How to measure the ROI of CX — A CXChangersTalk
These days, customer experience is one of the biggest topics. Many, if not most, vendors have restructured, reshaped, or just renamed their portfolios to reflect customer experience one way or the other. Customer experience is great, customer experience is valuable.
Now, what is customer experience?
According to Paul Greenberg’s definition, “customer experience is how a customer feels about a company over time”. Bruce Temkin defines customer experience as “the perception that customers have of their interactions with an organization.” Similarly, the Gartner Group defines customer experience as “the customer’s perceptions and related feelings cause by the one-off and cumulative effect of interactions with a supplier’s employees, systems, channels or products.”
What all these definitions have in common is that they are talking about something that is not in the realm of the business and quite abstract.
I often say that good customer experience (CX) is the new differentiator as products and services delivered by businesses are increasingly becoming a commodity. Only few brands can truly differentiate themselves based upon their products/services, price, placement, i.e., the classical tools of the marketing mix. This leaves customer experience as the lever that businesses can and need to work with.
But customer experience is not an end. It is a means. Businesses mostly need to be profitable, which means that the CFO is always on the table when it comes to approving new projects or initiatives, even in important areas like customer experience. The CFO’s main questions are about financial KPIs — and are often not answered in a better way than “everybody knows that good customer experience is good for business”.
This raises some interesting questions, starting with
- Why is it so hard to establish a financial benefit of a CX initiative? Is it so hard, after all?
- What are financial objectives that shall be reached by „good customer experience“?
- Is there a way of linking CX improvements to revenue/profit/cost/margin changes?
- How to find out whether a CX initiative has a positive ROI or achieved ist objectives?
One can easily think of many more questions.
Pressing questions that seemingly no one can answer.
Peter Pirner, formerly domain lead customer experience at Kantar, now independent customer experience consultant and host of the successful German language podcast CX-Talks is someone who has answers.
And now I had the pleasure of talking to him in the inaugural episode of the CXChangersTalks to get some answers to the questions above.
Peter, too, sees that there is a requirement to deliver a prospected ROI for projects that deal with customer experience management. But he cautions that there are a couple of tough questions that the company management needs to ask itself before embarking on a CX project. This is chiefly the question about the basic bias of a company to support the customer experience. Ask yourself: Would you invest even if you couldn’t easily measure an effect on the customer side? Peter maintains that if this question is answered with a “no”, then there is no need at all to think about improving the customer experience as one is talking a bog-standard investment e.g. into an IT system.
Given that the company really wants to improve the customer experience then it needs what he calls a “currency” that helps measuring an improvement of the customer experience and the desired result. This could be that the customer feels more emotionally attached to the business because the sum-total of all experiences leads the customer to the conclusion that they do not feel a desire to try something else or even to buy somewhere else.
A classic measure for this is e.g. the NPS. Peter emphasizes that using an improvement of this measure could already be enough for a really customer centric company.
If it is about calculating an effect in Euros or Dollar then we need to take the next step. This step could base on the concept of the customer lifetime value (CLV). The business now could work on establishing the customer lifetime values of different NPS segments. It is reasonable to assume that NPS promoters have a higher CLV than detractors or customers with a neutral NPS. Still, this needs to be calculated within the finance system. Given this, an increase of NPS promoters will result in a monetary impact that one can offset against the investment. Make no mistake, this is not a simple exercise.
Now, an objection could be that the NPS is not a good measure as the second question “did you actually recommend?” is missing. However, this is does not matter in this case, as the NPS only serves as an indicator for the degree of association that the customer has to the business. In so far it doesn’t matter whether a business uses NPS, CSAT or a hybrid measure. The basic principles of an ROI analysis work with any of them.
The more important question is whether the change already had an impact, as it can take years until customers realize that there has been a positive change — remember, we are likely addressing detractors of neutral persons. In my experience one needs to look at a time horizon of three years. During this time, it is of crucial importance to communicate. Communicate what the assumptions are, what is planned to happen in year one, two, or three. And to monitor whether the assumptions are still true, so that a course correction can happen if necessary.
There may be situations when an impact is visible faster. E.g., if the company loses customer fast. If this can be resolved by a change of the customer experience, then a similar model can be applied. Every customer that does not abandon me is a customer that I do not need to acquire. Of course, the company wants to develop this customer further, but simply, the company saves in customer acquisition cost as it does not need to acquire a new customer.
And the reduction of churn is something that usually can get accomplished faster than elevating happy customers to an even happier level.
So, in summary, we have two basic approaches:
The first one is concentrating on improving the degree of customer happiness in different segments and hence customer loyalty, which usually takes some time to come to fruition. One possible measure to start off from is the NPS, which needs to get related to customer lifetime value.
The other approach is looking at customer churn and reducing that via an improved customer experience — if applicable. This approach is likely to bring faster results and serves as a foundation for the more long-term oriented first approach.
For all of you who want to view/listen to the CXChangersTalk between Peter Pirner and me in original, watch it on my Youtube channel CRMKonvos.