The ROI of CX - Part 1: Research Review

Conversations I’ve had with Customer Experience (CX) practitioners often circle back to the question:

“How do we show the connection between the value of our CX program and real business returns?”

This 3-part article aims to answer that question through a quick look at the research (this Part 1), a summary of three case studies I heard at the Customer 360 Symposium in March 2024 (in Part 2 ) before outlining seven essential steps to connect CX improvements into measurable business returns (in Part 3 ).

So, on to Part 1, which provides a quick review of the research on the measurable improvements in customer loyalty, revenue growth, and cost efficiencies that come from investing in high-quality CX initiatives.

Watermark Customer Experience ROI Study

A long-term analysis by Watermark Consulting vividly demonstrates the financial benefits of CX leadership. For over a decade, Watermark’s annual The Customer Experience ROI Study has compared stock returns of CX leaders and laggards (as identified by third-party rankings such as Forrester and Qualtrics ) across industries.

The 2021 report highlights the stark contrast between CX Leaders and Laggards in terms of stock market performance.

The graph (above) shows the cumulative total return across a 13-year period. Some key findings:

• CX Leaders outperform the market, generating a return 108 points higher than the S&P 500 Index.
• CX Laggards post a return that is 110 points lower than the S&P 500 Index.
• CX Leaders generate a cumulative return 3.4 times greater than CX Laggards.

This study not only tracks stock performances but also explains the underlying reasons for superior financial results among CX Leaders:

1. CX leaders generate higher revenue. Satisfied and loyal customers exhibit better retention, are less sensitive to price fluctuations, and are more inclined to consider additional products and services, all of which contribute to increased revenue. Moreover, their enthusiasm results in positive word-of-mouth and referrals, further boosting revenue.
2. CX leaders also achieve higher cost efficiencies. They experience fewer customer complaints and lower service costs, leading to smoother operations and enhanced profitability. Additionally, customer referrals reduce the costs associated with acquiring new customers.

Harvard Business Research

In a 2014 Harvard Business Review (HBR) article , Medallia examined sector-specific data to shed more light on the direct impact of CX. They looked at the effect of positive CX encounters on drive repeat purchases and increased customer spending, and found

1. For Transactional Models: After accounting for other factors influencing repeat purchases (e.g., frequency of customer need for the company's goods and services), customers who had the best past experiences spent 140% more compared to those with the poorest past experiences.
2. For Subscription Models: A member rating their experience as the poorest has only a 43% chance of remaining a member a year later. In contrast, a member who gives one of the top two experience scores has a 74% chance of continuing their membership for at least another year.
3. For Predicting Future Membership: Medallia used this data to predict future membership duration based on experience quality. On average, a member who gives the lowest score is likely to remain a member for just over a year. Conversely, a member who gives the highest score is likely to stay for another six years.

These metrics underscore the dual benefit of investing in CX—boosting revenue while simultaneously driving down costs. The Medallia research emphasises that “delivering great experiences actually?reduces?the cost to serve customers from what it was previously”. They write:

Systematically solve the source of dissatisfaction, you don’t just make them more likely to return — you reduce the amount they cost you to serve. For example, Sprint has?gone on record ?as suggesting that as part of their focus on improving the customer experience, they’ve managed to reduce their customer care costs by as much as 33%.

Indeed, more recent research from Harvard Business School underlines the economic advantage of customer retention, showing that even a 5% increase in customer retention correlates with at least a 25% increase in profit[1].

Other Studies

Dimension Data 's 2017 Global Customer Experience Benchmarking Report[2] found

• 84% of companies that actively enhance their CX report an increase in revenue,
• 92% of companies see increased customer loyalty
• 79% see cost savings.

Similarly, the American Express 2017 Customer Service Barometer found that American consumers are willing to pay up to 17% more for a product or service if the company provides excellent customer service[3].

For additional compelling evidence, the Australian Customer Experience Professionals Association (ACXPA) offers an extensive list of Customer Experience Statistics to Use at Work. The CX Impact on Revenue and Business Growth section provides numerous research-based statistics that underscore the financial benefits of investing in CX. Here are some key highlights:

• Revenue Increase: Companies that prioritize CX see an impressive 80% increase in revenue (Zippia ).
• Budget Allocation: Organizations that demonstrate a clear connection between customer satisfaction, growth, margin, and profitability are 29% more likely to secure additional CX budgets (Gartner ).
• Customer Lifetime Value: Businesses with superior CX enjoy a customer lifetime value that is 600% to 1400% higher than that of detractors (Bain & Company ).
• Revenue Growth: CX leaders achieved more than double the revenue growth of CX laggards between 2016 and 2021 (McKinsey ).
• Spending Behaviour: Customers are willing to spend up to 140% more after a positive experience compared to those who report negative interactions (Deloitte ).
• Revenue Loss: Poor CX can lead to an average revenue loss of 9.5%. Research by Qualtrics across 17 different industries shows that even a single bad experience can significantly impact revenue (Qualtrics ).

Conclusion

In this Part 1, we’ve seen that the research consistently shows that investment in high-quality CX not only pays for itself but also provides competitive advantages in market positioning and financial performance. Businesses leading in CX not only recoup their investment but also achieve superior returns, showcasing the strategic value of exceptional customer experiences.

Part 2 will look at three case studies from the Customer 360 Symposium in March 2024 which makes this research real.

<-- Part 1 | Part 2 | Part 3 -->

Please leave any comments or questions below, or connect with me if you need any help with CX, Data or general Digital Transformation.

[1] The Economics of E-Loyalty – Harvard Business School (Fred Reichheld, Phil Schefter), 7/10/00

[2] 2017 Global Customer Experience Benchmarking Report – Dimension Data (member of NTT Group), 4/4/17; Includes 1,351 organisations across 80 countries.

[3] 2017 Customer Service Barometer – American Express, 12/15/17; random sample of 1,000 US consumers aged 18+