An age old targeting question…

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• Will I grow my business more by investing in…

New customers Existing customers

or

Existing Customers are More Valuable than New Ones

1st reason is that existing customers represent the bulk of total customers over the life of a brand

• The proportion of new customers plateau’s relatively quickly after launch

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In fact, on average, US corporations lose half of their customers every five years*

4* HBR, Learning from Customer Defections, March-April 1996, Frederick F. Reichheld

So, if we are constantly adding and losing customers each year

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New customers

Customer defections

HARD

A natural question to ask is, which variable do we have a greater ability to control?

HARD

ER

To understand why, we need to delve into the psychology of behavior change

You’re probably familiar with many of the traditional costs associated with behavior change

• Transaction costs

– Activation fees that we pay when we switch from Verizon to AT&T

• Learning costs

– Switching from a Windows based operating system to an Apple based operating system

• Obsolescence costs

– Switch from VCRs to DVD players which relegated our VCR collections to the scrap heap

7* HBR, Eager Sellers, Stony Buyers, June 2006, John T. Gourville

We may be less familiar with the psychological costs associated with behavior change

• Endowment effect/ Status quo bias*

– Lead customers to irrationally overvalue benefits they currently possess relative to those they don’t

– They do so because losses have a far greater impact on us than similar sized gains – a concept known as “loss aversion”

8* HBR, Eager Sellers, Stony Buyers, June 2006, John T. Gourville

Richard Thaler’s landmark experiments measured the magnitude of the endowment effect

• Revealed that people demand 2x more compensation to give up products that they already possess than they are willing to pay to obtain these products in the first place

• Subsequent research revealed that this effect intensifies over time so that up to 4x more compensation can be required to convince current users to migrate to new offerings

9* HBR, Eager Sellers, Stony Buyers, June 2006, John T. Gourville

These psychological costs help to explain why…

• New products fail at the stunning rate of between 40% and 90%

• 70% to 90% of the roughly 30,000 US packaged goods launched annually fail to remain on shelves for more than 12 months

10* HBR, Eager Sellers, Stony Buyers, June 2006, John T. Gourville

The story of a popular brand named Cardace in India

Cardace was the #1 selling drug in the Indian Pharmaceutical market (€20 million in 2005)

• Marketed by Sanofi (#2 multinational in Indian market)

• Cardace growth had settled into low double digit range

• Senior leadership was keen to accelerate the pace of growth

• The company placed a bet that growth from new customer

acquisition would more than offset any lost sales from diverting

resources from existing customers

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The primary change that Sanofi made was to expand the pool of target customers

2005 2006 20070

5,000

10,000

15,000

20,000

25,000

30,000

12,500

18,648

23,862

Targ

et

Cust

om

ers

* NOTE: Sanofi did not increase the size of its sales force during this period

49%

29%

* Segments by potential (1=highest; 3=lowest)

The expansion of target physicians was accompanied by a decline in the share of voice

The # of Prescribers declined in all 5 target specialties and the # of prescriptions (Rx’s) declined in 4/5 specialties

Specialty # of Prescribers # of Rx’s

Cardiologist -3% 11%

Neurologist -17% -26%

Diabetologist -15% -25%

Consult. Phys. -6% -19%

G.P. -12% -14%

Total -8% -12%

• Further detailed analysis revealed that the lost prescribers came disproportionately from the higher value segments (1 and 2)

Are we suggesting that you give up on new customers?

New customers remain an important driver of growth over the lifecycle of every brand

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Investment in existing and new customers should reflect their relative value and existing mindset

Companies can improve their odds of success in acquiring new customers

1. Seek out the unendowed (i.e. customers that don’t need to give anything up in order to adopt your product)

– Burton Snowboards targeting first time mountain-goers rather than existing skiers

2. Find customers who will prize the benefits of your product much more highly than others

– All-wheel drive cars in Colorado, Idaho, N. California, etc.

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Summary

• Existing customers are more valuable for two reasons

1. They represent the overwhelming majority of total customers over the lifecycle of your brand

2. They are more psychologically open to increasing their use of your brand

• New customers remain an important source of growth but we need to be selective about the ones we approach due to their tendency to overvalue the benefits of incumbent brands

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