Good, Better & Best: Three Ways to Calculate the ROI of Customer Experience (CX) Initiatives
By John Joba, Analytics Translator, Gongos, Inc.
Customer Experience is at a turning point. For years the discipline has helped usher in a mandate for customer centricity across organizations. In fact, a 2016 McKinsey study showed that improving experiences can increase revenue by 15% while lowering the cost to serve by almost 20%. Yet, companies are failing to realize the potential of that promise, with only 20% of companies seeing an ROI on CX projects, according to Confirmit. The result? Greater pressure on executives to make a CX business case.
There are two reasons companies could be failing to see ROI on CX projects. Either a) those projects fail to deliver on key objectives, or b) the industry is lacking a disciplined framework to prove and communicate success. We know there’s quite a bit of work to be done on the success front (only 23% to 28% of CX initiatives achieve “success”), but for the purposes of this post we’ll focus on the 80% of initiatives that fail to show ROI.
Based on research from Confirmit, one of the key barriers to demonstrating ROI is an inability to link CX metrics with financial measures. CX metrics, for example, NPS or Customer Effort Scores, are means to an end, not the end itself. In other words, CX metrics are a proxy for financial performance, and not all metrics are created equal, hence selection of the best surrogate metrics is important.
Yet, the problem doesn’t end there. Not only is it vital for CX initiatives to be correlated with financial outcomes, it’s imperative to be able to isolate the specific impact of CX on the business’ financial success while controlling for other factors occurring simultaneously. Best-in-class organizations are accomplishing this through a close partnership with finance teams. This “new” partnership enables them to not only highlight the department’s impact at year end or after an initiative is completed, but also to bring their ROI models to the conversation upfront to prioritize and forecast before an initiative takes flight. However, that’s easier said than done. Below, we’ve included three ways to help you get started proving the ROI of CX initiatives.
Good: Secondary Research + Company CX Data
When financial data such as customer spend is in short supply, outside information from the internet and industry experts can suffice for “back of the envelope” calculations. Start by searching the financial impact of the metrics you’re most interested in (this could either be the one you’re directly trying to impact or your company’s overarching CX measure). If your company uses NPS, one measure to base calculations on could be, “a 12-point increase in Net Promoter Score leads to a doubling of a company’s growth rate on average.” While growth rate may not be the best measure in all circumstances, it’s still a connection to financial results that can be coupled with internal data to create forecasts and begin the conversation. It’s important to note, however, that these metrics are averages and may not represent a specific industry or firm. We advise only using this approach when constructing the initial department-creation business case and at the earliest stages of maturity with a clear plan charted for near-term integration with finance.
Pros:
• Minimal exploration of internal financial data
• Low CX measurement sophistication necessary
• Expedited results
Cons:
• Financial impact is not tailored to the specific company and accuracy may vary substantially
Better: Company CX + Financial Data
With a customer measurement system in place and a steady stream of financial data, it’s possible to derive more accurate ROI calculations directly tied to firm profitability. In its most basic form, only four measures are required: the CX metric of interest (e.g. Overall Satisfaction), the number of customers, average spend, and average cost to serve at each “level” of the chosen metric.
While it may seem daunting to obtain these metrics, with cost to serve being particularly challenging, building this base more than makes up for itself in the long-run: metrics can be swapped, assumptions can be changed, and new factors can be added. Later, we’ll walk through an example leveraging this approach.
Pros:
• Tied directly to the firm’s key financial outcomes
• Simple and intuitive calculations that can be vetted by key stakeholders
• Base model is easily flexible and extensible to meet situational needs
• Efforts here are a stepping stone towards the Customer Equity framework
Cons:
• Some alignment of stakeholders to how metrics are calculated may be required
• Greater data integration and measurement sophistication required
Best: Customer Equity Framework
Bringing together multiple aspects of the customer and linking that to future growth, the Customer Equity framework fosters the most holistic understanding of CX’s impact on the business. The principle idea behind the Customer Equity framework is that each customer brings a certain lifetime value to a business and estimating that value across all customers creates a valuation for the entire business’ customer base and provides strategic direction on which customers to prioritize. Lifetime value is determined by purchase volumes and cost to serve, modified by the expected loyalty of each customer. Loyalty is governed by three forces: value equity, relationship equity, and brand equity, which can connect to each experience at a tactical level.
Ideally, it will be possible to simulate how an expected change in one small portion of the business will trickle up to higher-level drivers of Customer Equity and ultimately the valuation of the entire business. This approach requires the most effort to create, but pays dividends later with its ability to model the impact of even minute changes.
Pros:
• All-encompassing framework capable of linking seemingly “small” aspects to the experience to the bigger picture
• Most robust in terms of which data is factored in and which scenarios can be explored
Cons:
• Requires advanced analytical capabilities to create models
• Greatest level of data integration
• May need additional customer information in addition to CRM/CXRM
• Best-in-class implementations often reside within production-level data tools
Case Study: Creating a “Better” Forecast
Taking it beyond the theory, let’s consider an example of Say It!, a one-million customer, custom graphic t-shirt company. Based off of customer feedback there is an opportunity to improve the website’s outdated, clunky payment system. A proposed redesign of the system would cost $500K and testing suggests it would increase satisfaction by 3%. Based on internal data, we know a few more things about their customers’ financial state:
These numbers are aggregated across the entire customer base in the chart below to get total profitability. Going forward, the goal will be to isolate the expected change in profitability attributed to the redesign.
Using the financial numbers above and the testing results, we expect the redesign makes 43% of people satisfied and leaves 57% of people unsatisfied. The chart below summarizes the effect on profitability.
The chart may seem confusing at first, so let’s walk through it together. The new satisfied profits represent the change in total profitability of satisfied customers; recall, the expectation is that this group is growing from 40% to 43% of customers. New unsatisfied profits represent the difference in profits attributed to unsatisfied customers; recall, this group dropped from 60% to 57% of all customers. Now that the change in profits has been calculated, subtract out the cost of the redesign to get total net new profits: $417K or 83% one-year ROI.
Bringing it Altogether
Calculating ROI is a powerful, intuitive way for demonstrating the value Customer Centricity delivers to the business. Using a framework which combines CX data and financial results creates a customer-focused way of quantifying pain points, justifying their improvement, and prioritizing initiatives.
Furthermore, the simple model presented above can be extended and flexed in several ways; below are a few examples:
- Not in CX? No problem. This framework can utilize your KPIs too
- Think the project will take more than a year to complete or show value? Extend it into a multi-year ROI
- Do you think that having more satisfied customers will increase the rate and ease of customer acquisition? Add customer attraction to the equation and consider altering the cost of acquisition for new customers
- Is your company focused on changes to a 10-point scale rather than a simple yes/no? This framework can be expanded to include those changes as well
A parting piece of advice: Customer Experience ROI is likely a new endeavor for your team and others in the organization. Start slow, keep it simple, and align with key stakeholders utilizing this data along the way.
Click here to learn how the calculations were made.
