October 1, 2021
How Customer Experience Impacts the Bottom Line
Most purchasing decisions are made with the heart. An estimated 95% of buying behaviors are driven by emotion, not logic—despite what we might like to think.
While it might sound like one of the shortcomings of being human, emotional decision-making isn’t as irrational as it sounds. Why wouldn’t consumers choose to work with companies that solve problems with empathy, remembering not just their names but also past interactions, pain points, and preferences? In other words, they solve important problems the way the user wants them to be solved.
For brands, understanding which factors influence customer emotions—and why—is key to maximizing profits, fighting churn, and increasing both customer lifetime value (CLV) and duration. Yet, quantifying how customer experience impacts the bottom line—directly—isn’t easy. It involves data, the skills to interpret and act on it, and the infrastructure to support your strategy. In this article, we’ll discuss the financial impact of CX in tangible, objective terms.
The Connection Between Customer Experience and Profitability
Positive experiences lead to return purchases, which, in turn, means more revenue and lower CPA (cost per acquisition) and CRC (customer retention) costs.
Plus, great CX means more word-of-mouth referrals, more sales, and it also means that your company grows at a sustainable rate without increasing your marketing and advertising costs.
A few stats that back this up:
- According to Deloitte, customers who have positive experiences with a brand spend 140% more than those who reported negative experiences. What’s more, analysts also found that organizations consistently delivering positive experiences stand to reduce customer service costs by up to 33%.
- Data from one recent case study found that “totally satisfied” customers generated 2.6x more revenue than “somewhat satisfied” customers and 14x more than those who identified as “somewhat dissatisfied.”
- Good CX can also influence impulse buys—Segment survey data found that nearly 50% of shoppers made impromptu purchases after receiving a personalized experience. Take T.J. Maxx’s business model, for example. It offers a unique “treasure hunt” shopping experience that’s a win-win for both merchandisers and consumers.
Essentially, good CX keeps you in the game. The best CX will eventually win. The brands that get it right build strong emotional bonds that transcend the value of the product itself. It even opens up the possibility for satisfied customers to acquire more products and services from your portfolio.
On the other hand, poor CX can mean losing customers, suffering reputational damage—or worse—going out of business for good.
How to Measure the Financial Impact of the Customer Experience
While the benefits of investing in CX are well-known, many organizations struggle to connect CX initiatives to KPIs that help them gauge performance and drive improvements.
According to a Smart Insights survey, half of all respondents said they were unhappy with how their organization measures the impact of CX initiatives citing a narrow focus on hard metrics as the primary problem. What’s more, 42% said they were unhappy with their company’s ability to generate actionable insights.
While that could indicate a problem with the data or the skills required to interpret it, organizations often struggle to quantify the ROI of CX because they’re focusing on the wrong metrics or analyzing too few data points.
Understanding the business impact of customer experience starts with defining a value proposition in the context of your business strategy.
Do note that value is relative to the business goal and your intended audience. In some cases, it might be represented by revenue, customer lifetime value (CLV), or average order size (AOV). In others, it might be satisfaction or engagement.
In any case, start by looking at CX metrics that correlate with specific financial goals. Here are a few examples of what that might look like:
Satisfaction
Customer satisfaction should be measured from various angles—with a healthy mix of qualitative (reviews, direct interactions, interviews, mentions) and quantitative (think NPS and CSAT scores) data.
On their own, NPS and CSAT surveys don’t provide much context. They share how many people are happy, unhappy, or neutral about your brand, but they don’t tell you about the factors that had the greatest influence over brand sentiment.
Think of Starbucks vs. Disney. While both are well-established and well-regarded brands in their own right, Starbucks’s NPS score is 77, while Disney’s is -7. In addition to its popular rewards program, the Starbucks app is also used by nearly 50% of app users.
Angel Almada says, “NPS is a good way to measure overall satisfaction. But there are other mechanisms, like behavioral analytics and conversion funnels, that can help you understand the ‘why’ behind survey scores.”
Customer Lifetime Value (CLV)
Customer lifetime value (CLV) measures how much revenue a customer generates throughout the duration of their relationship with a brand.
This metric can be used to predict the lifetime spend of new customers, measure the impact of your retention efforts, and separate big spenders and habitual shoppers from everyone else.
As an example, in digital retail, good CX is measured by lifetime value. How much money have they spent? Beyond that, looking at factors like average cart size, loyalty, engagement, and the number of successful upsells, can help you understand whether you’re providing the kind of experience that improves CLV long-term.
Companies with ARR/MRR (annual and monthly recurring revenue) business models depend 100% on a positive CX so that subscribers will keep paying month after month.
Average Order Value (AOV)
Average order value (AOV), or average deal size, reveals which customers spend the most in a single order. Tracking this metric can help discern the people most willing to take advantage of upsell/cross-sell opportunities, who, e.g., aren’t confined by a tight budget.
The ideal combination is when you are able to get an ARR/MRR business model and a premium on top of it—similar to Costco and Beauty Pie with the best CLV and AOV overall.
Order Frequency
You’ll also want to look at order frequency—or how often an individual customer returns for a repeat purchase.
Adobe estimates that repeat customers are 9x more likely to convert than first timers.
BigCommerce data revealed that the most loyal 10% of customers spend 3x more per order than the other 90%, while the top 1% spend 5x more than the other 99%.
And it’s not only the fact that this group spends more money. Focusing on driving repeat purchases means you’re spending less on acquisition, onboarding, and nurturing because frequent shoppers need less convincing to pull the trigger.
Order frequency is also connected to retention rates. For example, Bain & Co research found that shoppers spend about 67% more on apparel orders after they’ve been shopping with a brand for 30 months.
Price Sensitivity
Price sensitivity looks at how discounts and promotions influence purchasing behavior. While promos can be an effective tool for bringing in new customers and rewarding loyal ones, it’s not sustainable as a primary sales strategy.
Customers who purchase often, yet only when prompted with a promo code, don’t qualify as “MVPs.” This is how J. Crew got themselves into trouble. They generated an expectation with their customers by consistently offering discounts to the point where people were no longer willing to pay full price.
Your goal is to find the people willing to pay the asking price for your product/service because they understand your value proposition, love your brand, and the features/content/experience you provide.
That’s not to say you shouldn’t promote sales/promotions to this group; it shouldn’t be the top priority. Instead, look at your loyal customers and segment them into different groups. They range from bargain hunters to big spenders and those who fall somewhere in between.
Identify the Touchpoints that Influence Behaviors
According to Smart Insights, 50% of survey respondents believe a journey-based CX strategy is “extremely” important to their company’s overall success. Another 30% said journey-based CX was “very” important.
Overall, the goal is to design a frictionless customer experience, such as how Apple’s. In turn, they can control the sum of the potential individual touchpoints. Understanding this should prompt you to zoom out and get a clear picture of what you’re trying to achieve.
Getting a better sense of conversion rates and funnels can also be a solid way to identify the friction points of a journey. To demonstrate the financial impact of the customer experience, you’ll need to learn how different parts of the experience influence specific behaviors first. What interactions contribute to the highest NPS scores? Which touchpoints generate the most complaints?
3Pillar Global expert, Mihnea Jeleriu, stresses the importance of constantly capturing customer feedback—both directly and indirectly—and paying close attention to what customers share.
She states, “understanding customer needs hinges on having complete visibility into the customer journey, market, and how they interact with the resources you provide. By analyzing that data and extracting actionable insights, you’ll be able to develop new content/features/products that improve the overall experience.”
That also means looking at former customers to understand what made them leave. What went wrong at a specific touchpoint to influence their behavior?
3Pillar Global’s Charles Zujkowski says, “this allows you to intervene before a customer leaves you in favor of a competitor. Data analytics will help in this area.”
Predictive analytics allows organizations to predict churn better, identify upsell opportunities, and track and monetize consumer data.
Success rides on ensuring that all data is correctly identified as usable data. It’s not sitting in a data lake—it’s going somewhere. It’s correctly identified and attributed. Improvements can only happen when you know where your data is coming from and understand which metrics to focus on to make better decisions.
Analyze Strategies and Prioritize High-Impact Improvements
There are a number of things you can do to improve your CX strategy.
Whether that’s launching a loyalty program, improving the checkout process, deploying AI chatbots, or creating a more cohesive cross-channel experience—you’ll want to dig into the data before you make any big decisions.
3Pillar Global’s Dario Espinoza points out that from a product development perspective, “companies should always use data—whether it’s from a specific tool, the UX team, or the data science department—to quantify the value a brand/product provides to the consumer.”
He shares that customers perceive brand value the moment they realize they have a need/want. It continues through the evaluation stage, to the point of purchase and beyond—during the installation, onboarding, use, and even the re-sale.
Monitor, Measure, and Improve
Angel adds to “keep talking to customers. Run user interviews, market research, dig into the analytics to surface new needs and find areas to improve.”
Focusing on making sure you measure the impact of each initiative against a specific goal can allow you to pinpoint which efforts had the biggest impact.
For instance, you might change the way your site serves up product recommendations. In that case, look at the impact on average order size or repeat purchases. As a result, you want to stick with the practices that work and ditch those that don’t.
Final Thoughts
Since there’s a direct link between customer experience and profitability, it pays to put customers first.
That said, find out which customers create the most value, which factors influence their behavior, and which KPIs best match your business goals. It’s about understanding why customers buy or don’t buy, categorizing them, creating a smooth customer journey based on behavioral data of previous customer experiences, and getting them to covert.
3Pillar Global aligns client business goals with customer needs to deliver innovative digital products to help you win market share and achieve rapid revenue. To learn more about maximizing the financial impact of your customer experience investment, fill out this form, and we’ll connect you with an expert.
Special thanks to these members of FORCE, 3Pillar’s expert network, for their contributions to this article.
Angel AlmadaFORCE is 3Pillar Global’s Thought Leadership Team comprised of technologists and industry experts offering their knowledge on important trends and topics in digital product development.