Understanding Customer Acquisition and Retention Costs

2-1 Homework: Acquisition and Retention Resources 2-1 Homework: Acquisition and Retention Resources

2-1 Homework: Acquisition and Retention Resources Company Overview Company Annual Revenues Marketing Expenses MKT % Spend Acquired Customers Retained Customers Starbucks $25,876M $1,035M 4% 120M 207M Customer Acquisition Cost A company’s customer acquisition cost (CAC) is the cost of converting a person into a customer (Optimove, 2023). This is one metric companies can use to track Return on Investment (ROI). It can provide insight into what is working and what isn’t. To calculate CAC, the company needs to divide the total spending on acquiring customers by the total number of customers acquired during the same period. In the case of Starbucks, 70% of its marketing spend went toward acquiring new customers. The acquisition spending can be calculated by taking total marketing expenses by the % spent on acquiring customers ($1,034M x .70). The acquisition spending is, therefore, $724,500,000. During this period of spending, Starbucks acquired 120 million customers. The customer acquisition cost is calculated out to be $6.04. Acquisition Spending (70% of MKT Spend) $724,500,000 Acquired Customers 120,000,000 Customer Acquisition Cost $6.04 Customer Retention Cost The customer retention cost (CRC) is the cost of retaining an existing customer. A company can calculate the CRC by dividing the total retention spending by the total number of retained customers during the same period (Bendle, 2021).

2-1 Homework: Acquisition and Retention Resources The remaining 30% of the marketing spend ($310,500,000=$1,034M x .30) by Starbucks went toward retention tactics. By taking the retention spending divided by the total retained customers (207,000,000) during the same period, the customer retention cost comes out to be $1.50. Retention Spending $310,500,000 Retained Customers 207,000,000 Customer Retention Cost $1.50 Product Acquisition Cost When a company decides to launch a new product, it can look at specific metrics to determine product viability and develop product forecasts. The company will benefit from selecting test markets to launch the product that best fits. For Starbuck’s new CBD-infused Iced Tea Lemonade, the initial market will be North America (United States and Canada). It’s the most established market of Starbucks. This target market generates 71% of Starbucks's revenue (Farley, 2022). Starbucks’ Fiscal 2022 Annual Report shows that 74% of its revenue is from beverages. Reports on the current trends for coffee and tea indicate that roughly 31% of Americans prefer tea to coffee (McCarthy & Richter, 2015). Based on the above-provided percentages and Starbucks' 4% marketing spend, Starbucks can calculate the product acquisition cost based on the following: North America Market Revenue (71%) ($25,876M x .71) $18,371,960,000 Revenue from Beverages (74%) ($18,371M x .74) $13,595,250,400 Revenue from Tea (~31%) ($13,595M x .31) $4,214,527,624 4% Revenue allocated for marketing spend ($4,214M x .04) $168,581,105 70% acquisition spend $118,006,773

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2-1 Homework: Acquisition and Retention Resources ($168,581,105 x .70) North American Acquired Customers (74%) (120M x .74) 85,200,000 North American Tea Customers (31%) (85,200,000 x .31) 26,412,000 Product Acquisition Cost ($85,200,000 / 26,412,000) $4.47 Recommendations Customer Acquisition Costs are typically higher than Customer Retention Costs. Starbucks’s CAC is 5x as much as its CRC, which is expected, so they allocate their marketing spending appropriately for acquisition and retention. The new product acquisition cost is less than the average customer acquisition cost by $1.57, which Starbucks can benefit from by launching this new product. It can also indicate that they could spend more on this new product to reach new customers. With new product development, Starbucks will try to acquire new customers but it can also try to sell to existing customers. It is cost-effective to try to penetrate the market with a new product by targeting existing customers. They are 50% more likely to try a new product than someone who has never purchased from the company (Lewis, 2020). References

2-1 Homework: Acquisition and Retention Resources Bendle, N. T. (2021). Marketing metrics: The manager’s Guide to Measuring Marketing Performance . Pearson. Farley, A. (2022, December 22). How Starbucks makes money: Most revenue comes from North America, beverages. Investopedia. https://www.investopedia.com/articles/markets/021316/how- starbucks-makes-money-sbux.asp Lewis, D. (2020, October 20). How to sell new products to your existing customers. LinkedIn. https://www.linkedin.com/pulse/how-sell-new-products-your-existing-customers-david-lewis/ McCarthy, N., & Richter, F. (2015, March 4). Infographic: Younger Americans are ditching coffee for tea . Statista Daily Data. https://www.statista.com/chart/3277/younger-americans-are- ditching-coffee-for-tea/ Nightingale, T. (2021, September 28). Tea and coffee trends: What Today’s consumers want. Restobiz. https://www.restobiz.ca/tea-and-coffee-trends-what-todays-consumers-want/ Customer acquisition costs vs. retention costs . Optimove. (2023, July 16). https://www.optimove.com/resources/learning-center/customer-acquisition-vs-retention-costs Essential Starbucks customers statistics in 2023 • zipdo . ZipDo. (2023, September 28). https://zipdo.co/statistics/starbucks-customers/ Starbucks Corporation. (2022) Starbucks Fiscal 2022 Annual Report. https://s22.q4cdn.com/869488222/files/doc_financials/2023/ar/Starbucks-FY22-Annual- Report.pdf

2-1 Homework- Acquisition and Retention Resources

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