Lesson: Revenue Relationships with Steve Blank

Step #4 Retain: Customers are more expensive to acquire than keep

So let's take a look at getting customers for a physical channel. So what does that mean? So imagine you're Jet Blue and you now have a new airline route going from La Guardia in the United States in New York City down to Florida, Orlando, and you really want to get people to know about this new airline route. The first thing you're going to use is earned and paid media. You might run TV ads, you might run radio spots, newspapers or your website, you might send out email. The first thing you're doing with this paid media is you're trying to get people aware that you even have a flight from New York to Orlando. And so, this first step in a physical channel is generating awareness. People just need to know that this thing exists.

The bad news is that your ad agencies and whatever could tell you how many people this ad will reach, but they can't quite tell you yet how many will purchase, but you're interested in okay, did they hear this?

The next thing that you might want is to know are they interested. Nowadays even in physical channels, we could see did anybody hit the Jet Blue website and did they push the button on fares from Orlando and New York to Orlando? Is there some interest or did they call your 1-800 number? But really where it finally gets engaging in a physical channel is are people actually asking for the schedules and are hitting the how much does it cost page.

In fact, what you really want to be tracking is are people calling reservations or if this was a car dealership, are they showing up in the dealer, taking the car out for a test drive? That's consideration and in a physical channel, it's really interesting to measure the difference between how many people did my ads or free media reach, versus how many did I get into my physical channel to actually consider the product. How many showed up in the store? How many showed up at my website? How many called the 800 number? And it's this space between actually doing and this is what makes it so hard in physical channels, is all the effort on paid and earned media. You really don't know where those customers are until they're physically inside your channel considering the purchase.

Then of course, when they collect albeit or tell a dealer, "I'll take the car," or in Jet Blue's case, actually say, "I'll buy this fare or book this seat," do you finally understand whether you have the order or not. And that's what acquisition looks like in a physical channel. Awareness, consideration, and purchase.

We've just been talking about getting customers in a physical channel. But what's really interesting is most startups kind of forget that it's much more expensive to get a customer than it is to keep one. Yet, we seem to go from order to order or user to user, forgetting about thinking about over time, is how can we extract more dollars or usage or whatever's important to us from our existing customers.

How we do that is the first thing we need to do is make sure our existing customers we've just gotten don't go away. And so, if you're in business long enough, you start thinking about how to keep customers. Some examples? The airlines are the perfect example of keeping the customers. They run something called a loyalty program. They give you points, they give you rewards, etcetera, for staying with their airline. Credit card companies, boy they love to keep you using their credit card because you know what? It's just a piece of plastic and they're loaning you money. Anybody could do that, but they want your business full-time. So they'll make up programs and things that make you think about, "Oh, it would be terrible to leave this credit card or this airline because I lose all the points." That's a great example of a loyalty program.

Or product updates. Here's a way to keep me loyal is instead of just this one time purchase, I'm getting these updates or newsletters or something useful through the lifetime of the product. Smart companies, who not only do loyalty and product updates, sometimes just send me newsletters and here's what's going on, and here's whatever, and how can we help you, etcetera.

Even though on day one, you're not thinking about keeping customers because you're desperately worried about getting them, just understand the next thing you're going to be doing is worrying about how to keep your most valuable customer. So let's take a look at keeping customers for the web mobile channel. So web mobile works almost exactly like physical channels, keeping customers. It's exactly the same idea.

You might want to offer loyalty programs, contests and events, blogs, RSS and email, or social media. All designed to engage customers. Why you want to think about keeping customers is that customers are a lot more expensive to acquire over here than they are to keep. The key thing that you want to worry about is churn, or sometimes called customer attrition. And here's why.

So imagine if you were losing 5% of your customers a month. In three years, you'd only have about 16% of them left. But imagine if you could reduce churn to 1%, so that every month, only 1% of these customers left. So after 36 months with 1% attrition, you'd have 70% of your customers left. Just think about it. With 5% attrition, your average customer sticks around for about 20 months, but with 1% attrition, they stick around for 100 months. You get five times more revenue from the same customers by just working on keeping these customers around.

By the way, in reality financial people discount the cash close from customers later in this life cycle, so the actual value you get is somewhat less. How much less depends on your industry and cost of capital, but we'll leave that for the accountants in a more detailed class.