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Blog

Jun 04, 2016

Show Me the Money! The Financial Impact of the Customer Experience

Categories:
Customer Experience

show me the money, or financial impact of customer experience

[Estimated read time: 7 minutes]

According to Forrester, 57% of executive teams want to position their companies as customer experience (CX) leaders in their industry. And going even further, 16% of them are aiming to provide customer experiences that lead across all industries.

These figures reveal that there is a sizable percentage of executive teams who are not pursuing excellence in CX. But why not?

Company leaders often fall victim to the misconception that maintaining their current customer experience is less expensive than providing a great customer experience. This is because short-term costs usually overshadow long-term payoffs. For example, think about the retailer that keeps a low inventory at their store locations. The finance team wants to avoid the costs associated with holding a lot of inventory - seems logical enough.

But the retailer is failing to consider the real-world impact. When customers can't find the item they came in to buy, they will think twice about returning to the store. The out-of-stock experience damages revenue and word of mouth (WOM) and "word of mouse" online. 

Why the misconceptions about CX?

People often assume great CX is more expensive to provide because they hear stories about customer service reps who go above and beyond, going to extreme lengths to surprise and delight. These tactics are expensive, so they aren't replicated. They also aren't necessary for great CX. There are many myths around what it means to provide a great customer experience, but research shows that customers are most satisfied when they get what they expected, and when they feel they've been treated fairly. If you aren't able to deliver what they expect, they will most likely be satisfied as long as you explain why. Customers want to feel informed and valued - not necessarily surprised and delighted.

Research shows that customers are most satisfied when they get what they expected.

Another reason for this misconception is that it's difficult to assess the revenue and WOM damage associated with sub-par customer experiences. The costs associated with poor CX manifest themselves in other parts of the company. For instance, if reasonable expectations about the product were not set, the organization will be dealing with product returns and an influx of angry calls to the contact center. 

To understand the financial impact of the customer experience, organizations need to start with assessing the value of a customer. Many such assessments build upon the Lifetime Value of a Customer introduced by Carl Sewell in the nineties, using a discounted cash flow from expected purchases from a customer or household over a three to five year period.

For an example, let's consider a household with two parents and one adult child living with them. Even though any one individual may only purchase a car every six years, between the three drivers in this household, they might buy a car every other year (if their purchases are spread evenly). If you're an auto manufacturer predicting the customer value of this household for the next five years, you could assume they might purchase 2.5 cars. The value of those cars equals the value of this household's continued relationship with your company. How much are your customers worth to you?

How CX impacts revenue, profit margin, and word of mouth

Revenue. A poor customer experience decreases customer loyalty by 20%, according to data from hundreds of studies conducted by John A. Goodman, author of Customer Experience 3.0 and respected CX expert. For every five customers that have a negative experience with your company, you are likely to lose one of them. Consider this statistic along with the customer value you calculated - could your customer experience be shaving 20% off your revenue potential? How much would 20% cost you?

Profit margins. Studies show that price sensitivity doubles when customers experience problems, and doubles again when problems recur or multiply. For instance, say 15% of customers who haven't had any problems think your prices aren't a good value for the money. If customers encounter problems, that number shoots up to 30%. This is why companies that provide consistently positive customer experiences can maintain higher margins.

Word of mouth. In this case, conventional wisdom is true: people are more likely to complain than they are to praise. Compared to positive customer experiences, poor experiences cause two to four times as much negative WOM. The prevalence of online reviews has exacerbated this issue. Even though only 5% of consumers typically post reviews, 30% of consumers use reviews when making a decision to buy or not to buy.

The payoff of improving CX

In order to understand what is to be gained from improving the customer experience, companies need to analyze two figures: the amount of revenue at risk because of the current customer experience (also known as "market damage"), and how much that risk could be reduced by improvements to the customer experience. Better CX leads to increased revenue from higher retention, improved customer acquisition due to positive WOM, and the ability to maintain higher profit margins.

To assess the market damage caused by your current customer experience, you will need to understand what percentage of your customers experience problems, how likely they are to voice those problems, and how effective your service systems are at resolving those issues. 

In the chart below are market damage calculations for a hypothetical company, Acme Inc. Let's assume Acme has a million customers of which 15% experience problems, and the average customer is worth $2500. Of the 150,000 Acme customers who are experiencing issues, we know that an average of 96% will never speak up, and that 91% of unhappy customers will not repurchase (for more on these statistics, watch the video "Bridging the Service Gap"). We also know that if you resolve a complaint in the customer's favor, they will do business with you again 70% of the time.

Using these stats and a few assumptions about Acme's service effectiveness, we can see that 134,058 customers are at risk of being lost. With an average customer value of $2500, that's more than $335 million Acme is putting at risk.

revenue at risk due to CX

After they get over the initial shock of risking a third of a billion dollars on their current CX, Acme can use these figures to guide conversations about which CX modifications will reduce the most risk. It's clear that the majority of the risk is coming from unhappy customers who are keeping complaints to themselves.

Although it's our knee-jerk reaction to view an increased complaint rate as a bad thing, it's actually good - without knowing what's wrong, you don't have an opportunity to fix it. If you had a curable disease, wouldn't you want to know about it?

The risk assessment makes it clear that Acme's first priority is increasing their complaint rate, giving them more chances to resolve issues they don't currently know about. They can accomplish this by gathering customer feedback through additional channels, such as social media, and incorporating proactive communication into their service channels. With these changes, let's say Acme is able to bring their complaint rate up to 30%. That improvement alone would reduce their revenue risk by $40 million.

Without knowing what's wrong, you don't have an opportunity to fix it.

The next item Acme must address is their service effectiveness. Currently, only 60% of their complaining customers are satisfied with the resolution they receive. What if Acme could increase their satisfaction rate to 80%? That would decrease their risk by an additional $13 million. Service effectiveness can be improved through better agent guidance and smarter self-service tools, resulting in more customers getting the resolutions they need and remaining loyal to Acme for years to come.

Contrary to popular belief, great CX is less expensive than poor CX, which leaves money on the table and loses customers over time. How much of your customer revenue is at risk? 

To learn more about how smart customer engagement solutions can reduce your at-risk revenue, schedule a demo of the Astute Solutions suite.

 

Source: "Customer Experience 3.0" by John A. Goodman

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