In today’s highly competitive business landscape, many companies are focused on cutting costs to improve profitability. While cost optimization is important, businesses must be careful when it comes to customer experience (CX), as it can have a significant impact on the lifetime value of customers.
First, let’s level set on what “lifetime value of a customer” means. The lifetime value of a customer, often abbreviated as LTV, refers to the predicted or estimated total value that a customer will bring to a business over the course of their entire relationship with that business. It is a key metric used in marketing and business strategy to determine the long-term profitability of acquiring and retaining customers.
The calculation of lifetime value can vary depending on the business model and industry, but generally, it involves estimating the average purchase value or revenue generated from a customer, multiplied by the average number of purchases or transactions that a customer makes within a specific time period, and then subtracting the initial cost of acquiring that customer.
For example, if a customer spends an average of $100 per purchase, makes 5 purchases per year on average, and stays with the business for 5 years, while the cost to acquire that customer is $50, the lifetime value of that customer would be: LTV = ($100 x 5 x 5) – $50 = $2250. This means that, on average, this customer is expected to generate $2250 in revenue for the business over their lifetime as a customer.
Understanding the lifetime value of a customer is important for businesses because it helps them make informed decisions about customer acquisition strategies, retention efforts, and overall profitability.
Now that we are all set on LTV let’s take a good look, and explore how cutting costs in customer experience can diminish lifetime customer value, and take a few statistical knuckle-sandwiches with it.
Reduced Customer Satisfaction Leads to Lower Customer Retention
Customer satisfaction is a critical factor in determining customer loyalty and retention. According to a study by American Express, 33% of customers will consider switching to a competitor after just one instance of poor customer service. When costs are cut in customer experience areas such as customer service or product quality, it can lead to reduced customer satisfaction. This can result in customers being less likely to repeat purchases or remain loyal to the brand, leading to lower customer retention rates.
Statistical Support: A study by PwC found that 32% of customers will stop doing business with a brand after just one bad experience, while 59% will switch to a competitor for better customer experience. Another study by Forrester Research found that customers who have a negative experience are 64% more likely to switch to a competitor, compared to those who have a positive experience.
Diminished Brand Reputation Affects Customer Trust
Brand reputation is closely tied to customer experience. When costs are cut in customer experience, it can lead to negative reviews, complaints on social media, and word-of-mouth, which can damage a brand’s reputation. According to a survey by BrightLocal, 85% of consumers trust online reviews as much as personal recommendations. Negative reviews or complaints about poor customer experience can erode customer trust and result in potential customers being hesitant to engage with the brand.
Statistical Support: A study by Trustpilot found that 80% of consumers say they would switch to a competitor after encountering a negative review online. Additionally, a study by Dimensional Research revealed that 86% of consumers said they would be less likely to purchase from a business that has negative online reviews.
Lower Customer Loyalty Leads to Decreased Customer Lifetime Value
Customer loyalty is a key driver of customer lifetime value. Loyal customers tend to make repeat purchases, spend more over time, and refer others to the business. However, when customer experience is compromised due to cost-cutting measures, it can result in lower customer loyalty. Customers may feel less valued, less satisfied, and less likely to remain loyal to the brand, resulting in decreased customer lifetime value.
Statistical Support: A study by Bond Brand Loyalty found that customers who are highly satisfied with their experiences are 56% more likely to stay loyal to a brand and 59% more likely to recommend it to others. Another study by Accenture revealed that 77% of customers retract their loyalty faster than they did three years ago, with poor customer service being one of the top reasons.
Missed Upselling/Cross-Selling Opportunities due to Decreased Customer Trust
Positive customer experience can create opportunities for upselling and cross-selling, where customers are more likely to purchase additional products or services. However, when customer experience is compromised, it can result in decreased customer trust and reduced receptiveness to upselling or cross-selling efforts. Customers may not be willing to engage in additional purchases if they have a negative perception of the brand or feel undervalued, resulting in missed revenue opportunities.
Statistical Support: A study by Salesforce found that 66% of customers are willing to pay more for a great experience. In addition, A study by The Harvard Business Review found that 56% of customers who had a great customer experience purchased additional services or products.
In conclusion, cutting costs in customer experience can have negative consequences on customer satisfaction, loyalty, brand reputation, customer retention, and upselling/cross-selling opportunities. All of these factors can contribute to diminished customer lifetime value, as customers may be less likely to engage with the business in the long term, resulting in lost revenue and potential business growth opportunities. It’s important for businesses to carefully consider the impact of cost-cutting measures on customer experience and find a balance between cost optimization and maintaining a positive customer experience to maximize customer lifetime value.