Is Customer Experience Worth It? And How Much Should You Invest?

The following article, Is Customer Experience Worth It? And How Much Should You Invest?, originally appeared on ExperienceInvestigators.com.

As part of our Year of CX initiative, we recently released a calculator to help you see the impact CX improvements can have on your bottom line. Try the calculator for free here.

Is customer experience worth it?

This is a question I get all the time.

• C-level leaders want to know if customer experience (CX) is worth the investment.
• Customer-focused employees across marketing, sales, HR, and other departments want to know if new CX initiatives are worth pushing for.
• Even organizations with running CX programs are often wondering how those efforts are paying off.

So… Is customer experience worth it? Two thoughts come to mind:

1. Customer experience can be tied to three areas of specific, tangible returns on investment.
2. BUT the question is flawed — customer experience happens whether you’re intentional about it or not.

This means customer experience done well can meaningfully improve your organization’s bottom line, while customer experience left ignored can meaningfully hurt it.

Let’s investigate each of these ideas further.

The Three Areas of ROI

What is the return on the investment of customer experience? Let’s break down the ways customer experience not only is worth the investment, but absolutely necessary!

First, it’s important to know that customer experience can’t exist in a vacuum — you must do the work to align your company goals with your CX goals.

Consider what most organizations focus on for their overall business goals:

• Companies need to earn more than they spend. In fact, they need to earn profits to succeed.
• This means they have to watch two things carefully: revenue and expenses.
• Most organizations are looking to increase revenue and reduce expenses.

This often gets translated into the following business text:

SALES! SALES! MORE SALES!

In fact, if you look at traditional business plans, they don’t even talk about customers. They talk about GETTING customers, but then the plan moves on to the internal side of the conversation – operations.

The amazing thing about focusing on customers along their entire journey, including AFTER they become customers, is how it pays for itself in several ways.

Investing in customer experience means creating ways for customers to STAY customers longer. It means creating revenue through these three areas:

1. Higher retention rates and lower customer churn

According to Forrester Analytics Customer Experience Index Online Survey, US Consumers 2019, delivering a good experience by solving customer problems quickly means improved retention.

On average, it can mean their customers are seven times more likely to stay with them!

What could this mean for your organization? Some organizations are literally losing dozens or hundreds of customers every day. By not investing in customer experience, they are missing opportunities to improve the business results they want simply by keeping customers.

2. Customers who stay longer with your brand also spend more with your brand

Loyal customers are more valuable to your brand. 70% of consumers with high emotional engagement spend up to two times or more on brands they are loyal to, according to a study by Cap Gemini.

And common sense will tell you that a customer who stays with your brand longer will be more valuable than a customer acquired and then lost quickly.

3. Customer referrals lead to immediate returns

Gaining customers via referrals reduces the cost of acquiring these new customers. They are more likely to convert and do so faster.

In one research study, a bank in Germany found that In a study of almost 10,000 accounts, referred customers were 25 % more profitable than customers acquired in other ways. Plus, nearly three years later, the referred customers generated higher profit margins, were more loyal, and showed a higher customer lifetime value.

And as customers stay with your organization, they not only spend more, but they cost less. After all, it can take up to 7x as much to get a new customer than to keep one!

“In our industry, retaining a customer & keeping them happy is important which is why customer experience & continuous improvement are key values that everyone in our organization focuses on.

It’s our belief that when we invest in CX, listen to the voice of our customers & find opportunities to improve, we will deliver on the exceptional customer experiences that build strong, lasting relationships with our policyholders & agent partners.”

Chris Neeson, Customer Experience Leader, Ohio Mutual Insurance Group 

Customer Experience is Happening Whether You’re Intentional or Not

You can run a business and sell products without ever uttering the phrase customer experience, and yet it still happens.

Customer experience is the sum of each interaction a customer has with your brand and how they feel about it. That happens no matter what.

The way to leverage this is to understand that intentional, proactive, and positive customer experience design leads to real results for your organization AND your customers.

Yet, customer experience is often seen as a “soft skill” or something that’s nice to have but not really necessary.

But the best companies focus on CX in ways that lead to business outcomes. They do this by understanding:

• It’s a mindset – always top of mind
• It’s a strategy – CX provides business outcomes
• It requires business discipline – it takes effort and action to achieve the best results

Imagine if a business had one quarter where sales expectations weren’t met and they announced they were “getting rid of sales.” Absurd, right? There is a basic understanding that investing in sales means earning business results.

There’s no shortage of data to show why an investment in customer experience strategy is worth it. But what does that really look like?

How to Invest in Customer Experience

Defining a customer experience strategy is not enough. You have to then assign budgets, resources to develop processes, systems, and overall cultural changes to actually make it happen. (And here’s another reminder – tie these investments back to your strategy and success statement! That’s how you prioritize.)

Investments that are directly tied to customer experience might include things like:

• Customer experience management tools, like customer feedback software or more robust Voice of the Customer (V0C) platforms, Customer Relationship Management (CRM) technology, or investments in customer data centralization
• CX initiatives to understand customers better, like customer journey mapping, overall customer research, and customer data analysis
• Programs to invite customers into the organization more, like Customer Advisory Boards, customer accessibility labs, or inviting customers into meetings or events

Of course, CX is not just about learning and identifying insights. You need to act on them!

That leads to a whole other set of investment opportunities:

• Cross-functional leadership assignments, coordination, and communication to act on next steps
• Governance tools and processes to coordinate centrally, along with the project management required to facilitate
• Specific journey improvements, like digital fixes or mobile app redesigns, along with general process improvements

And then finally, there are the cultural changes and reinforcements required to deliver on the customer experience goals.

These are investments focused on your employees.

• Strategic communication around CX foundations – defining the customer experience for your organization and how each employee plays a role
• Workshops and training for both employees in general and for specific groups
• Ongoing, meaningful recognition and rewards for those who contribute to the success of your customer experience initiatives, sometimes including specific compensation incentives

While this may sound like a lot, many of these investments are shared with other leaders. It’s difficult to say, for example, that the improvements to the customer’s journey should be owned by one CX budget. So many organizations look at these investments in shared or overall ways.

But these types of investments should absolutely lead to a return. That’s where knowing your numbers can help.

How to Calculate Customer Lifetime Value

Do you know your Customer’s Lifetime Value?

Customer Lifetime Value Model:

CLTV = Customer Value x Average Customer Lifespan

But how do we know these numbers? Here are a few leading measurements to try.

Calculate average purchase value:

If you’re unsure of the data, you can calculate this by dividing your company’s total revenue in a time period (usually one year) by the number of purchases over the course of that same time period.

Company’s total annual revenue = $500,000/3500 (total purchases in one year) = $142.86 customer’s average purchase value

Calculate average purchase frequency rate:

Calculate this by dividing the number of purchases by the number of unique customers who made purchases during that time period.

3500 (total purchases in one year) / 1500 (unique customers in same year) = 2.33 average purchase frequency rate

Calculate customer value:

Calculate this by multiplying the average purchase value by the average purchase frequency rate.

$142.86 (Average Purchase Value) x 2.33 (average purchase frequency rate) = $332.86 Customer Value

Calculate average customer lifespan:

Calculate this by averaging the number of years a customer continues purchasing from your company. If you have historical data, you can do this officially by adding the sum of all your customer lifespans and dividing by the total number of unique customers.

A more accessible way to get to a current number is by using your current customer churn rate to estimate this. Your churn rate is the number of customers you lose in a given time compared to those you gain. You can calculate this by dividing the number of “churned” or lost customers by the total number of customers in a given time period.

550 lost customers this year/ 1500 customers this year (x 100 for percentage) = 36.67 % Annual Churn Rate

You can then use this to get to your Average Customer Lifespan by using the formula that 1 = Average Lifespan / Churn Rate.

1 / .3667 = 2.72 Years for Average Customer Lifespan

Calculate CLTV:

Multiply customer value by the average customer lifespan. This will give you the revenue you can reasonably expect an average customer to generate for your company over the course of their relationship with you.

$332.86 Customer Value X 2.72 Years for Average Customer Lifespan = $905.38 Customer Lifetime Value

Putting this all together:

Investing in improving the experience will result in higher Customer Lifetime Values. This means more revenue without more sales or more customers.

Multiply that by the opportunity of increased retention, where customers are likely to spend more with you, and increased referrals, where those customers are likely to spend more earlier with you, and you can see how these investments seem not just worth it, but silly to ignore.

What about increasing retention overall? How could that impact your organization’s bottom line?

If you know what a year of retention means, you can predict what a 10% or 50% increase would mean for revenue.

More Types of Customer Experience ROI

Customer Experience Can Make You Less Reliant Upon New Sales

So if we know that investing in the customer experience matters to revenue, is that enough? Why do some companies ignore this?

Well, frankly, it’s easier to track metrics like “new sales.” Customer experience is about a whole ecosystem of strategy, discipline, and measurement.

If you know your customer’s lifetime value, you can start determining what increasing that by just a little might mean for your business.

You can also start estimating what a bump in retention or an increase in loyalty might mean for your organization’s bottom line.

Increased loyalty means more spending, more referrals, and more positive word-of-mouth marketing.

It means building so much happiness that it literally turns into profits!

Customer Experience Can Reduce Expenses

Do your goals include reducing expenses? Most organizations pay attention to what they get from the investment (revenue) and also what they save from investments. These savings PLUS increased revenue lead to more profits.

Proactive, positive customer experiences can prevent customer service issues. There is a cost associated with each point in serving the customer.

A great customer experience will literally help you prevent costs, like:

• Customer service staffing
• Cost of service
• Customer channel switching, leading to more effort and expenses
• Preventing service issues proactively to avoid service calls and customer support issues
• Reducing refunds
• Avoiding unnecessary service calls, repairs, or retributions
• Employee and customer communication to facilitate “workarounds” to solve issues or achieve goals

Gartner reports that proactive customer service is desperately needed to meet customer demands, however just 13% of 6,000 customers reported receiving proactive customer service.

The same report showed proactive service results in a full-point increase in Net Promoter Score (NPS) and other experience metrics.

Gartner and others have found that a one-point increase in these metrics has major positive implications on customer loyalty. That loyalty leads to results for your business like increased retention, improved word-of-mouth marketing, and wallet share.

By reducing customer effort through proactive customer experience design, thoughtful customer experience management, and cultural buy-in, you gain both higher levels of revenue and profit AND reduce the costs associated with serving customers.

But let’s not stop at revenue and costs! We are also investing in the goodwill and everyday joy of people.

Customer Experience Can Make the World a Better Place

I’m not joking.

The mission of my company is To Create Fewer Ruined Days for Customers.??

Why? Because if we do that for one another, we make the world a better place. I mean this very literally!

Nobody wants to ruin somebody’s day. But it happens when customer experience is not well-thought-out or considered as an actual part of doing business.

And now, let’s talk about the other side of how CX can earn you a real return.

CX Can Create Better Days for Your Employees

And finally, there’s another area to earn a return on the investment of CX:

Your employees and culture! It’s not too surprising to know that happy, productive, and engaged employees deliver better experiences to your customers.

Productivity and efficiency in the workplace are not often connected to customer experience, but I’d like to make the argument that employees, regardless of their role, who are more productive actually help the processes and touchpoints your customers experience run smoother, faster, and with less customer effort.

Employee experience (EX) is in step with customer experience. If your employees are unhappy, then your customers will be, too. And no employee wants to work somewhere customers are constantly complaining or dissatisfied.

“We developed a formal employee experience program, where EX = CX is our motto.”

Debbie Szumylo, Customer Experience Evangelist, Thomson Reuters 

Without great customer experiences, employees will become disengaged, less productive, and be more likely to leave their role. And without great employee experiences, customers are likely to be disappointed, disengaged, and more likely to leave as a customer.

IBM’s Employee Experience Index highlights five dimensions in the overall experience, and one is “Purpose – understanding why one’s work matters.” This is why I talk so much about having a well-crafted and well-communicated Customer Experience Mission.

Help your employees understand how they are living this mission in their roles, and they will deliver for you and your customers!

Employees will feel good about their work and help recruit other high-quality employees to their organization. Just like those customers who are referred, job candidates sourced from referrals are 4 times more likely to be hired and stay for 4+ years as an employee, compared to just 25% of those sourced through job boards, according to the employee referral software provider Erin. 

And your employees want more, interactive training to support their work. In fact, a whopping 94% would stay at a company that invests in learning, according to LinkedIn.

Give your employees the training they want and need, then support those new skills and ideas with a constant stream of customer experience content.

There is no part of the organization that is not impacted positively by a proactive, positive customer experience.

That sounds like a tremendous ROI to me.

This article, Is Customer Experience Worth It? And How Much Should You Invest?, originally appeared on ExperienceInvestigators.com.

As part of our Year of CX initiative, we recently released a calculator to help you see the impact CX improvements can have on your bottom line. Try the calculator for free here.