Saturday, July 20, 2013

Measuring the ROI of a Good Customer Experience

A man was visiting his farmer friend one weekend, and as the two of them sat in rocking chairs on the front porch the visitor couldn’t help but notice a pig hobbling around the barnyard with a wooden leg. How remarkable! So, he asked his host, what’s the story on that pig with a wooden leg there?
Oh, the farmer replied, that’s my pig Winslow. Winslow is one terrific pig. We had a barn fire about a year ago and believe it or not, Winslow went into the barn and dragged my two-year-old son Jimmy out by the scruff of his neck. Probably saved Jimmy’s life.
So, the visitor surmised. Winslow must have injured his leg in the fire?
No, the farmer said, but when you have something that good, you only want to eat it a little at a time.
A lot of businesses today are generating their profits by eating their own customers a little at a time. Response rates continue to decline generally, across all forms of outbound marketing, while customers themselves feel less and less loyal to the brands they deal with, so their lifetime values are declining, as well. Why?
It’s really very simple. The overwhelming majority of businesses measure their financial success based on current sales and costs, while customers are focused on the customer experience they anticipate.
But the ROI of delivering a frictionless customer experience isn’t reflected in a company’s current-period sales. When a customer has a frictionless customer experience she becomes more likely to buy the brand again and more likely to tell others about the brand, and the cash effect of these benefits won’t be realized until some financial period in the future. They represent an increase in the customer’s current lifetime value, but not in her current purchasing.
The problem is that there is an inherent conflict – a tradeoff – between a customer’s current-period purchases and her lifetime value. For one thing, successive outbound marketing campaigns will inevitably suffer from diminishing returns, as the most likely customers buy first, so the population of remaining customers becomes less and less likely to buy. But in addition, the more aggressively a business tries to promote its current sales, the more resistant its customers will become, perhaps even feeling pressured and losing trust in the marketer’s motives.
Most companies don’t have analytics systems refined and ambitious enough to estimate the magnitude of an increase in a customer’s lifetime value, so they ignore it altogether. Instead, they focus solely on the dollars-and-cents involved in this quarter’s transactions. They are laboring under the ridiculous idea that the more easily measured something is, the more important it must be.
The result is that businesses are still, even after the financial crisis, obsessed with short-term results. In sales and marketing terms, it means they are simply eating their own customers, a little at a time.
If your business is operating this way, here are a few things you can do to deal with the problem:
  • Improve your customer analytics function, to ensure that average customer lifetime value is regularly measured (at least quarterly, if not daily) for a variety of different customer segments.
  • Then track changes in lifetime value over time, in order to understand the actual financial value created by improvements or changes in the delivered customer experience. (Use test-and-control mechanisms to try to eliminate, as far as possible, non-relevant factors.)
  • Introduce some non-financial metrics of success, in addition to the financial metrics of sales revenue, costs, and profits. NPS, customer satisfaction scores, and other voice-of-customer metrics can be correlated with changes in customer lifetime values, and over time this will give you a useful "shortcut" for estimating the real ROI of improvements in the customer experience.
  • Be sure to get the CEO’s commitment to these efforts, as well as explaining the program to shareholders. Otherwise, these kinds of metrics will get thrown out again the very first time your company’s short-term results decline.
If you continue to focus entirely on current-period financial results, you will be gradually depleting the customer lifetime values available to your business. And you really don't want to be in the business of eating your own customers, a little at a time.


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