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Yes, Virginia, There Is A Return On Customer Experience Investments

Article by on February 6, 2010 Editor's Pick 12 Comments

In some business circles, getting people to believe in a return on customer experience investments is a lot like getting them to acknowledge the existence of Santa Claus.

Admittedly, it can be difficult to quantify a specific profit or revenue impact from some types of experience enhancers—more robust “voice of the customer” programs, more polished customer statements, better trained front-line personnel, streamlined customer touchpoints, a more user-friendly website, etc. The financials surrounding such initiatives are much less precise than those of hard-dollar initiatives, like the renegotiation of real estate leases or the consolidation of corporate functions.

Of course, that doesn’t mean customer experience investments have any less of a compelling return than these other endeavors. It just takes a little more work to quantify it. And, frankly, in some cases, it requires a leap of faith.

Leap of Faith?

I know what you’re thinking. Most Chief Financial Officers won’t look kindly on a business case grounded in a leap of faith.

The fact of the matter is, though, there are plenty of big business decisions that are routinely made with limited quantification and a healthy leap of faith. Corporate re-brandings, advertising programs, synergistic mergers, and even the hiring of highly compensated, star CEOs—these are all examples of initiatives that bring with them a good deal of risk and expense, yet must be green lit without the benefit of a precise, quantifiable business case.

…there are plenty of big business decisions that are routinely made with limited quantification and a healthy leap of faith.

How does a senior executive, CFO or Board member give their assent under such circumstances? They complement what limited hard data may be available with gut instinct. They get comfortable taking a leap of faith because they simply believe in the concept behind the investment, whether it’s the power of a reinvigorated brand, the potential unlocked by an acquisition, or some other venture.

So when executives push back on customer experience investments, citing the absence of an iron clad, quantifiable business case, their reservations may actually reflect a deeper skepticism about the true value of customer experiences strategies.

One way to address such underlying skepticism is to elevate the dialogue, getting executives—even for just a moment—to focus less on project-by-project justifications and more on the macro impact of experience-oriented business strategies.

Is The Market Rewarding Customer Experience Leaders?

To that end, Watermark Consulting recently conducted an analysis of stock market performance for customer experience leaders and laggards over the past three years, a time period encompassing the market’s run up to its all-time high in late 2007, to its Great Recession-induced nadir in early 2009, to its more recent bounce back.

To identify the leaders and laggards, we used Forrester Research’s 2007 Customer Experience Index study, picking the top ten and bottom ten publicly traded companies from Forrester’s rankings. Then we compared the total return from investing in an equally-weighted portfolio of customer experience leaders to that for customer experience laggards and the broader market (as reflected by the S&P 500 index).

The results were quite revealing:


From 2007 through 2009, through the best and worst of times, the customer experience Leader portfolio outperformed the broader stock market, generating cumulative total returns that were 41% better than the S&P 500 Index and 145% better than the customer experience Laggard portfolio.

During each of the three years, the Leader portfolio always outperformed the index and the Laggard portfolio always underperformed the index. Looking at these data points, it certainly appears that customer delight and customer misery have very different influences on company stock performance.

In addition, while the Leaders portfolio declined in value during the depths of the recession, the decline was less pronounced than that for the broader market. As the recession abated in 2009, the Leaders portfolio also proved quite resilient, more than doubling the return of the S&P 500.

This performance profile supports the notion that customer experience leaders are somewhat cushioned from the most severe impacts of economic downturns, because they represent one of the last places consumers cut back and one of the first places to which they return.

What The Numbers Really Mean

There are plenty of criticisms that could be lobbed at this analysis: the three-year time period is too short, the Leader and Laggard sample sizes are too small, the Forrester study isn’t a good measure of customer experience excellence, stock market returns aren’t good indicators of long-term company performance, etc.

No analysis is perfect and this one is hardly meant to suggest that any company embracing a strategy of customer experience differentiation will outperform the S&P by over 40%. There are many variables at play, not the least among them pure execution (embracing a strategy and actually implementing it are two very different things).

Companies that successfully bring great, end-to-end customer experiences to the marketplace are rewarded—by consumers and investors.

These results are also not meant to preclude attempts to cost justify customer experience improvement efforts on a project-by-project basis. That rigor must remain; this data merely provides some much-needed air cover.

What this analysis does suggest is this: Companies that successfully bring great, end-to-end customer experiences to the marketplace are rewarded—by consumers and investors. Their operational excellence and attention to detail, their simple and straightforward communication, their well-equipped and genuinely helpful front-line staff—the sum of these parts pays off in the end, even if the precise impact of individual components is uncertain at best.

Hopefully, by framing the return on customer experience excellence in terms executives can easily understand (stock price and market value), this analysis will begin chipping away at the lingering doubts that some of them harbor towards experience-oriented investments.

And with that target of skepticism removed, all that’s left to figure out is who eats the milk and cookies on Christmas Eve.

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12 Responses to Yes, Virginia, There Is A Return On Customer Experience Investments

  1. Chris M February 8, 2010 at 3:23 pm #

    Jon, Good stuff. There was a similar study done about 10 yrs ago that linked “market perfromance” to Customer Sat. as measured by the ACSI (American Customer Satisfaction Index) model. At a former employer we were able to create a model linking CSat with retention and then with profitability. The model was widely accepted by our Finance team as the best way to evaluate CE projects. Thanks for sharing.

  2. Andrew McFarland February 9, 2010 at 1:55 pm #

    This is a fantastic study! Glad you posted it. We always seem to struggle quantifying the tangible benefits. Lacking those facts companies will keep treating customer service like a cost, instead of the benefit that it is.

  3. Rags Srinivasan February 10, 2010 at 8:46 am #

    Jon
    As you correctly point out later in the article no analysis is perfect and all the shortcomings you list are valid. My additional concern is drawing causation from correlation (the title of the post). We need to ask what is the Omitted variable here that most likely drove both CX and performance?

    -rags

  4. Jill Hart February 10, 2010 at 7:57 pm #

    Jon –
    Your summary of the value of investing in the customer experience is another springboard for strategists and interaction designers like myself who advocate including customer feedback throughout the product, or system, development lifecycle.

    I thank you, and customers interacting with user interfaces of companies around the globe, thank you too!

  5. Karl February 12, 2010 at 10:43 am #

    Jon –

    Thanks for this assessment, certainly helpful in driving forward this difficult topic with CFO’s & data driven strategists. I recently mused about my new found affinity with Southwest Airlines due to my positive experiences – particulary postive vis-a-vis other carriers (www.cmgpartners.com/blog). An important question in my mind is what will happen to the non-believers, the industries and companies that do not accept and adapt to the importance of customer experience?

  6. Guest February 13, 2010 at 8:04 am #

    Jon, as good as this analysis is, and it is certainly a helpful contribution to the discussion, the fact is that it will not be sufficient to convince most financial executives when discussing the pros and cons of specific initiatives.

    Overall financial success that is correlated with better customer experience at a company is great, but it hardly helps a marketing executive during a debate with other executives at the firm about how much investment a company should make in which kinds of experience-improving services. It has become fairly easy to “prove” that good customer experiences have some kind of impact on a company’s results, but Martha Rogers and I have always been struck by the fact that all these indicators are inherently non-financial metrics – even the ones you’ve outlined in your post here. The problem is that you still can’t actually quantify the financial benefit of, say, investing an extra $25 million in contact center training, or installing software and re-engineering a system for $50 million, in order to improve the customer experience.

    And, if your marketing exec says, well if we want a good customer experience then we should just DO these kinds of things, then our question is: What if the cost is $100 million? Or $500 million? See the problem? At some point a balance has to be struck, but where? Simply saying that CXP leaders tend to have better financial results than CXP laggards won’t solve the hard problem of resource allocation. To solve this problem you need a metric for the benefits of customer-experience-management that can be converted to dollars and cents.

    That’s why we invented the financial metric, “Return on Customer,” a precisely quantifiable measure of the efficiency with which a company’s customers are creating value. Lately, there has been more attention paid to the ROC metric, including a recent piece in the UK’s Marketing Week magazine here: http://preview.tinyurl.com/yz8ahq9. If your readers want to learn more about it quickly, we have also posted a brief synopsis of the ROC concept and metric on our own blog here: http://preview.tinyurl.com/yjrwfah.

  7. Steve Kershaw February 17, 2010 at 7:56 am #

    I agree with ‘rags’ above – these correlations are not necessarily the same thing as causation. Those who spend more on engaging the consumer, may just happen to do so becasue their company is big and hence, can afford to do so…

    But my real concern with this is the linkage to the stock market which is such a volatile thing to try and measure against especially during the recent few years. But even when we’re living in normal times, a company announcing record profits can still fall in the stock market due to financial markets having priced in this growth 2 years back in expectation and then sell the stock on the basis that it can only go downhill from here now you’ve peaked…

    Looking at just 3 years takes no account of market fluctuations – to take short term effects out of the equation you would need to look back a minimum of 10 years to have enough data to work on.

    I’m not sure which industires are included in this study – but in the UK at least, some of the most profitable and biggest companies that are listed have very poor customer satisfaction levels – banks, energy providers, oil companies…these guys give you poor service because they can!! The pain of change is so great and you can only move to another poor Customer service provider as they are all poor that you are effectively trapped – and they know this – so they can make you wait an hour on the phone to get through – because they can…(I know – I’ve changed energy provider 4 times and they are all, at best, abysmal)…what I’m getting to – is that if these industries which take up such a huge amount of the stock market all did badly in the last three years, then it will look like Customer Sat leads to more successful companies purely because the industry sectors with the lowest satisfaction levels happen to be those that have done less well in the stock market during the recession…over the next three years, the opposite could occur – but then, would one argue then that poor levels of service lead to more success on the stock market??
    If, on the other hand, this project is just looking at FMCG and other consumer industries, then it has more credibility.

    To be honest, I would just stick to what one of the previous readers said above and try and link customer service and experience to retention and possibly sales in a given sector – but to move on to linking to profits and even worse, the stock market, is a step too far I fear….

  8. David Wheeler February 18, 2010 at 5:33 am #

    There are couple of comments that I would like to add, it is OK looking at the stock value of organisations, the companies that are laggards in terms of where they should be against competitors.
    The differentiator between these brands and also ran brands is probably that they have engaged employee’s and a employee engagement strategy, you cannot have a great customer experience without engaged employee’s so think on!!!!

    http://www.engagingforgrowth.com
    http://www.ecew.co.uk

  9. Doug Shaw February 18, 2010 at 5:39 am #

    Jon et al

    I’m always interested to read research which joins the dots between engagement, service and business growth. I don’t think they are the only answer but they serve a useful purpose as a bridge from the rigidity and measurability of financial dials, to the warmth and wonder of human experience. I understand why numbers people like numbers. They are easy to understand and compare (though there is considerable risk in making straight forward linear comparisons, particularly where survey data is concerned). On their own, or even as a bunch of measures, they mean little without some understanding of how those annoyingly unmeasurable things like people, got them there.

    A very simple measure of improving customer experience might simply be to take a look at the order book. If it’s growing beyond the activity the company undertakes to promote its business, then I would suggest that growth is being helped along by recommendation resulting from…guess what? Yup – a positive customer experience.

    I wrote the cover story for Customer Magazine last month which centred on the connection between employee engagement and great service. This may be useful to you and your readers, though it’s more about simple actions you can take to make improvement happen and stick rather than the pure measurement thereof. Here’s the link.

    http://www.customermagazine.co.uk/resources/Customer+8-11.pdf

    Additionally, I’m involved in an event happening on April 14th in London, England all about the links between engagement and a great customer experience and sustainable business growth. Here we’ll connect business results to behaviour, motivation, service, and more. Building the whole jigsaw puzzle with experts from a range of global and national companies. In case this is of interest, you can find out more at http://www.engagingforgrowth.com

    As a final reference point (for now) I would suggest readers check out some of the interesting work Towers Perrin has done linking these things together. They offer another interesting view (with graphs and numbers to please the CFO and help strengthen the link).

    This is an interesting site and I have a lot more research big and small which I am happy to share. I’ll bookmark and keep coming back. Keep up the good work.

    Doug

  10. linda ireland February 21, 2010 at 6:52 pm #

    Jon, thanks for your work here – and the provocative post. I appreciate the look at stock price performance, and am glad the correlation to better performance was strong for customer experience leaders.

    Yet I have to agree with Don Peppers and Steve Kershaw that stock price and “a leap of faith” seem a step or two removed from the very tangible challenges leaders face every day when choosing between two alternatives that look “pretty good” (the choices between purely bad and good ideas are easy). The closer we can link customer experience as a driver for a decision and profit as its outcome, the easier life will be for us as leaders.

    This debate will be with us for a while. My firm Aveus has done research on the link between customer experience and profit. Like you we did not prove causation between specific actions and financial outcomes. We did, however, find that those organizations who understand and use a defined customer experience in daily decision making are TWICE as likely to BEAT their profit targets. (More about the research: http://bit.ly/Mfq8o This post may be helpful too: http://bit.ly/13kCWm )

    The more evidence we find, the faster we can dispel the myth that investments in customer experience are a trade-off to financial performance. Thanks, Jon.

  11. Sampson Lee March 4, 2010 at 11:53 pm #

    Hi, Jon,

    I recommend Emotion Curve.

    It maps the customer emotions generated at each touch-point or sub-process, and links them to form a curve in reflecting the perceived experience across the entire customer lifecycle (covers all touch-points at stages of pre-purchase, at-purchase, and post-purchase), or at a specific touch-point (e.g. retail, call center, website, etc.). Unlike the conventional approaches focus on enhancing efficiency and are process-centric; emotion curve represents the genuine customer feeling by addressing emotions and five senses, in a natural time sequence from an experience perspective. It is a truly [customer-centric] experience assessment and management method. The statistic data of emotion curve is derived through substantial X-VOC surveys, from the experience ratings on each touch-point or sub-process, evaluated by different target customer segments. The definition and selection criteria of touch-points and sub-processes are based on vigorous and scientific research, method, and sequential steps. An Emotion Curve shows how customers perceive experience. It is an innovative and powerful tool for creating a branded customer experience strategy. Furthermore, through a simple curve, from CEO to receptionist, no matter in boardroom or post room, all people in a company could easily understand and communicate the customer experience levels, by using a common graphical language.

    Below are a few examples to show how it works:

    Link Experience to Brand Differentiation
    Link Experience to Repeat Purchases
    Link Experience to Customer Satisfaction

    Have a nice day!

    Sampson Lee
    [ Connect Sampson on Twitter or LinkedIn ]

  12. Graham Hill March 5, 2010 at 2:52 am #

    Hi Jon

    Thanks for the provocative post. We need more thoughtful provocation like yours in a world increasingly full of banal blog posts.

    It never ceases to amaze me how many people simply want to believe in customer experience (CEx), or customer delight, or customer-centricity, irrespective of the evidence or the lack thereof. I guess it is the same inner-need that makes some people evangelically religious. Unfortunately, believing in something doesn’t make it true.

    As Don and others have pointed out, your analysis is full of methodological holes that render your conclusion effectively meaningless. Forrester’s approach to CEx measurement is flawed. Stock markets rarely factor in the quality of the CEx. And of course, statistical correlation has nothing to do with real-world causation.

    Even if there was a relationship between CEx and financial value, research suggests that most companies’ stock returns revert to their industry’s mean over a relatively short period of time. Today’s winners are tomorrow’s also-rans.

    That’s doesn’t mean that there isn’t a relationship between CEx and value creation. But the trick is, as Don points out, to base it on an understanding of financial fundamentals, on the business levers that influence them and on how different aspects of the CEX pull the levers that drive value creation.

    Graham Hill
    Customer-centric Innovator
    Follow me on Twitter

    Interested in Customer Driven Innovation? Join the Customer Driven Innovation groups on LinkedIn or Facebook to learn more.

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