2.2 The Importance of Customer Acquisition

Customer acquisition is at the fore for any organization when designing CRM campaigns. Over the past century, we have seen the evolution of customer acquisition techniques spurred by technological advancements and customer heterogeneity. Whether we are talking about improvements in data collection capabilities, data storage capacities, or the ability to analyze data collected from customer behavior and profiles, these improvements have paved the way toward increasingly intricate and focused acquisition techniques. From mass-level acquisition techniques like Ford's Model T ‘universal car,’ to segment-level acquisition strategies such as Kellogg's Special K weight-loss brand, and finally to one-to-one acquisition such as Dell PC customization, companies have had a growing ability and need to tailor their offerings as well as their acquisition methods to individual customers.

From a traditional manager's perspective, a successful and positive customer acquisition strategy involves attaining the highest possible customer acquisition rate by implementing mass-level strategies. Any combination of mass marketing (radio, billboards, etc.) and direct marketing (telemarketing, mail, e-mail, etc.) would be implemented in order to target ‘eligible’ customers rather than ‘interested’ ones. This meant searching for customers who, regardless of their purchasing habits or particular tastes, could not be ruled out of using the product based on general product usage criteria. A CRM strategy that had as its goal to sell diapers would target new/young parents through mass marketing channels such as parenting magazines, promotions at podiatrist offices, or even home furniture magazines. The mass-level acquisition approach could also include more general methods that would target people who could potentially be young parents based on demographics (age, marital status, gender, etc.) [3].

Companies such as Tide (owned by Proctor & Gamble), McDonald's, Coca-Cola, and General Motors most epitomized this strategy during the second half of the twentieth century. This was partly due to the fact that, for example, an advertiser in the 1960s could reach 80% of US women by airing on CBS, NBC, and ABC at the same time [4]. Kraft Food and Beverage Company recently implemented mass-level acquisition when it bought Cadbury Schweppes in 2010 for the purpose of increasing its general brand range and broadening its customer base [5]. However, despite the long-standing success of mass-level acquisition, changes in the firm–customer relationship have over the years required a change in acquisition philosophy. A new approach to CRM pertaining to customer acquisition, dubbed ‘cultivating customers,’ is gaining ground. This is a conscious move from mass marketing of products to one that is focused on the end consumer [6]. This is a direct result of increases in data collection and storage capabilities that have uncovered layer upon layer of customer differentiation. Differentiating and segmenting with regards to demographic, psychographic, or purchasing power-related characteristics became more affordable and possible, and eventually became necessary in order to keep up with competing firms.

Segment-level acquisition ushered in a new philosophy in customer acquisition: customers are different, and so we should begin to cater to those differences. Although segment-level acquisition did not take this theory to the extent that one-to-one customer acquisition has, it certainly acknowledged a growing trend of subsets or groups of customers within a larger target market. Being able to collect, store, and analyze customer data in more practical, affordable, and detailed ways has made all of this possible. As firms have become more capable and committed with data analyses, offerings have become more specific, thus increasing the amount of choice for customers. This has in turn spurred customers to expect more choice and customization in their purchases. This continuous firm–customer interaction has consistently shaped segment-level marketing practices in the process to better understand customers.

The emergence of segment-level acquisition has manifested itself in many ways. From a demographic standpoint, companies can now differentiate between customer groups who live in certain geographic environments or areas. But companies also segment different customer groups based on psychographic characteristics such as hobbies and leisure activities, or based on purchasing-related characteristics that take into account customers' financial positions. These segmentation techniques are often combined in the process of customer acquisition, exemplified by Tata's launch of their Nano car. On a purchasing-power level, Tata was appealing to the Indian lower–middle class by offering the most affordable car ever made. The customer segment that was targeted with the launch of the Nano was a large contingent of two-wheeler-riding Indians who with this offering could upgrade their method of transportation to a car. It is here that that Tata incorporated a psychographic element, by targeting customers for whom the status symbol of owning a vehicle rather than a two-wheeled bike or scooter was of high importance. By enticing these customers from both a pricing and status symbol standpoint, Tata targeted a subset of customers to whom this offering would appeal (the rise in metropolitan traffic shortly after the release of the Nano can be somewhat attributed to people abandoning two-wheelers in favor of this affordable car) [7].

The CRM strategies of insurance companies and mobile phone companies are also great examples of segment-level acquisition, as their business models are based on the concept of providing different packages for different groups of people. With life insurance companies, for example, companies tailor their packages using almost every segmentation method. Whether it is demographic (using age, gender, health) or purchasing-power related, firms can offer a wide array of policies based on specific and relevant customer information. Mobile phone companies build their business models based on a similar concept that involves family plans, individual plans, and different packages that offer customers different frequency use of texting, calling, and data to find the plan most appropriate for their usage.

But as segmenting capabilities due to data mining improvements have improved over time, segment-level acquisition has yielded an overwhelming number of segments for firms to keep track of. It is through the continued improvements and innovations in data collection, storage, and analysis that acquisition has moved toward one-to-one acquisition. This one-to-one acquisition has reached a level of specificity that segment-level did not offer. The acquisition process now occurs between firms and individual concepts from start to finish. The emergence of modeling-based CRM has been a cornerstone in this trend.

Although many of the same segmentation criteria from segment-level acquisition are present in one-to-one acquisition, they are taken to a new depth of detail for each customer. Where one-to-one acquisition has truly taken flight is in e-commerce and online interactions with customers. Companies' online portals such as Amazon.com, Nytimes.com, and Yahoo.com have offered users the ability to personalize everything from the content they view to the way that they view it. Amazon.com, for example, uses collaborative filtering in order to recommend music or books to users that it would like [8]. The online radio company Pandora bases its entire product on a similar concept of personalization. Users create radio stations based on an artist or song that they like, and Pandora will play music similar to that song or artist which users can signal ‘thumbs up’ or ‘thumbs down’ in order to continue fine-tuning the station to their liking. PC manufacturer Dell and sportswear giants Adidas and Nike have all engaged in one-to-one acquisition techniques where customers are granted the opportunity to tailor their products according to their own taste. In the case of Adidas's launch of its Adizero soccer boots, it offered customers the ability to personalize every aspect of the Adizero while offering suggestions as its database took note of the customers' tendencies.

Customer acquisition is an important step for companies in developing a successful and comprehensive CRM strategy. Identifying the right customers to acquire, predicting customer response to promotional activities, and understanding the long-term effects of marketing on customer acquisition are key components in the acquisition process. In order to maximize the efficiency of each one of these steps, firms must use the tested/proven metrics and models for analyzing the various components of customer acquisition.

In Chapter 3, we will discuss the different models and metrics that should be used by firms in their respective business environments. We will take an in-depth look at the modeling-based approach to customer acquisition for both B2B firms and B2C firms, highlighting the differing modeling components necessary for successful customer acquisition in each. Additionally, we will look at the different models needed for contractual and non-contractual customer acquisition relationships within B2B and B2C respectively. Some of the models discussed will include: (a) differences between customers acquired through promotions and those acquired through regular means, (b) effect of marketing activities and shipping and transportation costs on acquisition, (c) impact of the depth of price promotions, and (4) differences in the impact of marketing-induced and word-of-mouth customer acquisition on customer equity.