Customer Experience Economics: Making the business case for CX

Customer Experience (CX) is increasingly seen as a critical business function as companies are waking up to the new value drivers in the experience and reputation economy.

The classic value drivers for CX come from engaged customers spending more, staying longer, and referring friends. These typically contribute 20% EBITDA growth or more when done right; see our CX Impact approach for a key capability to deliver this benefit and sustain it over time.

The new value drivers for CX derive from the critical importance that customer ratings have in many industries and from the value that customers attribute to great experiences and emotional engagement, which goes beyond the product features and promotions of classical marketing. In many industries these have the potential to double profits with CX done right—or eliminate profits if done wrong.

Let’s look at each in turn.

The classic value drivers for CX

There are six classic drivers for Customer Experience Economics which can be measured and modelled across industries. We have worked with online and offline, B2B and B2C (and B2B2C), and almost any other business model across new and old industries to build financial models that earned the trust and commitment of the entire leadership team.

[The classic CX value drivers] — The classic value drivers for Customer Experience: Positively engaged customers (“Promoters”) spend more, use more, stay longer, refer more, cross-buy more, and cost less to serve.

Customers who have a positive engagement with your brand and products or services:

Spend more: are more likely to buy more and higher-value products and services.
Use more: use your services and products more, thereby deriving more value which in turn justifies higher spend (as price premium, more expensive produces, or higher volume).
Stay longer: churn at a much lower rate. Many industries are moving to a subscription model and here retention is a critical value driver.
Refer more: make more positive referrals and fewer negative referrals. A prospect with a personal recommendation is much more likely to convert than one attracted only by traditional marketing. Promoters can be converted to advocates who not only would recommend you if asked but who actively and unsolicited promote your brand.
Cross-buy more: hold a greater range of products and use a greater range of services. This is a strong driver of retention and price elasticity.
Cost less: typically cost less to serve; and offer more opportunities for selling through service.

Building a model for CX Economics that is trusted by the organization’s leadership team and gives them courage to make the right decisions and act on them, is critical for lasting success and impact from your CX programme. You should be achieving, and measuring, 20% EBITDA growth from CX.

The new value drivers for CX

[CX becomes a core capability in the Reputation and Experience economy] — Customer Experience becomes a core capability because it amplifies the financial and market impact of operational decisions through the new value drivers of Reputation and Experience.

We live in a Reputation and Experience economy; understanding this and how that means that Customer Experience amplifies the financial and market impact of your operational and marketing decisions is critical for CX Success.

1. Reputation and Ratings

Companies used to own and control their reputation but now reputations are increasingly in the hands of their customers.

Brand leaders dominated their markets with vast advertising and communication budgets in an environment where there were few competitive signals of quality of products or service.

Now reputations are increasingly controlled by consumers: ratings, Trip Advisor, Trust Pilot, social media, Likes, etc. This is very obvious in B2C industries and increasingly important in B2B.

2. Experience and Emotions

Companies used to differentiate on the classic 4Ps of marketing: Product features, Pricing, Promotion, and Placement. These are still important.

However, in a global economy it is getting harder to be truly unique. Production of physical goods can be copied quickly and manufactured in volume at short notice. The same is true for much software and service. Distribution has obviously been transformed: not only can anybody set up an online shop in minutes but crucially they can be discovered easily through search engine and social referrals. Business services in all areas provide unprecedented speed and low costs to launch challenger propositions.

Now the battleground is increasingly in the new value drivers. One more star in aggregate ratings allows many businesses to charge 20-30% higher prices, and conversely, one less star will make many products unprofitable. With most product features satisfied, customers expect and value (are willing to pay more for) great experiences and emotional engagement with the brand.

CX amplifies the financial impact of your operational decisions

These two value drivers are reinforcing: Customers with an extreme experience (good or bad) are much more likely to leave reviews and ratings, and customers who value experiences and emotional engagement and much more likely to rely on reviews before they engage with a brand.

In this Reputation and Experience economy, Customer Experience becomes a core capability because it amplifies the financial and market impact of operational decisions through the new value drivers of Reputation and Experience.

This amplification is key to understanding Customer Experience Economics and to the business case for change and CX Impact.

How we can help

We have worked with organizations across industries to re-ignite and accelerate their CX programmes for impact. As a result, these companies have delivered enviable results for their customers and for their business with measured impact on Customer Experience, loyalty, recommendations, and EBITDA.

We support you to develop robust and clear financial CX Impact models that are understood and trusted by the entire organization and drive actions. We help you develop clear operational recommendations prioritised by impact to ensure you deliver sustained change.

While principles and approach are reusable across businesses, the details of your operations and commercial value model are different from every other organization. We will capture this to ensure the recommendations are relevant your managers and the impact is trusted by your leadership.

Read more about our approach to CX Impact.