How to measure returns on your investments in customer experience
According to research by consulting firm Temkin Group, 68% of large companies cite “competing priorities” as a significant obstacle to their customer experience efforts. For small businesses, that number would be higher.
But why is it that entrepreneurs and executives don’t prioritize customer experience despite data showing that it has a direct impact on revenue?
Well, it’s one thing to look at the data and nod your head, but it’s another thing to spend money on improving customer experience when you aren’t sure about the return on investment (ROI).
So how can you measure the ROI?
What is customer experience?
Here’s Gartner’s definition of customer experience:
“The customer’s perceptions and related feelings caused by the one-off and cumulative effect of interactions with a supplier’s employees, systems, channels, or products.“
Obviously, customer experience has always mattered, and business owners have always tried to treat their customers well. However, in the past, customers had much less choice and weren’t as quick to switch to a competitor as they do now. Today, no matter which niche you are in, you can be sure that your customers have a variety of other options at their fingertips at any given time.
All this competition means that you have to provide a customer experience that is so good that your customers won’t even think of switching. Otherwise, you’ll have to deal with a crippling churn rate, because with so many options out there, an unsatisfied customer has no reason to stay with your company. They might even share their experience on social media, making it harder for you to attract new customers. This is supported by data from Temkin Group research.
Apparently, after a bad experience with a company, 22% of consumers decreased their spending and 19% of consumers stopped doing business with that company altogether.
Moreover, after a bad experience with a company, 30% of consumers told the company about it, 50% told their friends, and 14% tweeted about it.
In short, bad customer experience is a revenue killer. Not only do you lose the unhappy customer (or at least see a significant decrease in their spending), you also lose potential customers.
Meanwhile, positive customer experience drives revenue growth, since according to Temkin Group research, consumers were 3.5x more likely to make additional purchases after very good customer experience.
And businesses are becoming well aware of the importance of customer experience.
According to Janelle Estes, VP, Strategic Research Services at UserTesting, “We’ve seen a shift in how executives and leaders invest in the customer experience. Those that are providing the best customer experiences are making significant investments to place the customer at the center of every decision they make.”
However, improving customer experience costs a lot of money, and the whole thing often feels so vague that it gets pushed to the bottom of the priority list.
For example, if you spent $100 on Facebook ads and made $150 back, you know that the ROI is 50% (this is an intentionally simplistic example). So it’s easy to keep putting money in Facebook ads.
But if you spent $100 on improving customer experience and you have no idea how much helped you, or even whether it was profitable at all, you will find it hard to justify investing any more money into it.
That is why you need to be able to gauge the ROI of customer experience if you want to actually make it a priority in your business.
What are the key customer experience metrics?
Before we get into measuring ROI of customer experience, we need to make sure that we measure the customer experience itself, otherwise it will be impossible to establish any relationship between the money you spent on it and your revenue.
In their article “Customer experience metrics: a brief guide on how to measure CX” the User Testing team explains six key customer experience metrics:
- Net Promoter Score: “NPS is the percentage of your customers who would—or wouldn’t—recommend your company to their friends, family, or colleagues.” You can learn more in our “Net Promoter Score Guide: Everything You Need to Know and How to Improve It”.
- Customer Satisfaction (CSAT): “CSAT is the average satisfaction score that customers rate a specific experience they had with your organization—such as getting an answer from customer support or returning a product.” You can learn more in our “Complete Guide to Customer Satisfaction” and then you can use our software to conduct CSAT surveys.
- Customer Effort Score (CES): “CES helps you determine the effort required by your customers to accomplish a task, like getting a support request handled or finding the product they were looking for.” You can learn more in our “Customer Effort Score” guide.
- Customer churn rate: “Churn rate is the percentage of customers who either don’t make a repeat purchase (for transaction-based businesses) or cancel their recurring service (for subscription-based businesses).”
- First response time: “First response time is the average time it takes for a customer to get an initial response to their support issue.” You can use our software to track first response time.
- Average handling time: “Average handling time is typically measured by taking the average amount of time it takes to fully resolve a customer issue—starting from when the customer first initiates the interaction all the way to the point when the issue has been successfully resolved.” You can use our software to measure the average handling time.
How many of these customer experience metrics are you currently tracking in your business?
Pretty much all serious businesses track their churn rate, but other metrics often get overlooked. That’s a mistake. You need to establish the customer experience baseline and then see whether the customer experience is improving. You can’t do that without tracking the relevant metrics listed above.
Of course, if you are only tracking churn, then the task of adding five more metrics might seem daunting. So, break it up into smaller tasks, and introduce the metrics one by one. It might take a while but it’s better to do it gradually and then stay on top things than try to bite off more than you can chew, get overwhelmed, and abandon the whole idea of measuring customer experience.
Once everything is in place, you can’t jump straight into measuring the ROI, you need to establish the customer experience baseline. What is your net promoter score, CSAT, CES, churn rate, first response time and average handling time at the moment?
It’s best to let the data accumulate for about six months so you can be sure that what you are seeing is the average and not an outlier. If you only track it for a month there’s always the possibility that something has affected the customer experience that month making it an outlier month as opposed to an average month.
How can you measure the ROI of customer experience?
Measuring the ROI of customer experience is messy. It’s hard to establish a clear relationship between the money you have invested in it, the improvement in customer experience, and the increase in revenue. Why?
Ideally, you would set aside some time, invest in customer experience, and not make any other changes during that period of time. You could then take a look at the revenue growth, compare it with the baseline revenue growth, and calculate the ROI of your investment in customer experience.
But, of course, you are in the cut-throat world of business, not in a science lab, so you don’t have the luxury of running this kind of experiment. So what should you do?
Your best bet is to:
- Establish a customer experience baseline using the metrics discussed in the previous section.
- Invest in improving the customer experience. This is somewhat tricky because you might not be sure what exactly you should put your money into. Better onboarding? Better UI? Better customer support? Making these better would improve customer experience. You can go through the customer support tickets to see what people are struggling with the most and then prioritize that issue.
- See if the improvement in customer experience leads to your revenue going up. Keep in mind that you need to account for the average revenue growth rate when measuring this.
Once you have determined that the investment led to an improvement in customer experience and it led to an increase in revenue, you can calculate what the ROI of that investment was.
Of course, there are problems with this:
- The most glaring issue is the fact that the increase in revenue might be caused by other factors. Say you decided to invest in customer experience, but around the same time, a famous blogger mentioned your product to his audience. How can you tell how much of the revenue growth occurred due to the investment and how much due to the shoutout? Well, you can’t.
- The effect of customer experience is often delayed. For example, someone might have a bad experience and could wait for a few months before they stop doing business with you, or they can have a good experience and then wait for a few months before sharing it. So the effect would show up several months later but you wouldn’t know it and would attribute it to your recent failures or successes.
- Customer experience is made up of countless small interactions someone has with your company. So as you continue improving various aspects of it you might find that it’s hard to tell which specific improvement resulted in an increase in revenue, especially when you take delays into account.
So yes, there’s no way around it, this is napkin math. However, measuring ROI imprecisely is better than not measuring ROI at all. What matters is the big picture. Does investing in customer experience make you money?
Yes? Then keep doing what you’re doing. No? Then re-evaluate.
The good news is that you will gain more confidence in your napkin ROI number as you keep observing the relationship between the investment, the improvement in customer experience, and the revenue.
Keep in mind that if you are spending money on improving customer experience, but you aren’t seeing any revenue growth, the answer isn’t to stop investing in customer experience.
What you should do instead is to analyze the data and determine what aspect of customer experience you should invest in, because the issue is probably you putting money into something that doesn’t matter as much as you think it does.
