For every $1 invested in CX, companies can expect a return of $3. It is crucial to determine your customer experience ROI since without it, it will be impossible to develop, evaluate, and continuously improve your customer experience activities.
However, CX involves various touchpoints and customer interactions with a company, making calculating the return on investment (ROI) of customer experience (CX) initiatives difficult.
The soft ROI won't be enough to place CX projects on an equal footing with other business programs and initiatives. To present a compelling business program and win approval for ongoing investment, you must have the quantitative ROI.
In a study conducted by Clootrack of the ROI of Customer experience, 20 CX leaders from across the globe have shared their challenges in calculating the ROI and also have shown how they were successful in calculating the ROI of their CX investments.
In this article, I'll go through a thorough example to show you how to calculate your customer experience costs, returns, and ROI. I'll also show you how to use this ROI calculation to create a successful CX program.
What is Customer Experience ROI?
Customer Experience ROI (Return on Investment) is a financial measure of how effective a company's efforts to improve customer experience are. It is computed by dividing the overall increase in revenue or cost savings realised by a customer experience program by the total cost. This formula can be used to assess the efficacy of customer experience programs and decide whether they are worthwhile to invest in.
Why is Customer Experience ROI Important?
Customer Experience ROI is important because it helps companies to determine whether their investments in a customer experience program and initiative are paying off. By measuring the total benefits of customer experience initiatives against the total cost, companies can determine whether their investments are profitable and how much they are benefiting from them. Companies can use this information to adjust their customer experience strategies in order to maximize their return on investment.
Why Calculating the Customer Experience ROI is Hard?
Businesses often struggle to calculate the return on investment (ROI) of customer experience (CX). This is partly because CX is not a tangible asset, such as a product or service, and there is no well defined methodology for measuring how it affects the bottom line.
Furthermore, many of the benefits of a successful customer experience program are intangible and difficult to quantify. Loyal customers and their brand awareness, for example, are frequently cited as the most important customer experience benefits, but it is difficult to quantify their influence on the organisation. Additionally, CX projects are frequently costly, and the ROI of customer experience may be delayed.
There are three major reasons why establishing the ROI of CX is difficult:
1. CX initiatives are often long-term investments and may take time to yield results.
2. It is difficult to accurately measure the customer experience in a consistent way across different segment customers.
3. The financial benefits of CX initiatives are often indirect and difficult to calculate.
3 Steps to Calculate the Customer Experience ROI
Calculating the ROI of CX is critical for businesses that want to understand the financial impact of their CX initiatives. CX ROI helps companies to determine the value of their investments in CX and make informed decisions about where to allocate their resources.
To calculate CX ROI, businesses need to follow three main steps:
Step 1: Determine CX investment
The first step in calculating CX ROI is determining the investment in CX initiatives. Ask yourself
Which are the most important Investments Needed?
A new CX program may need training to the existing staff, might require investment in technology or new tools, and also you need to factor in the day to day expenses of the CX program.
What timelines do I have to set for these investments?
It is essential for Customer Experience (CX) leaders to forecast a timeline for when each of the planned investments will take place. This is important as these investments can be expensive in large enterprises and they need to be staggered over a period of time. Establishing a timeline and plan will help to ensure that the investments are made in an efficient and practical way, allowing the company to maximize revenue impact and their ROI.
What will be the estimated cost for these investments?
Now is the time to start building cost estimates for customer experience investments. It is important to use past expenditure as a benchmark and to thoroughly research and evaluate potential partners or service providers to ensure that they are best suited for your customer experience investment needs. This will help you to accurately estimate future expenditures and ensure that your customer experience investments are cost-effective.
Step 2: Identify Key Customer Experience Metrics
The next step to calculating customer experience ROI is to identify the key business metrics that you will use to measure success. It’s important to select financial metrics that are directly related to your CX goals, such as customer satisfaction, customer retention, or customer loyalty. These financial metrics will then be used to measure the impact of your CX investments.
1. Customer Retention Rate:
The rate at which customers continue to use a company's services or products over a period of time. It is an important metric to measure customer experience because it indicates how satisfied customers are with the company's offerings.
2. Customer Satisfaction Score:
This metric measures how satisfied customers are with a company's products or services. Companies can track this metric by collecting customer feedback on a regular basis.
3. Net Promoter Score:
This metric measures increased customer satisfaction and loyalty and is based on customer responses to a single question: "How likely are you to recommend this company to a friend or colleague?" Companies can use NPS and financial metrics to gauge customer satisfaction, loyalty, and the impact of customer experience initiatives.
4. Customer Effort Score:
This metric measures the amount of effort required for a customer to interact with a company or its services. Companies can use this metric to assess the customer experience and identify areas for improvement.
5. Average Resolution Time:
This metric measures how long it takes for a customer service representative to resolve a customer's issue. Companies can use this metric to evaluate improved customer experience, service performance and the overall customer experience.
Step 3: Calculate CX ROI
Once the CX investment and return have been determined, the final step is calculating the CX ROI. This is done by dividing the CX return by the CX investment and expressing the result as a percentage.
For example, if a business invested $100,000 in a CX program and saw a return of $150,000, the CX ROI would be 50%.
Calculating CX ROI is not a one-time process. Instead, it should be an ongoing practice that businesses use to track the impact of their CX initiatives and make data-driven decisions.
By regularly calculating CX ROI, businesses can identify areas for improvement, measure the success of their CX initiatives, and show the value of CX to stakeholders.
4 Best Practices of Customer Experience ROI
Improving customer experience can lead to increasing customer retention and a revenue increase of up to 25%. However, to maximize the ROI of CX, businesses need to adopt best practices to help them achieve their CX goals. Here are some CX ROI best practices:
1. Establish clear objectives
To measure the impact of CX initiatives, businesses need to have clear goals and objectives in place. Such goals must be aligned with the overall business strategy and focus on improving a customer experience metric such as customer satisfaction, apart from loyalty and improved customer retention.
By establishing clear goals and objectives, businesses can measure the success of their CX initiatives and track progress over time.
2. Identify and track relevant business metrics
Measuring the impact of CX initiatives requires identifying and tracking relevant business metrics. These key metrics may include customer satisfaction scores, Net Promoter Scores (NPS), customer churn rate, and revenue impact/growth.
By regularly tracking these cx metrics, businesses can gain actionable insights into the effectiveness of their CX initiatives, collect customer feedback and make data-driven decisions.
3. Utilize customer feedback data for informed CX decisions
Customer data is critical to making informed CX decisions. By analyzing customer feedback, behavior, and engagement data, businesses can gain insights into what existing customers want and need and how they interact with the company.
This information can be used to develop and improve CX initiatives, ensuring they meet customer expectations and drive ROI.
4. Continuously improve CX initiatives
CX is an ongoing process that requires continuous improvement. By regularly reviewing and refining CX initiatives, businesses can keep up with changing customer needs and preferences.
This may involve implementing new technologies, optimizing processes, or updating CX strategies to align with evolving business objectives.
Clear goals and objectives, relevant financial metrics, data-driven decisions, and continuous improvement will help businesses deliver exceptional customer experiences and drive long-term business success.
Examples of Calculating Customer Experience ROI
The ROI of CX is vital for companies to track because it can help them make informed decisions about where to allocate resources to improve customer experience. It also allows companies to show the value of CX investments to stakeholders, such as executives and investors.
Here are some ways to calculate CX ROI:
Calculating the impact of NPS on CAC
Suppose a company has an NPS of 50 and a customer acquisition cost of $100. If the company increased its net promoter system score by 10 points to 60, it could expect a decrease in CAC as satisfied customers are more likely to refer new customers to the business.
Using a conservative estimate, if the company's CAC decreased by 10%, the new CAC would be $90. The impact of this reduction in the cost of customers acquired on revenue growth would depend on other factors, such as the size of the customer base and the average revenue per customer.
Calculating the impact of CES on the churn rate
Suppose a company measures its CES for customer service interactions and finds its average CES score is 3.0. The company then implements improvements to its customer service processes and sees an improvement in its average CES score to 4.0.
Based on historical financial data, the company knows that customers with a CES score of 3.0 or lower have a churn rate of 10%, while customers with a CES score of 4.0 or higher have a churn rate of 5%. Assuming that 1000 customers interacted with the company's own customer service team during this period, the impact of this improvement on customer churn rate can be calculated as follows:
300 customers had a CES score of 3.0 or lower, with an expected churn rate of 10%, resulting in 30 churned customers.
700 customers had a CES score of 4.0 or higher, with an expected churn rate of 5%, resulting in 35 churned customers.
Therefore, the expected churn rate is 65/1000 or 6.5%.
Calculating the impact of CRR on CLV (Customer Lifetime Value)
Suppose a company has 10,000 customers and a CRR of 80%. If each customer spends an average of $500 per year with the company and has had a relationship with the company for 5 years, then the total CLV (Customer Lifetime Value) of each customer is:
CLV = ($500 * 5) / (1 - 0.8) = $2,500
If the company can increase its CRR to 90%, then the total CLV of each customer would be:
CLV = ($500 * 5) / (1 - 0.9) = $2,778.50
This represents an 11.14% increase in CLV per customer.
A higher customer lifetime value is always better!
Calculating the impact of TTR on customer satisfaction and loyalty
Suppose a customer contacts a company with an issue that takes 10 days to resolve. The customer may feel frustrated with the length of time it took to resolve the issue, leading to lower customer satisfaction metrics and decreased loyalty to the brand.
But if the same issue is resolved in just 2 days, the customer may feel more satisfied with the customer service experience and more likely to remain loyal to the brand.
Key Takeaways While Considering the Calculation of Customer Experience ROI
Though CX ROI calculation can be challenging, it helps CX professionals and organizations prioritize and allocate resources toward initiatives that generate the most financial value for new customers and the business.
Measuring key customer satisfaction, loyalty, and retention metrics helps determine CX ROI. However, businesses must establish clear goals and objectives to maximize CX ROI, identify and track relevant metrics, regularly calculate CX ROI, and invest in CX initiatives that generate the highest ROI.
By their customer experience leaders adopting best practices and making data-driven decisions, businesses can improve their CX and drive growth and customer loyalty.