At the end of the day (or fiscal year), investments in enhancing the customer experience and strengthening customer relationships must be justified by business results. It might be more politically correct or genteel to say that the only thing that matters is delighting the customer. But this, I think, would be disingenuous.
Does a company pursue customer delight to the point that it means skyrocketing costs and shuttering the business because the business model can’t be sustained? Delighting customers is, and always should be, a means of creating value and profits. Whether this is phrased in terms of maximizing, generating sufficient or simply producing value may be open to debate. Creating satisfied, happy or delighted customers, however, is not the end objective; rather, it is the means for meeting business goals.
What’s the RoCX?
So how do we decide where the scales tip in customer experience efforts – what is worth doing, and what is over the top? The answer has to be rigorous assessment of ROI … or, in this case, RoCX.
Data from clients and numbers from other examples confirm that good customer experiences strengthen customer relationships (AKA loyalty), which leads to improved business results.
• Higher retention/lower churn rates: Loyal customers stay customers longer
• Larger share of wallet: Companies capture a greater share of spend from their more loyal customers
• Higher rates of cross-selling/up-selling: Companies sell more products to and up-sell more effectively to their more loyal customers
• More positive WOM/less negative WOM: Loyal customers are more likely to say good things/less likely to say bad things about a company
Failing to Connect the Dots
What is confusing is why more companies don’t link their data to get their own RoCX numbers. There is plenty of data illustrating the connection, but the real proof for a company – for your company – is based on your customers.
Time and again, however, I have seen companies measure their CX (or loyalty) and then simply fail to even try to connect the results to customer behaviors or financial outcomes. To me, this is like running 26 miles and then quitting the marathon rather than run the extra two-tenths of a mile.
The linkage between CX/loyalty metrics and business outcomes is the Holy Grail: this is what justifies the investment in measuring, monitoring, managing and improving CX. This is what you take to the CXO to prove your point and secure funding. This is what determines where to further invest or to disinvest additional resources.
Every company should be performing similar analyses to quantify the RoCX for their business. The results for other firms are directionally significant – but the only numbers that really matter are those that quantify the impact of customer experience and loyalty for your firm. This is the business end that justifies the ongoing investment in the means.
The fine print of RoCX
To rigorously assess your ROC, it is important to know the limits of loyalty efforts; anyone who tells you that there are no caveats in CX is clearly trying to sell you a bridge or something.
So, as you formulate your particular RoCX equation, be sure to take the following into account:
Loyal customers are not necessarily the most profitable customers.
Loyalty will enable a company to capture a larger share of the customer spend. But customers have a “capacity.” Capturing 100% of the spend of a working class household may well yield less than a 20% of the share of wallet from an affluent household. Holding all of the financial accounts of a household with modest means, for example, almost certainly will generate less of a return than managing even a small share of the assets of a high net worth investor. Given a customer’s “capacity,” loyalty is about maximizing the share of a customer’s current spend and the share of lifetime value a company captures.
Strong CX measures don’t guarantee profitability or even viability.
This one hurts to admit, but there are countless examples that profitability or even survivability isn’t simply a function of CX and loyalty.
• There are an endless number of Mom & Pop and small/middle market companies that stayed close to their customers but simply couldn’t compete with or were gobbled up by bigger competitors with lower costs and less attention to CX.
• Many major corporations with strong reputations for their focus on customers – from Wachovia, Commerce Bank and WaMu (Washington Mutual) in banking to Starwood (hospitality), LinkedIn (social networking) and DirecTV (satellite TV) – have been acquired by stronger, richer firms with weaker reputations for CX.
• And there are those customer favorites – Borders, Linens ‘n Things, Circuit City, to name a few – that just couldn’t evolve and went bankrupt.
Customer experience and loyalty are more topline than bottom-line measures.
Great customer experiences and loyalty drive sales and revenue, customer retention and acquisition, customer lifetime value and cash-flow. While all of these should translate into greater profits, the direct impact is on the topline. Delivering a great experience isn’t something a company can do for free: it requires investments and ongoing operating expenses. Those and other costs must be managed to make sure that a sufficient share of the topline gains from CX are carried down to the bottom-line.
Caveat: Cost savings from CX.
Almost thirty years ago Reichheld (of NPS fame) asserted that it cost less to serve loyal customers. This adage has since been endlessly repeated. Unfortunately, this is more urban legend than truth. There are some clear examples where this would be the case: I’m sure that the loyal Intuit customer, for example, is more proficient with the software and is, therefore, less likely to call tech support than the newbie.
But for every such case, there are multiple contrary examples: loyal customers are more likely than less loyal customers to speak to the chef and order something special not on the menu; to expect a “deal,” a little something extra for their repeat business; to be friendly and chat with the sales clerk, the store manager or the guy behind the deli counter; to take a test drive of their favorite car; or even to have a protracted conversation with the service rep at Zappos about the shoes they are buying . . . to do any number of things that actually create costs for a company.
That’s OK: all of the research indicates that it’s the personal touch (which costs money) that is central to people feeling they have had a great experience and to their attachment (READ: LOYALTY) to a brand. The extra demands of these customers are part of the cost of delivering on the promise of CX and strengthening loyalty. They are good for business because they pay off in terms of the increased lifetime value of the customer. But don’t try to pawn off a focus on CX as a way to cut costs; instead, grimace the next time you hear the cost-cutting rationale mindlessly repeated without evidence.
The economic payoff from enhanced customer experiences and loyalty is real. But you can’t even begin to quantify the value using third party numbers or so-called “norms.” Every company has its own cost structure, operating model and customer base.
There simply is NO SUBSTITUTE for linking your CX/loyalty measures to customer behaviors or other outcome data. How is customer spend, frequency of spend, share of spend, number of products owned, retention, recommendations or other activities affected by their experiences with and loyalty to your brand? To understand this, it is essential that companies run their own numbers as a path to having a grasp on their RoCX and determining the end value that justifies the investment in the means.