Yes Australia, There Is A Return On Customer Experience Investments too

What a great way to start the year with rigourous research and resulting article from Jon Picoult of Watermark Consulting
Unlike staff cutbacks, the launch of a new product or generally more tangible management acts, Customer Experience improvement is often seen in similar company as culture or change management improvement. Because it is often seen as intangible, some company leaders are reluctant to investigate it. Just because you cant immediately see the the benefits on the bottom line like you can when you undertake other investments, dsoesnt make it any less valid.

It just means that those of us who work to improve the customers experience for the the purpose of increasing customer retention and hence revenue, need to work harder to communicate the message.

This is an excellent article and a proof that increasing focus on Customer experience through Service Design is not only valuable, but a requirement for leaders of businesses if they are to deliver on their mandate to increase shareholder wealth.

Lets keep spreading the news, in the “tipping point we trust”.

Yes, Virginia, There Is A Return On Customer Experience Investments

By Jon Picoult on Feb 06, 2010, of Watermark Consulting

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In some business circles, getting people to believe in a return on customer experience investments is a lot like getting them to acknowledge the existence of Santa Claus.

Admittedly, it can be difficult to quantify a specific profit or revenue impact from some types of experience enhancers—more robust “voice of the customer” programs, more polished customer statements, better trained front-line personnel, streamlined customer touchpoints, a more user-friendly website, etc. The financials surrounding such initiatives are much less precise than those of hard-dollar initiatives, like the renegotiation of real estate leases or the consolidation of corporate functions.

Of course, that doesn’t mean customer experience investments have any less of a compelling return than these other endeavors. It just takes a little more work to quantify it. And, frankly, in some cases, it requires a leap of faith.

Leap of Faith?

I know what you’re thinking. Most Chief Financial Officers won’t look kindly on a business case grounded in a leap of faith.

The fact of the matter is, though, there are plenty of big business decisions that are routinely made with limited quantification and a healthy leap of faith. Corporate re-brandings, advertising programs, synergistic mergers, and even the hiring of highly compensated, star CEOs—these are all examples of initiatives that bring with them a good deal of risk and expense, yet must be green lit without the benefit of a precise, quantifiable business case.

…there are plenty of big business decisions that are routinely made with limited quantification and a healthy leap of faith.

How does a senior executive, CFO or Board member give their assent under such circumstances? They complement what limited hard data may be available with gut instinct. They get comfortable taking a leap of faith because they simply believe in the concept behind the investment, whether it’s the power of a reinvigorated brand, the potential unlocked by an acquisition, or some other venture.

So when executives push back on customer experience investments, citing the absence of an iron clad, quantifiable business case, their reservations may actually reflect a deeper skepticism about the true value of customer experiences strategies.

One way to address such underlying skepticism is to elevate the dialogue, getting executives—even for just a moment—to focus less on project-by-project justifications and more on the macro impact of experience-oriented business strategies.

Is The Market Rewarding Customer Experience Leaders?

To that end, Watermark Consulting recently conducted an analysis of stock market performance for customer experience leaders and laggards over the past three years, a time period encompassing the market’s run up to its all-time high in late 2007, to its Great Recession-induced nadir in early 2009, to its more recent bounce back.

To identify the leaders and laggards, we used Forrester Research’s 2007 Customer Experience Index study, picking the top ten and bottom ten publicly traded companies from Forrester’s rankings. Then we compared the total return from investing in an equally-weighted portfolio of customer experience leaders to that for customer experience laggards and the broader market (as reflected by the S&P 500 index).

The results were quite revealing:

From 2007 through 2009, through the best and worst of times, the customer experience Leader portfolio outperformed the broader stock market, generating cumulative total returns that were 41% better than the S&P 500 Index and 145% better than the customer experience Laggard portfolio.

During each of the three years, the Leader portfolio always outperformed the index and the Laggard portfolio always underperformed the index. Looking at these data points, it certainly appears that customer delight and customer misery have very different influences on company stock performance.

In addition, while the Leaders portfolio declined in value during the depths of the recession, the decline was less pronounced than that for the broader market. As the recession abated in 2009, the Leaders portfolio also proved quite resilient, more than doubling the return of the S&P 500.

This performance profile supports the notion that customer experience leaders are somewhat cushioned from the most severe impacts of economic downturns, because they represent one of the last places consumers cut back and one of the first places to which they return.

What The Numbers Really Mean

There are plenty of criticisms that could be lobbed at this analysis: the three-year time period is too short, the Leader and Laggard sample sizes are too small, the Forrester study isn’t a good measure of customer experience excellence, stock market returns aren’t good indicators of long-term company performance, etc.

No analysis is perfect and this one is hardly meant to suggest that any company embracing a strategy of customer experience differentiation will outperform the S&P by over 40%. There are many variables at play, not the least among them pure execution (embracing a strategy and actually implementing it are two very different things).

Companies that successfully bring great, end-to-end customer experiences to the marketplace are rewarded—by consumers and investors.

These results are also not meant to preclude attempts to cost justify customer experience improvement efforts on a project-by-project basis. That rigor must remain; this data merely provides some much-needed air cover.

What this analysis does suggest is this: Companies that successfully bring great, end-to-end customer experiences to the marketplace are rewarded—by consumers and investors. Their operational excellence and attention to detail, their simple and straightforward communication, their well-equipped and genuinely helpful front-line staff—the sum of these parts pays off in the end, even if the precise impact of individual components is uncertain at best.

Hopefully, by framing the return on customer experience excellence in terms executives can easily understand (stock price and market value), this analysis will begin chipping away at the lingering doubts that some of them harbor towards experience-oriented investments.

And with that target of skepticism removed, all that’s left to figure out is who eats the milk and cookies on Christmas Eve.

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One thought on “Yes Australia, There Is A Return On Customer Experience Investments too

  1. As great as the analysis by Jon Picoult is, and it is certainly a helpful contribution to the discussion, the fact is that it will still not be sufficient to convince most financial executives when discussing the pros and cons of specific initiatives. On Jon’s original article, I posted this comment, and I think your readers will be interested in the issue outlined here:

    Overall financial success that is correlated with better customer experience at a company is great, but it hardly helps a marketing executive during a debate with other executives at the firm about how much investment a company should make in which kinds of experience-improving services. It has become fairly easy to “prove” that good customer experiences have some kind of impact on a company’s results, but Martha Rogers and I have always been struck by the fact that all these indicators are inherently non-financial metrics – even the ones you’ve outlined in your post here. The problem is that you still can’t actually quantify the financial benefit of, say, investing an extra $25 million in contact center training, or installing software and re-engineering a system for $50 million, in order to improve the customer experience.

    And, if your marketing exec says, well if we want a good customer experience then we should just DO these kinds of things, then our question is: What if the cost is $100 million? Or $500 million? See the problem? At some point a balance has to be struck, but where? Simply saying that CXP leaders tend to have better financial results than CXP laggards won’t solve the hard problem of resource allocation. To solve this problem you need a metric for the benefits of customer-experience-management that can be converted to dollars and cents.

    That’s why we invented the financial metric, “Return on Customer,” a precisely quantifiable measure of the efficiency with which a company’s customers are creating value. Lately, there has been more attention paid to the ROC metric, including a recent piece in the UK’s Marketing Week magazine here: http://preview.tinyurl.com/yz8ahq9. One of the important benefits of ROC is that this metric can be increased not just by acquiring more customers or by generating more sales, but also by improving the customer experience your current customers encounter. And in fact, changes in Return on Customer can be sued to derive a precisely measurable financial value of the individual customer experience, by itself, because good experiences are directly translatable into increased lifetime values. If your readers want to learn more about it quickly, we have also posted a brief synopsis of the ROC concept and metric on our own blog here: http://preview.tinyurl.com/yjrwfah.

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