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How to Calculate the Customer Experience ROI

Jan 8, 2021 | Blog, Calculator

The ROI (return on investment) of customer experience for a business is undeniably high. In fact we have previously said that ‘Customer Experience is Everything‘. Even a small increase in positive customer experience (CX) can propel revenue growth to new heights, increasing company profits considerably. Calculating the ROI of CX is usually measured as a ratio between net profit over a set period and the cost of the initial or recurring CX investment. A ratio over 5:1 is excellent for most companies, with a 10:1 ratio being quite exceptional. As usual, the higher the ratio, the greater the business impact, yet we will see that business metrics like these have their limitations.

What we will cover:

  • CX defined
  • The value of CX
  • Results from a successful CX program
  • Methods in calculating CX
  • A free, online CX and defection calculator
  • Real-time, on the spot feedback to improve CX

What is Customer Experience?

Bad customer experience is something we think we know – after all, unhappy customers seem to be very vocal. Yet customer experience is not so easy to define. There are at least 15 definitions to choose from. However the one we prefer is:

CX is the overall customer experience of interaction (or perception by customers of their interactions) of a client with a company.

It is critical to remember that interactions begin occurring way before the physical purchase of the product or the delivery of the service. Touchpoints or service elements perceived by customers before and after a purchase is part of this experience. In fact, this is often termed, “the customer journey”, the assessment of which is often called “Customer Journey Mapping“. Specifically, this reviews the quality of encounter as the customer interacts with the business – both online and offline, no matter how many times. Invariably, this would include:

 

  • The quality of customer care
  • The interaction between customer and employees
  • The quality of customer service
  • Overall customer engagement
  • Advertising
  • Packaging or other resources
  • Product features
  • Service features
  • Ease of use
  • Reliability

 

With all these facets, it’s challenging to quantify CX because it’s an interdependent relationship created by the offer and its reception. Moreover, a customer experiences is uniquely personal. It often involves sensory, emotional, and physical perceptions that create a memorable, unique experience, whether that experience is positive or negative.

The Value of Customer Experience

CX is a valuable tool for understanding the best methods to grow a company and increase revenue. The financial payoff to the business in delivery great CX is massive. For example, the Harvard Business Review published research on actual customer transactions and comments. They found that among thousands of global customers studied, those who had the best past experiences spent far more money as compared to those who had poor past experiences. The revenue increase from a greater percent of consumers delivered financial benefit. Clearly the improved customer experience ROI is impactful.

Although the profit margins may take time to materialize, the ROI of CX is impressive when considering the following:

  • 84% of companies that work to improve their CX report an increase in their revenue
  • Superior CX increases profits by 7 % when compared to laggards in CX
  • Companies that focus on their customers from the start are 60% more profitable than companies that don’t focus on customers.

 

Don’t think that is staggering enough?

The Loyalty Effect by Fred Reichheld (Bain & Company), arrestingly stated that:
Increasing customer retention rates by 5increases profits by 25% to 95%….WOW. Since then, this connection between customer retention and financial performance has been underscored by many others.
  • Customer-centric companies are 60% more profitable than companies that don’t focus on customers.
  • Brands with superior customer experience bring in 5.7 times more revenue than competitors that lag in customer experience.
  • 84% of companies that work to improve their customer experience report an increase in their revenue.

 

For a customer experience leader, the true value in calculating CX rests in its ability to indicate where companies should increase their efforts and direct their people to meet customer expectations. Examining negative experiences also offer guidelines as to what to improve. Why are customers unhappy? Why are customers leaving? Finding these answers will undoubtedly increase profit margins. Superior CX builds a foundation of loyalty, increasing the probability that customers will return to you when they need your goods or services. Customers are also more likely to share their positive experiences with others and pay more for the same products. This is the hidden value of great CX. Great CX means that the individual’s interaction at all points of contact matches the individual’s expectations.

So How are We Doing?

How are US businesses performing? Is overall customer satisfaction increasing? How much bad experience is out there? Although it is accepted that delivering great CX is important, many companies still have some way to go delivering it. Currently, only 49% of US consumers say that companies provide a good customer experience. This means that, the need for exceptional CX is urgent. Consumers have a greater number of choices that are complex and more ways to obtain them. Because it is difficult to measure and takes a long time to see its profitability, some companies don’t see the payoff in examining CX. Why are they ignoring the customer experience ROI?

This is a big issue and colossal blunder, after all, consumers trust an organization they already know and companies are reaching out to their existing base with value-added propositions. A satisfied customer are more likely to stay with a company they feel good about which means a higher customer lifetime value.

Results for transaction-based models

The transaction-model data focused on CX scores that individual customers reported on a scale from 1 to 10. When CX was highest, the annual revenue per customer significantly increased nearly 2.4x higher than customers who reported a low score. Customers with poor CX (1-3) typically generated 1% in revenue, with no repeat buying. Looking at CX from another angle, the results of transactions show a 140% increase in future spending behaviors when CX is positive.

Results for a subscription-based model

This data was focused primarily on subscription loyalty. Did the customers subscribe for another year? CX data can predict loyalty simply by looking at an individual’s CX score and whether, in the following year, they remained with the company.

It costs much less to retain existing customers than to acquire new ones. Companies worldwide are beginning to offer customers added perks with their original purchase in order to keep customers and get them to spend more on a brand they trust. Customer service is also becoming more responsive and accessible.

Methods and Steps in Calculating the ROI

The formula is simple:

($ Benefit – $ Cost) / $ Cost

Its hard to directly and conclusively link CX spend to return. Specific key drivers for customer satisfaction are elusive. The universal and most often used method to calculate ROI, links customer feedback with future spending, customer loyalty and other financial metrics. By understanding how to measure the ROI of CX after a project is completed, you can emphasize the contributions that you and your people have made toward company goals. This insight can be a powerful motivator and help guide project decisions.

Any study on CX should focus should be on increasing speed, convenience, consistency, friendliness, and the human touch. The study will need to review customer surveys, consumer call lines, online comments, persistent complaints, social media impact (for word of mouth) and feedback loops.

Finally, spending money to analyze customer data leads to better decisions and better outcomes. In fact, in 2020, more than 40% of all data analytics handled projects related to some aspect of CX. Finding the right organization to analyze and expand on this data is critical and, in the long run, worth every penny.

CX ROI Calculator

Poor customer experience increases defection. Great customer experience programs increases customer retention and delivers a huge impact on revenues. So what  initiatives are available to help measure the ROI of customer activity? What tools get used by customer experience leaders?

There are many ROI models including Lifetime Value and CSAT. Fortunately there is an Excel calculator for this key metric that tracks the revenue impact of customer experience investments. This spreadsheet can be downloaded . The defection cost is a mix of lost profit, and brand impact from negative online reviews. It is always much higher than the business thinks – so it is vital to know the impact to confirm the changes in the customer experience efforts. It is always much higher than the business thinks – so it is vital to know the impact. The calculator is a quick way to estimate the impact of this customer base defection, using Excel.

Each element is entered eg. average transaction size, margin. percentage of loyal customers etc. The calculator quantifies the profit loss, then shows the ROI of customer experience improvements that can help stop this defection and of course, help halt the online complaints. The out put of the process is a simple sheet complete with easy to grasp charts – see the example below.

Customer Defection Calculator (Excel)

Use Real-Time Feedback to Help Improve CX

The digital age has provided many opportunities for customers and businesses alike. Real-time feedback from customers allows a business to respond immediately. This means an immediate answer to a bad experience and a decrease in negative impact.. Moreover, no more comment cards or feedback forms needed to capture customer experience. A better long term initiative is to use the cell phone of the customer to deliver on-location actionable feedback. The feedback process is simpler for the happy customer, yet much more effective for the business – particularly if some golden rules are followed. Customer satisfaction will improve as will the relevant financial metrics and become a competitive differentiator. The process should like the one below:

 

Digital Comment Card Feedback Process

 

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