CX Economics Part 2: The new value drivers for the Customer Experience business case

Customer Experience (CX) has become a critical capability for companies in many industries. We previously looked at how CX has become a core enterprise capability and the 6 classic value drivers for CX that deliver +20% EBTIDA growth in any industry. But CX Economics has changed fundamentally, perhaps most obviously in B2C markets. Let’s look at these changes and what they mean for the CX business case.

[The Four States of Disruption]
Accenture published an index that measures an industry’s current level of disruption as well as its susceptibility to future disruption. Source: HBR.

This is the era of market disruption. Accenture publish an index which shows that two-thirds of companies currently face high levels of disruption, and two-fifths show severe signs of susceptibility to future disruption.

The classic value disrupters in this economy are well known. Production is now fast, cheap, made to order in Asia and shipped globally. This is true for physical products as well as software and services. Of course there are exceptions, but they are exceptions to a rule and to a trend.

Distribution has been transformed with direct to consumer models. Everyone can set up an online shop in minutes but not only that: they can be found easily through search engines and social media.

Scale is no longer the barrier that it used to be. Services and software can be easily bought online at low cost and with easy integration. Many industries now experience unprecedented speed and low cost to launch challengers. This is even true in heavily regulated and capital intensive industries like Banking.

So on one hand the traditional corporate advantages have been eroded and the effectiveness of the classic 4Ps levers of marketing (Product, Price, Promotion, and Place) has been diminished. We are not suggesting for a moment that they are no longer important, just that they are no longer sufficient and that the battleground for competitive advantage has to a large extent shifted to reputation and experience.

Control of brand reputation has moved from company to consumer

Companies used to own and control their reputation. In the Don Draper era portrayed in the Mad Men drama series, brand leaders dominated their markets with vast advertising and communication budgets in an environment with few competitive signals of quality of products and services.

Now reputations are increasingly controlled by consumers through ratings, Trip Advisor, Trust Pilot, social media, and so on. This 180 degree shift is one of the most powerful dynamic in the current consumer markets.

You cannot roll back production, logistic, or technology shifts.

You can act on reputation.

Some do it right already1:

“We take most of the money that we could have spent on paid advertising and instead put it back into the customer experience. Then we let the customers be our marketing.”

Tony Hsieh is the Founder and CEO of Zappos, the online shoe and clothing retailer that is famous for its relentless focus on the customer experience. He identifies how well treated customers bring in more and better business than traditional advertising. To Tony Hsieh, customer service, advertising, and marketing are essentially the same thing.

Reputation == CX and core P&L driver

Reputation is now dictated by customer experience. Everything is now rated: from the simple to the premium, garbage bins to Porsche cars.

93%
of consumers say on-line reviews impact their purchase decision and they would not buy from a brand with less than 3.3 stars.

Source: Podium survey of 2,005 US consumers who leave online reviews.

The more important the overall experience is to your customers the more ratings and reviews and more volatility you get—for better or worse—and the more urgent it is that your organization recognises CX as a core business KPI.

We call this the Reputation and Experience Economy: Customers look for ratings and reviews before they buy; they value (are willing to pay for) better experiences; and experiences (good or bad) generate more ratings and reviews.

68%
of consumers are willing to pay up to 15% more for the same product if they were sure they would have a better experience.

Source: Podium survey of 2,005 US consumers who leave online reviews.

Most companies feel the impact of ratings and reviews on their prices and demand. In the hotel industry a famous (and dated) study2 found that a single incremental star +1★ in customer ratings of hotel rooms is linked to a 21% increase in price. Many hotels operate at around 20% EBITDA margin so this has the potential to double or completely eliminate profits. Many newer studies3 quote effects in the range 25-35%, perhaps reflecting the increasing importance of rating sites.

For consumer products the quoted impact vary but typical effects4 of a 1★ increase would be:

The new value drivers for CX

In summary, the battleground for differentiation has to a large extent moved from the classic ‘4P’ value drivers to the new disrupters of Reputation and Experience. Therefore, Customer Experience has now become a critical and core business capability. Witness the takeover by SAP of Qualtrics: enterprise software buys Customer Experience management because that is enterprise capability now.

[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.

These two new 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.

This reinforced 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.

Contact us today for a demonstration and a conversation about the impact of your CX initiatives.

  1. Source: Forbes 2010

  2. Determinants of hotel room price published in International Journal of Contemporary Hospitality Management. 

  3. The determinants of hotel room rates: an analysis of the hotel industry in Warsaw, Poland, Emerald Publishing Limited. 

  4. Value of online reviews, Podium January 2018. 

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