By Shaun Smith, Contributing Author to The Perfect Customer Experience.
Show me the money
“A key obstacle cited by many (61 percent) for measuring the customer experience is the difficulty of monetizing the value of investments for improvement – despite the fact that it does make a significant difference” Source: Experience Maturity Monitor SAS Institute Inc and Peppers and Rogers Group 2009
We consult with many leading brands on the customer experience and find that one of the first things we have to do is to convince them that their investment will be returned. The question is how can you do this when customer behaviour lags the change in performance? This is not a new issue as the Peppers and Rogers Group quote, above, found.In response to this need, we recently developed a tool that can help you convince your board of the value of customer experience management.
The CEM+ Calculator™
We call the new tool our CEM+ Calculator™. It takes real data from client organisations – number of customers, their purchase behaviour and current levels of advocacy – and then projects the impact on revenues of what will happen if you increase advocacy through changes to the customer experience. It also allows the costs of the improvement to be factored in, allowing the ROI to be calculated.The benefit of this approach is that it allows organisations to estimate to a fairly accurate degree (given the many variables affecting organisational performance) the impact on their revenues and profits of investing in the customer experience – making the decision no different to any other form of capital investment. This allows the Customer Experience Officer to talk to the Chief Financial Officer in a language he or she understands!
Satisfaction is not enough
So, why is such a tool necessary? Why not just rely on customer satisfaction data to show a return on investment?Traditional measures of customer satisfaction have little to do with customer experience, or financial performance, for that matter. According to research, 80 percent of customers who switch suppliers express satisfaction with their previous supplier. Rather than just satisfaction, revenue growth has everything to do with ‘advocacy’, the extent to which customers or clients prefer a supplier and then refer friends and colleagues to you. For example, First Direct, the UK retail bank, has the highest level of customer satisfaction in the market and is recommended by its customers every five seconds gaining over one third of all new business from referral. Advocacy translates into increased share of market and higher levels of retention, all of which mean good news for your bottom-line.
What is customer advocacy?
The dictionary definition of “advocate” is “Plead for, defend, champion, recommend, support”. When Steve Jobs, the CEO of Apple introduced the iPad at the annual Apple convention, the reaction of the audience was more akin to a religious meeting than a product launch. Apple customers are passionate champions for the brand in a way few other technology users are. How does this translate into money? Satmetrix research in the computer hardware industry found that Apple advocates generate revenues of $4,500 each compared with their competitors who earn just $2,600 from their best customers. The difference is the emotional connection with the brand: Apple customers are willing to pay more, repurchase more frequently and refer other customers.
The Advocacy Index
For those organisations wishing to increase margins by driving down sales costs whilst driving up revenues, advocacy is the answer. Advocacy requires you to know who your most profitable customers are and to consistently deliver a customer experience so as to create a high degree of trust in your brand. Only then will these loyal and highly profitable customers be prepared to recommend your organisation to others.In his classic HBR article ‘The one number you need to grow’, Frederick Reichheld argued that the only measure of performance that really matters is the ‘Net Promoter Index’. This is the result of subtracting those customers who are dissatisfied from those who are highly satisfied. Our term for this is the ‘Advocacy Index’ and our CEM+ Survey™ measures this to determine the extent to which your firm will grow organically through attracting and retaining profitable customers via positive word-of-mouth.
Focusing on your most profitable customers
We did research in the mobile phone market and found that the top 5% of customers represented a significant proportion of the profit and were worth several times more than the average customer to the mobile phone providers. Yet these customers were not treated any differently to reflect their high value and increase their likelihood to stay loyal and become advocates. In fact in most instances, new customers got better deals than the long standing customers.It was this insight that led the mobile network operator O2 to focus on rewarding these valuable customers. O2 established a separate call centre and more highly trained employees for these high value customers. Their loyalty rose significantly as did the profits.This is still true in financial services where new customers are routinely offered more attention, deeper discounts and better deals than long established customers. In loyalty terms this is madness. In his book The Loyalty Effect, Frederick Reichheld says that loyal customers are more profitable because the costs of sales are amortised over a longer period, they increase their purchases and percentage of spend with you, cost less to administer, refer others and are willing to pay a premium. By focusing on delighting highly profitable customers, companies keep them loyal and eventually turn them into advocates who attract others who value the same things and thus in turn become advocates themselves.Shaun presented some of these ideas with Simon Groves – Head of Strategy and Customer Experience for O2 – at the Satmetrix Net Promoter Score Summit in London on June 17th 2010. It has since been announced that O2 have topped a poll of European consumers asked to score their customer care experiences with mobile phone networks. O2 achieved a rating of 24% compared with the industry average of only 3% (MyCustomer.com has more details).