By Swati Sahai

The importance of calculating your customer experience ROI cannot be overstated—how will you build, measure and regularly optimize your customer experience efforts if you don’t know the return on your CX investments?

Customer experience leaders often face hurdles in budget approval because customer experience ROI has not been forecasted or quantitatively expressed. All the time and effort spent in designing a modern, responsive customer experience program can go to waste if you are not able to articulate in numbers the value that it will bring to your organization.

In order to put CX initiatives on a level-footing with other business programs, it isn’t enough to simply provide the soft benefits. You need the quantitative ROI to make a strong business case and obtain approval for continued investment.

In this post, I’ll walk through a detailed example to illustrate the steps needed to calculate your customer experience returns, costs and ROI, and how to use this ROI to build a successful CX program.

Customer Experience ROI = 100 x (Benefits – Investments) / Investments

2 Steps to Calculate Customer Experience Benefits

Measuring benefits or returns is the toughest part of the ROI calculation and the reason why most CX practitioners avoid ROI calculation. This is because it requires that you calculate the impact of customer experience changes on the hard quantitative metrics your business is measured by.

Follow the two steps below to calculate CX benefits:

Step 1. Choose the Business Metrics Most Impacted by Customer Experience

Investing in customer experience is of paramount importance today and has several quantifiable benefits. The key, however, is to choose the business metrics that are best suited to your particular industry and business.

Here’s a list of business metrics most commonly used for customer experience ROI calculation:

Revenue

Top-line revenue is the most common business metric to consider. A recent Forrester study found that the revenue of CX leaders outgrew the revenue of their CX laggard competitors by 5 to 1.

Another data point for the revenue impact of CX comes from the Forrester Customer Experience Index (CX Index™). An analysis of this index showed that the biggest companies in certain industries can earn up to hundreds of millions of dollars in incremental revenue for every one point of increase in Forrester’s Customer Experience Index (CX Index™).

revenue impact of CX

 

Customer Retention

Improving customer experience has a direct impact on increasing customer retention and reducing churn. With the low cost of switching, most customers are quick to move to competitors when they have a poor experience. However, they also reward good customer experience with continued loyalty.

As per Forrester, customers who have a high-quality experience are 2.7 times more likely to keep doing business with a brand than customers who have a low-quality experience.

Here is how to calculate the impact of increased retention:

Financial Services firm ‘X’ is trying to increase retention by improving customer experience.

Customer Experience ROI calculation by calculating customer retention

For the purposes of this illustration, I have assumed no new sales in Year 1 or Year 2. The table above shows how a lift of 10% in retention leads to a revenue increase of $105 million for this financial services firm.

Cross-sell/Upsell

Customers who are delighted with their experience spend more with a business by buying additional products and services. They enjoy interacting with your company and keep coming back for more.

Using the same financial services example, we can illustrate the revenue impact of cross-sell and upsell as follows:

Customer Experience ROI calculation by adding in cross-sell/upsell

Customer Satisfaction

Measuring the revenue impact of increased customer satisfaction is the hardest part of the customer experience ROI calculation. Businesses are used to thinking of customer satisfaction as a warm, fuzzy concept that is hard to quantitatively pin down.

But, the revenue impact of customer satisfaction can and must be measured.

Use your key customer satisfaction metric (NPS®, CSAT or another) for this calculation. Determine what a 1-point increase in Net Promoter Score or CSAT is worth in terms of additional sales or improved customer retention.

That number is the revenue impact of increased customer satisfaction.

Cost-to-Serve

Improving customer experience has a direct impact on reducing the cost to serve customers as it results in streamlined processes, a reduced volume of calls to the customer care center and efficiencies from understanding the end-to-end customer journey.

Let me explain through the example of a retail bank ‘A’:

Bank ‘A’ receives 4 million calls annually in its customer care center, accounting for a huge chunk of its total expenditure. Using customer journey analytics and call center data, bank A realized that 15% of the calls were about problems that could have been easily resolved through customer self-service, such as how to set up a fraud alert on the bank’s mobile app.

Bank A has, therefore, correctly assumed that by providing more self-service options and improving the user experience on mobile apps, as well as improving call handling, they can substantially reduce the call center cost.

Calculate Customer Experience ROI by adding in cost savings

Step 2. Use Customer Journey Analytics to Show the Link Between These Business Metrics and Customer Experience

Choosing the right business metrics and calculating their quantitative impact is a crucial and difficult first step. Pat yourself on the back for successfully conquering it!

But how do you know for sure that these business metrics were impacted by customer experience?

To prove this correlation definitively, you need to employ customer journey analytics.

Identify Drivers of Customer Behavior

In order to show the link between CX metrics and customer experience, you have to first discover how customer experience drives changes in customer behavior. Customer journey analytics can do this in a way that no other tool can.

It can do so without annoying your customers after every interaction (while taking into account any survey results that you already have). Moreover, it provides results based on the end-to-end customer journey for your entire customer base, something that no survey can ever achieve.

Identify drivers of customer behavior through journey analytics

Segment Customers

Not all customers are alike. Some bring much higher revenue while others may be strategically important. It is important to identify these important customers and focus your CX investments and efforts on them. Relying on data provided by customer experience metrics, such as Net Promoters and Net Detractors obtained by NPS, is inaccurate and insufficient for segmentation.

Instead, segment your customers behaviorally using customer journey analytics.

Discover the Impact of Customer Experience on Business Metrics

Using customer journey analytics, you can discover how your customer interacts with your business, how his behavior changes based on customer experience and how your business metrics are ultimately impacted because of this changed behavior.

Discover the impact of customer experience on business metrics

3 Steps to Calculate Customer Experience Investment

Now that you have done the heavy lifting of calculating customer experience benefits (returns), it is time for the customer experience investments that will be required to achieve those benefits.

Follow the three steps below to systematically calculate your customer experience investments.

Calculating the ROI of Customer Experience eBook

Step 1. Plan Which Investments Are Required

Investment in Training

Improving customer experience in large enterprises is impossible to achieve without investing in training. This could take the form of re-training existing staff or training new staff.

Regular re-training is particularly important for your call center employees (Read: How to Improve First Call Resolution, Reduce Call Volume & Accelerate Self-Help)

The first level of call center agent training should focus on the company’s product and services so that new agents are thoroughly equipped to answer any query related to a product/service without needing expert assistance. Having a product knowledge base handy often helps.

Cross-train agents on the functions of other teams or departments, so they are better equipped to navigate a complex issue and connect a customer with the right resources as quickly as possible.

Similarly, training agents to isolate and get to the core of the problem is essential.

Investment in Technology/Tools

Improvements to customer experience often require upgrades to your technology infrastructure, which sometimes require large investments. Systems that may need improvement include database management systems, CRM systems, analytics tools, and self-service applications among others. As an example, many customer experience teams are investing in speech analytics and text analytics tools to enhance their customer data measurement capabilities.

Investment in Operating Costs

Operating costs for customer experience include building and operating new mobile apps and websites, costs for running new and improved VoC surveys, the cost for cultural transformation to make your organization more customer-centric, and ongoing salary and support costs.

Step 2. Build a Timeline for CX Investments

It is important for CX leaders to forecast a timeline for when each of these planned investments will take place. The costs for customer experience investments are huge in large enterprises and are typically staggered over a few years.

Step 3. Build Cost Estimates for Investments

Now it’s time to build cost estimates for each planned customer experience investment. Use past expenditure to benchmark future costs in areas like training. Choose the partners or service providers best suited for your customer experience needs and get an accurate estimate of future expenditure.

Example: Calculate Customer Experience ROI for a Retail Bank

Putting together all the steps above, let’s calculate customer experience ROI.
To illustrate this, I will go back to the hypothetical example of Financial Services Firm X.

Base data to calculate lift assumptions in customer experience ROI calculation

 

Calculate benefits in the customer experience ROI calculation

 

Assumed Investments in customer experience ROI calculation

 

Customer Experience ROI % = 100 x (Benefits – Investments)/Investments

Calculate Customer Experience ROI with this example of a fictional financial services firm

How to Use Customer Experience ROI to Build a Successful CX Program

1. Prioritize CX Investments Based On Company Goals

By calculating customer experience ROI, you have taken a big step towards getting budget approval for your cx investments. Be sure to prioritize them not only in order of customer experience team goals but also the goals of the company as a whole.

Interview top executives, attend town-hall meetings and comb through important documents like annual reports to ensure you are aligned with the key metrics and goals that matter for your business. Only then will you build a successful customer experience program that will be evangelized by key people in the company.

2. Emphasize the Cost of Inaction

Not improving customer experience (and therefore not investing in it) is no longer an option for most businesses. In an environment where customer expectations are rapidly rising and it’s easier than ever to switch to another brand or provider, the cost of inaction is tremendous, mostly by way of customer churn.

3. Identify Quick Wins to Demonstrate Success

Use the customer experience ROI calculation to identify quick wins which will demonstrate early success. Nothing works like showing what improved customer experience looks like! This will help in bolstering the profile of your CX program within the organization and go a long way in winning advocates and continued budget.

4. Measure and Track Customer Experience ROI Over a Period of Time

It is important to take a long term view when measuring customer experience ROI as both the returns and investments accrue over a period of time.

Calculating predicted ROI is good, but remember to keep measuring and tracking real customer experience ROI over a long period of time to ensure that benefits and ROI are developing in line with expectations. This will help you make adjustments in your customer experience program as needed.

Summary

To realize the benefits of improved customer experience like retention, revenue growth, and customer satisfaction, it is essential to quantitatively measure customer experience ROI. This will ensure that you get the necessary budget to make the investments in CX to build a successful program. The detailed quantitative steps provided in this post above will help you calculate the ROI and track it over a long period of time.

Are you measuring customer experience ROI in your organization? Share your experience in the comments below.

Net Promoter, Net Promoter System, Net Promoter Score, NPS and the NPS-related emoticons are registered trademarks of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc.