By Scott Logie, MD, Insight at REaD Group
The generally accepted wisdom is that the costs associated with repeat business are, for the most part, significantly lower than acquiring new business. Research suggests that 70% of companies say it’s cheaper to retain a customer than acquire one, while others have suggested that the cost of acquiring a new customer can be as much as seven (or is it four, five, six or 10?) times more expensive. None of this is new or shocking information and whatever the multiple, it has been shown to be true over many years and across many companies.
So why then do many brands continue to charge existing customers more for their products than they charge new customers? Research from Which? and shared by the BBC suggests that on average existing customers pay £70 more than new customers for Home Insurance. In addition, for combined insurance, the average premium paid for a policy 20 or more years old was £396 per year, compared with the £195 new customers paid.
I have recently had two experiences of this. First, when renewing car insurance for my wife and myself – we got quotes from our existing provider that had increased substantially from last year. We checked on a friendly meerkat site and saw we could move and save a lot of money. One call to the provider and they moved the price close enough for us to agree to stay.
We then had to renew the pet insurance on our large cat and dog collection. After many years of simply renewing we looked around and found better cover for a lower price from a very well-known provider. Half the cost in fact. We called again, and this time were offered only 20% reduction on the quote. They seemed genuinely shocked that we declined.
From experience, and this is not a defence by any means, merely an attempt to understand, there are a number of reasons this can happen. For example, the cost to acquire a new customer, along with lower rates to attract this new business, often means that the cost has to increase in year 2 to make some profit. Or maybe internal models show that these customers are loss making due to claims, so they force the second-year costs up to cover the claims made by the cohort they belong to. Or maybe the companies just think we are a bit lazy (after all around 70% of people still don’t move their insurance after year 1) and that we won’t notice.
No matter how we cut this, there is a problem. All of these approaches are company centric, not customer centric. As many brands and sectors have realised, focussing on existing customers can be very valuable.
Digitally native businesses, for example, value not only their customers but the data they have on those customers. Similarly, large retailers have invested heavily in loyalty schemes, in Sainsbury’s case literally in buying Nectar. This demonstrates investment in existing customers. They are not ignoring the acquisition of new customers but know that there is a balance to be struck.
That’s not to say that every customer is valuable, or indeed that every customer should be retained. Maybe my current car and pet insurers simply decided I was not worth keeping and tried to price me out of their brand but, in all honesty, given how they folded like a linen suit on the underground this July, I doubt that to be true. I think it’s more likely the case that those companies still have an “acquire at any cost” mentality that means the existing customer gets less attention.
It’s great to see that Which? are taking up the fight and that the regulators are going to look at this but surely the economics suggest that this needs to be looked at and rectified by the brands themselves. After all, it’s four, five, six, seven or ten times cheaper to retain a customer than acquire a new one.