Acquisition vs. Cross-Sell Economics: The No Brainer Investment Decision
Why is it that so many companies these days are over investing in customer acquisition?
Don’t get me wrong, acquiring new customers is critical to any business’ growth, but we all know that customer acquisition costs (CAC) can be extraordinarily high. Studies show that attracting a new customer can cost 5 to 7 times more than retaining an existing customer. All too often the payback period (when incremental margins exceed CAC) exceeds 12 months. If that customer doesn’t stick around for years, a lot of money has gone down the drain…
Conversely, cross-selling — selling more products/services to existing buyers — can have an incredibly high ROI. Assuming near $0 CAC, the cost-to-sell an add-on product or service typically has a payback period of < 3 months. Now ask yourself, how many companies have an average customer share-of-wallet greater than 30%? Very few….
Here is a simple example: If a company has an average customer share-of-wallet of 25% and they increase that to 40% across just half their customer base, that’s 30% revenue growth from their existing customer base ALONE! And the incremental profits from each deal hits their bottom line within 90 days.
So why are people investing so much in acquisition vs. investing in cross-sell?
To be honest, acquisition is operationally easier and “sexier.” Today’s B2B marketing technologies — social media, marketing automation, email, webinars, etc. — make lead gen easy to automate, deploy, and scale, plus have a tantalizingly low “cost per lead.” But while Marketing teams can create tons of top-of-the-funnel volume and noise, once you consider conversion rates the cost of a closed lead skyrockets. A simple rule of thumb is that the cost per closed marketing lead is 30 times as expensive as a simple marketing qualified lead (MQL). The lead black hole and low conversion rates can just blow up CAC.
Conversely, cross-sell can be difficult to execute. As we will outline in future blogs — cross-selling has an incredibly high ROI but requires involving enabling sales reps, overcoming perceived customer relationships risks, and investing in rigorous analytics to make sure companies offer the right products to the right customers at the right time.
The lesson is simple — most companies should shift more investment from customer acquisition to customer cross-sell programs that are scalable and sustainable. Our SVP goes in-depth on 4 different cross-sell plays your team can run in this blog.
Would love to hear your thoughts below…