Today's economic conditions require businesses to squeeze every penny out of each transaction. Doing this requires an in-depth understanding of customer behavior so that the marketing and service strategy optimizes the return. In our video "How to Get the Most out of New Customers," I talk about the importance of recognizing hit-and-run customers before they cost you money. Franck Silvestre responded by asking, "Could you explain why hit and run customers cost money?"
Franck, it's tempting to think of all new customers as being equal. They are contributing to cash flow and look alike when they make their first purchases. We, as marketers, are used to people becoming long term customers after the first buy. This is why so many companies focus more on acquisition than retention. Historically, 95 percent or more of the people who bought once from a company would continue to buy if there wasn't a major service issue. Marketing worked something like this: Find the best sources for customer acquisition, provide incentive to buy, and reap the rewards of lifetime value.
Things are different now. People are using the Internet to find the companies selling the products they need. With a few clicks, they can compare prices, service, and shipping charges. In other words, people have options and they are using them to get the best deal.
In our analysis, we see as much as 60 percent of new customers leaving after their first or second purchase.
Think about that for a minute. Before the Internet, five percent or less of the new customers acquired were hit and runners. It wasn't enough to raise any flags. After the Internet, 60 percent are hit and runners. This is a huge difference that has a direct effect on the profitability and success of the business.
The scariest part is that traditional marketing metrics don't identify hit-and-run customers. The newest members to the database continue to receive marketing materials until they cycle out of the active segment. This escalates costs without providing any return on investment.
Let's say that your company invests $2 per month in marketing dollars for every active customer in your database. Activity is defined as having purchased within the last twelve months. The average acquisition is 1,000 customers per month.
The annual marketing costs for each customer is $24 which means that you are investing $288,000 annually in marketing to newly acquired customers. If 5 percent are hit and runners then $14,400 of your marketing budget is wasted. The costs of identifying those customers would exceed the initial price. When that number jumps to 40 or 60 percent, then $115,200 to $172,800 are lost. The sooner you are able to identify the hit and runners so you can stop marketing to them, the less it will cost.
A few business models thrive off of hit and run shoppers.
WOOT! is a good example. Their prices are so good they naturally attract customers. Once people find out about the site, they watch for the deals. Contrary to the social media marketing myths, most companies can not replicate this activity. Thousands of followers, fans, and updates don't convert into cash without an effective marketing strategy that includes customer retention.