Playing the Odds: CX is About Value Optimization and Risk Mitigation

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It’s increasingly rare to find a mid-sized or larger company that doesn’t have a CX/VoC program of some sort. But for many (perhaps even most) firms these programs are check-the-box cookie-cutter formalities that aren’t listening or taking meaningful action on what they hear. So not much changes, and then leadership bemoans the cost of the programs, their flat scores, and their uncertainty as to what to do and the wisdom of spending on CX improvements.

To a large extent this stems from the treatment of CX as some sort of silver bullet to solve all of the company’s challenges and their lack of clarity regarding the what and why of CX. CX is not some magic panacea. Rather it is the science of designing and delivering experiences that maximize the probability of creating value for the firm and minimize the probability of risks that suck out value. Physics is certainty; CX (as well as a good card game, marketing, and life in general) is probabilistic.

Value

A firm’s true worth is the value of current and future cash flows from customers, not its MarketCap. In other, more geeky terms, its net present value. CX is a strategy — not the only strategy — for boosting the value of those future cash flows from customers or their lifetime value.

  • The most obvious means for increasing lifetime value is to extend the “lifetime” of the customer. That is, retain them for as long as possible.
  • Another avenue for adding value is to cross-sell or upsell customers, boosting their spend with the company. Since money has a “time value,” immediate or near-term cross or upsells can be more valuable than the longer-term retention of a lower-value customer.

While not strictly part of the customer lifetime value formula, customers also create value through their advocacy for the brand and referrals. In most instances, this value is more difficult to quantify, but it is nonetheless real.

Fred Reichheld (of NPS fame) has long maintained that loyal customers — the result of great customer experiences — also bring value to the firm with a lower cost to serve. While this has been echoed by numerous others, the cost side of the value proposition is far murkier than the revenue side. Yes, the customer on their sixth iPhone or tenth year of using some app or program may be less likely to require technical support and generate the associated costs compared to the new customer.

But think of all the loyalty programs, discounts, bundles, and extra services targeted to existing customers to keep them as customers. All these marketing strategies mean higher costs, not cost savings. These customer retention and cross/upsell strategies may be great investments in boosting CLTV (customer lifetime value), but they translate into higher costs for the firm, not cost savings.

Risk

Bad experiences can be toxic to customer relationships and present the risk of destroying or choking off value for the firm. Poor experiences can trigger defections or reduced spend. The nature of human behavior is that bad experiences are remembered longer, acted on more quickly, and shared with others more extensively than good experiences. As such, disappointing experiences can stimulate adverse customer behaviors, from defection from the brand to negative word-of-mouth.

Some level of performance failure is inevitable, no matter how good a company is at delivering great customer experiences. A sound CX program incorporates a closed-loop process to try to redress performance problems with customers and mitigate any associated risks. More broadly, this process also should be a means for risk avoidance by instituting improvements to minimize the likelihood that other customers will run into the same problems.

Playing the Probabilities

The starting point is deciding on the business objective: what does the firm want to maximize? Renewals/Retention? Revenues? Profitability? The company should then test to determine which metric best explains or predicts the desired outcome: OSat, NPS, Ease of Doing Business, or some other metric. With the KPI determined, key driver models will quantify the relative impact of the various items about which customers have provided feedback.

Because we are dealing with human behavior and not light particles that always respond to the same stimuli the same way, at every step the results generate probabilities. The smart CX strategy uses those probabilities to curate and design experiences that maximize the likelihood of customers engaging in those behaviors that create the desired value for the company and minimize the risks.

This is, in effect, no different than any other tactical implementation of corporate strategy. Companies (should) pick store locations that have the highest probability of maximizing sales, design their websites to minimize the likelihood that customers can’t find what they want or abandon their shopping carts, and build their apps to increase the probability that customers are easily able to complete their desired tasks.

That’s all CX is: doing those things that maximize the probability that customers engage in “loyalty behaviors” that drive value to the firm while minimizing their chances of risk.

Howard Lax, Ph.D.

Supporting better informed decision making with technology, research and strategy. With a focus on CX/VoC/NPS, Employee Engagement and emotion analytics, Howard's domain is the application of marketing information and SaaS platforms to solve business problems and activating CX programs to drive business objectives.

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