuring the Return on Investing in Customer Acquisition and Retention

Abstract

We examine customer acquisition under budget constraints. Marketers often compare customer lifetime value (CLV) with acquisition spending to project returns but such simple marketing return on investment (SMROI) metrics are biased wherever retention spending occurs. Omitting retention understates marketing investments, overstating SMROI. We propose MROI, which equals CLV minus acquisition costs divided by the sum of acquisition and discounted retention spend. Using analytic models we show that managers using SMROI will acquire customers with relatively high retention costs over more profitable investments. We map the competitive implications, specifically increased competitive intensity giving lower returns and market profits using SMROI. We note how retention spend can be planned for at acquisition, that MROI is more robust than SMROI to error in projecting retention rates and marketing effectiveness, and that SMROI overstates the value of customers providing access to further cash flows, e.g., referrals and cross-sales. Critically, when using SMROI for acquisition a firm may waste cash acquiring customers, then immediately refuse to retain them. MROI, therefore, also reduces the challenges related to firing customers.