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Five ways to quantify the ROI of customer experience management

13th Apr 2011
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Nelson Pascua frames ROI analysis around specific measures and outcomes in order to quantify the fully loaded economics of customer-centricity.
In the customer experience space, return on investment (ROI) is a term often thrown around but rarely defined. That lack of clarity can be problematic, especially when businesses are considering different customer feedback programs or when trying to make the most out of the one currently in use.
The purpose of this article is to help frame ROI analysis around specific measures and outcomes in order to quantify the fully loaded economics of customer-centricity - increased sales to existing customers, lower staff turnover costs, increased brand value and more.
Read on - we’ll flesh out a few different definitions of ROI as it relates to customer experience management (CEM) and offer examples of the ROI real companies have achieved using CEM programs.

ROI of CEM #1: Reduce at-risk revenue. Recover potentially lost customers
 

A CEM program should allow businesses to 'close the loop' with customers, identifying those who are at risk of defecting in time to pull them back into the fold. Consider this example of a customer at an industry-leading luxury hotel.
During the customer’s visit to this hotel, a string of poor customer service transactions left him frustrated and angry. Unhelpful receptionists, delays during his check-in, and a missed wake-up call ensured that the customer would not be staying at the hotel again.
The day after his stay ended, a link to an online survey arrived in his inbox. Though he was busy, the customer took the time to fill it out, naming the offending employee. Not even 24 hours later, he received a call from the hotel manager apologising sincerely and offering him a free night’s stay the next time he was in town. Delighted, the customer accepted the offer and renewed his loyalty to that hotel brand.
What the hotel chain lost in revenue from offering the customer a free night was more than made up in the ROI of future visits the customer is likely to make, as well as any referrals he may make to friends and family members based on one outstanding act of service recovery.

ROI of CEM #2: Engage existing customers as a sustainable engine for growth
 

Good CEM programs allow businesses to identify their most loyal customers and single them out for loyalty rewards and promotional offers. The ROI of these actions translates into more future visits and more money spent.
Data collected by Medallia shows that in a single transaction at a top apparel chain, the strongest brand advocates of the business spend 15% more than brand non-advocates. That activity is also an indication of future behaviour - within three months of responding to the survey, these loyal brand fans will make 10-15% more visits and spend 10-15% more than those who were less than thrilled with their shopping experience.
The bottom line is that fans of your business will spend more and more frequently. Using CEM tools to engage them and market specifically to them further increases the ROI of these programs.

ROI of CEM #3: Reduce the costs of new customer acquisition
 

When positive buzz about your company abounds, new customers tend to follow. Think Apple or Southwest. CEM can help businesses follow in the footsteps of these iconic companies and attract new customers almost effortlessly.
By tracking various CEM metrics such as likelihood to recommend, businesses can see how many 'wow' customer stories they’re generating over time, and compare that to the number of 'ouch' stories circulating. One level deeper, businesses can identify the trends behind the numbers - using verbatim analysis of open-ended comments correlated with positive or negative scores, for example. Finally, businesses can facilitate fan word-of-mouth by pointing promoters to social media sites like TripAdvisor, Facebook and Twitter.

ROI of CEM #4: Engage employees. Reduce staff turnover and cost of hiring
 

Businesses can also use CEM programs to measure satisfaction and engagement among employees, and take steps to improve if necessary. Common metrics include employee satisfaction score and employee churn rate.
A body of research - as well as our experience - demonstrates that engaged employees are less likely to quit, even for more money, and more likely to refer friends and family to apply to work for their companies. This in turn reduces the cost of recruiting, hiring, and training new employees. For more information, see the research of Daniel Pink, whose book “Drive: The Surprising Truth About What Motivates Us” is a mainstay in our library.

ROI of CEM #5: Reduce the cost of customer and employee feedback infrastructure
 

Businesses are switching in droves from more traditional customer satisfaction programs offered by market research vendors to technology enabled real-time CEM programs. Market researchers are tasked with answering specific questions and frequently focus on methodological purity. At core, market research is reflective and non-operational in nature.
What’s more, market research is more expensive than CEM. The average cost of a CEM implementation is approximately $250K while market research projects can cost upward of $1M.
Traditional market research uses a behemoth of a questionnaire that’s costly to develop, administer and analyse. To entice a statistically significant sample of customers to sit through the entire survey, rewards or sweepstakes are often necessary. By contrast, CEM surveys should be short and to the point, attracting customer response through ease of use. In addition, once implemented, the best CEM programs require very little support, and businesses can run their own analysis using the platform.
A final value-add offered by top CEM vendors is support from client services personnel. Periodically, these experienced analysts can correlate survey results to in-store sales, analysing the practices of high-scoring branches versus low scoring ones, providing benchmarking reports to businesses, and sharing best practices among multiple clients in a particular industry.
To summarise, here are five ways businesses earn ROI from CEM programs:
  • Recover at-rick customers.
  • Engage existing customers.
  • Reduce cost of new customer acquisition.
  • Engage employees and reduce staff turnover.
  • Reduce cost of feedback infrastructure.
Although improving customer experience is its own reward, CEM programs offer committed users the added bonus of ROI across multiple business channels.

Nelson Pascua is vice president of Client Services for Medallia, Inc., a CEM vendor headquartered in Palo Alto, CA. Specialising in retail and ecommerce clients, he is an expert in research methodology and advanced analytical techniques.

This column is part of a monthly series featuring thought-provoking articles, best practices and valuable insight by the Medallia team. CEM solutions by Medallia enable companies to gather, monitor and act on feedback from customers, partners and employees. Learn more by visiting the Medallia website at www.medallia.com.

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By paulblunden
15th Apr 2011 17:52

Measuring ROI is both important and difficult and few companies in my experience manage to do it very well in the area of customer experience. In many ways the arguments made in the article are not helpful because they over simplify the challenge.

Take the first about the hotel visitor. In fact we need to take elements of the second example to start to begin to measure the ROI. For instance, does the customer of the hotel use it because of convenience - is it the nearest to where s/he needs to stay anmd is that what is driving his decision? If the person only ever stays twice and the impact of his word of mouth criticisms have no influence on others because perhaps they don't need to stay in this type of hotel) then the transaction is potentially break even, or perhaps even loss making.

Longitudinal measurement of behaviour and transactions can combine to offer a lifetime value of customer figure that can then feed into an ROI calculation but the method needs to stand up to scrutiny. The article appears to be saying that customers are dumping big research in favour of quick surveys but in my experience they are actually doing both.

Moving the debate on can only be a good thing so this type of article is important, but it is not quite so black and white when customers are involved.

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By Steve Earwaker
28th Apr 2011 20:22

Paul Blunden raises some interesting thoughts, and I agree that this type of article and the ensuing discussions are very helpful.  He is right that some companies are better at this than others, and I would add to the point that importantly, in my experience those companies who do it well tend to enjoy many/all of the 5 benefits that the author points out.  Many of these customer-centric companies also develop into iconic brands, with a strong reputation for providing superior customer experiences. 

One final observation, and this relates to the example of different companies like the hotel company versus the retailers or an airline.  The ROI will play out differently for each type of company, more specifically each company would enjoy a different mix of the 5 benefits cited by the author.  In hotel companies, for example, customer retention/loyalty and repeat business are clearly very dominant ROI's -- it is not unusual for a hotel chain to derive 75% or more of its revenues from a core group of highly loyal customers.  Retailers, on the other hand and as the author points out, derive tremendous ROI when positive word-of-mouth results in new customer acquisition; otherwise they must spend large sums on advertising.

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