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CustomerThink Report

Best Practices to Prove the Business Value of Customer Experience

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Chapter 4

Prove CX Value with Cost/Benefit Analysis and Intangibles

With a clear understanding of success drivers, and a defined strategy to link CX improvements to the forms of business value that prospective supporters care about, creating a compelling business case is the final step. Believe it or not, this is the easy part. With the proper homework and relationships, the business case is a summary of what everyone has already agreed to.

What should be in the business case? CustomerThink members were asked that question in an online survey and strongly endorsed what CX experts also say: hard numbers are key. A “cost/benefit analysis showing a positive ROI” was the top-ranked choice of nearly 200 respondents, with 56% rating this factor as “extremely important” in getting approval. The impact on department KPIs was third with a 47% rating.

CustomerThink Report

Figure 5 – Factors in Spending Decisions

Sure, numbers are the most important. But executives can be influenced by other factors (see intangibles discussion, below) and want to know that those involved in executing the initiative will back it enthusiastically. Relationships also received high ratings, including support by the executive sponsor (49%) and endorsement by affected stakeholders (43%).

For complex undertakings, risk must also be considered. How will the CX leader increase the odds that the proposed plan will be delivered on time, on budget? A successful pilot or “proof of concept” can show that the CX program, when fully implemented, is likely to deliver the expected results. Worldlynx Wireless used one pilot store to prove that improved CX cut churn, and to finetune rollout plans to all stores. Once again, CX pros should review other winning internal proposals and see whether these elements are expected.

Finally, of the seven factors survey takers were asked to consider, a “compelling proposal presentation or document” was last on the list with 24% of respondents giving “extremely important” ratings. Still, another 60% rated this factor as “important,” so nearly two-thirds see value in how the business case is packaged.

Methods of ROI Calculation

Thus far, this report has used the term “ROI” generically to mean showing how the benefits of CX improvements compare to the necessary investments. Here’s a brief review of common techniques.

One popular method express ROI as a percentage of net benefits to investments.

ROI = (Benefits – Investments) / Investments x 100

A 300% ROI, for instance, means that the net benefits are three times the investments (capital and operating expenses). Spend $100, get $400 back, and that’s a $300 net benefit or three times the total invested.

What’s missing from this ROI calculation is the time required to get the benefits. Say two potential projects have the same 300% ROI, but one could deliver the benefits in one year while the other takes three years. Absent other factors, the first initiative will be more attractive to executives.

Simple Payback is another way to relate benefits to spending. It answers the question: How long will it take to recoup the initial investment?

Payback Period = Amount Invested / Estimated Annual Net Cash Flow

Payback periods are often expressed in years. Let’s say $200 is invested and the net benefits are $100 per year. The payback period is two years. In technology investments, it’s common to see vendors pitching payback periods expressed in months, to highlight the speed of getting the initial investment back.

Neither of these methods takes into account the time value of money. Costs and returns are worth less and less the further in the future they occur. To address that issue, Net Present Value (NPV) represents the amount by which the expected cash flows of an investment exceeds the initial amount invested, using cash flows discounted by an interest rate. Put another way, NPV is today’s value of expected cash flows minus today’s value of investments over time.

NPV = Sum of (Net cashflow in each period t) / (1 + discount rate)t

The “discount rate” is used to devalue future cash flows. Let’s say the discount rate is 15%. After one year, the net cash flow would be divided by 1.15. After two years, the divisor becomes 1.32 (1.15 x 1.15). One year later, the divisor is 1.52 (1.15 x 1.15 x 1.15). Add up the cash flows, and a positive NPV means the stream of benefits exceeds the stream of investments.

NPV requires a monthly or annual allocation of investments and benefits. It can help executives screen out projects that are heavy on front-end investments with returns that are too far in the future.

Internal Rate of Return (IRR) is another way to factor the value of cash flows over time. Essentially, this involves setting NPV to zero then solving (using Excel or another tool) for the discount rate. Sometimes companies will establish a minimum IRR as a “hurdle rate” for investment decisions.

Which method is best? When costs and benefits are incurred in a year or two, ROI or Payback may suffice. For complex projects with costs and benefits occurring over several years, NPV provides a more accurate picture.

That said, the best ROI method is one that is accepted and used internally for similar programs. This should be uncovered during prior research with prospective sponsors. Get examples of other approved/funded projects and use a similar approach, rather than “pioneering” a new justification methodology.

Potential CX Returns and Investments

Broadly speaking, benefits could include increased revenue, cost reductions or avoidance, and risk reduction (which generally reduces costs, management time, or bad publicity.) What’s included depends directly on the type of CX program envisioned. Here are a few examples from CX experts to illustrate.

Revenue could come from capturing a larger share of the customer’s budget, says Strativity founder Lior Arussy:

During our work with a consumer products manufacturer who works through channels, we identified that their current customer experience is affecting their ability to capture a larger portion of the customer budget. When we demonstrated that they on average leave $2000 per customer on the table and capture on average only $199 per customer, they realized it is time to redesign the experience.


Dave Fish, consumer researcher and founder of CuriosityCX, finds process improvements can increase both
customer satisfaction and revenue:

For example, having employees take orders while in drive-through lines 1) gets people through faster, making for happier customers and 2) increases throughput through the drive-through increasing revenue. There are little tweaks like this everywhere which can improve the customer experience and by doing so make more money.

Similarly, CX journey mapping expert Jim Tincher found better customer service can boost margins while also cutting costs:

Heart of the Customer mapped a journey for a manufacturer and found that customers who were happier with the way complaints were handled were more likely to purchase higher-margin products. So, reducing friction in the complaint process led to higher revenue – as well as cost reductions from decreased call volume.

Revenue is often the “big whale” of major CX transformations, where executives strive to drive higher levels of customer loyalty and spending. Naturally, these are riskier endeavors and probably not the place to start for fledgling CX leaders.

Fixing problems is the quickest way to improve customer satisfaction and reduce costs, providing a quick-win that can keep the funding flowing. According to Harley Manning of Forrester:

Vanguard uncovered a back-end problem that caused some digital transfers from other institutions to fail and get “kicked to paper” (the recipient got a letter in the US Mail and had to call Vanguard to complete the transfer process). Vanguard fixed the problem, which made customers happy and eliminated their need to call Vanguard (a call that the customer didn’t want to make in the first place).

Indeed, in many CX case studies reviewed for this research, cost reductions had an outsized role in ROI calculations. CX leaders only exploring revenue growth are missing a huge opportunity. According to Manning, companies able to significantly increase their CX scores all focused on business process improvements that had the dual benefits of improved customer satisfaction and decreased costs.

Still, executives with a vision for a differentiated customer experience – not just one that is just “fixed” – will need to make significant investments to change customer behavior. Revenue increases will likely take longer to realize and have more uncertainty. That’s why CX justifications should include multiple scenarios from low (conservative) to high (aggressive) to give sponsors an idea of the range of possible outcomes.

Another key factor is the source of CX support within the company. As discussed earlier, senior managers may be more receptive to a loyalty-based business case. But operational executives are much less likely to sign off on revenue increases based on customer satisfaction increases alone. Instead, the business case should be tied to the KPIs of the department. For example:

  • For marketing, show how better personalization improved prospect response rates or lead generation
  • For sales, show how an improved buying experience reduces sales cycle time or increases close rates
  • For customer service, show how customers can help themselves, saving them time and the company money

Costs

The spending needed to get the benefits is of course the other side of the ROI equation. Such investments are much easier to estimate. CX programs often include a Voice of Customer component to collect and analyze customer feedback and possibly operational or behavioral data. CX consultants and journey mapping experts can help identify key issues and develop plans.

For operational changes such as a shift to digital interactions, technology investments, implementation, and training are likely costs. Professional services firms may need to be contracted to help prototyping, user testing, integration, etc. if these skills are lacking within the organization.

Don’t forget to include the value of management and employee time spent in training programs required to prepare them to deliver a new/improved experience.

Intangibles, Because Executives Value More Than Numbers

This report has stressed the need for formal justifications based on hard numbers. And rightly so, because it’s a shaky foundation for the CX industry that so few initiatives can justify their existence.

But it’s also a mistake to make the business case only about ROI. Executives make all kinds of decisions based on judgment and feeling, not just the numbers. The more strategic the investment, the greater the risk and ikelihood that other factors will play a role in a decision. It’s also worth noting that decision-making is not as logical as it may seem. In B2B selling, it’s well known that buyers will decide emotionally and then justify with logic. CX leaders need to provide both.

So-called “intangible” benefits can be just as real as ROI. They just can’t be assigned numbers, yet.

Start with how the initiative supports the stated business strategy of the company. Even if numbers are hard to prove, a business case should explain how the CX initiative supports strategies to differentiate, increase margins, improve employee morale, etc.

Another important source of intangible benefits should be the managers and employees affected by the CX program. With the right homework, they can be advocates and influence executive decisions. Creative CX leaders can show how they help operational managers meet their goals.

Marketers are motivated to increase brand awareness, prospect engagement, and referrals. Give them additional insights to help! Voice of Customer data is a treasure trove of insights that can help marketers understand why customers buy, or why they stop. Invite the “promoters” identified in NPS surveys to provide case studies to help bring in more customers like them.

In B2B sales, sometimes sales productivity is slowed down by issues outside their control. Even if CX does not directly impact their selling process, productivity could be boosted by fixing obstacles like overly complex contracts, product defects, or unresponsive customer service. Or, customer feedback can provide clues about the kind of buying experiences more likely to lead to deals or shopping carts.

Bank of America Turnaround Hinges on Improved CX

Bank of America has trailed in customer satisfaction ratings (ACSI) for 25 years. Even if the focus is restricted to the past 10 years, the bank’s ratings were markedly below other large US banks from 2011 to 2015. But after that, ratings improved substantially.

What happened? According to Holly O’Neill, BofA Chief Client Care Executive: “Between 2013 and 2015, Bank of America pivoted from a product and fee-driven approach to a more relationship-driven approach that focused on the expertise of our people and our innovative technology.”

This “pivot” was accomplished with a massive technology investment to improve digital experiences, which saved money compared to human-based support. Then BofA invested the savings in upgrading “expert advice” for customers having more complex requirements. In 2016 they launched a training Academy for frontline associates. The bank also implemented a new client survey “Voices” program which makes it easier for customers to provide input and for frontline teams to take action.

Chairman and CEO Brain Moynihan called this a “hightouch, high-tech” approach in BofA’s 2017 Annual Report: “[W]e are following customer behavior to combine improvements in our 4,500 financial centers and new digital capabilities to enhance the overall customer experience however customers choose to engage with us.”

In early 2019, J.D. Power rated BofA ranked highest in customer satisfaction with retail banking advice.

Source: https://customerthink.com/cx-roi-making-the-case-toimprove-the-buying-experience/

Customer service/support organizations can sometimes be a dumping ground for problems they didn’t create. Be a partner in helping them. For example, CX leaders could help the VP of customer service put a cost on poor policies or products that drive call volume and costs.

CX Leaders, the Next Step is Up to You!

I wrote this report for CX leaders who are passionate about customers but struggling to get internal support for CX investments. The advice I’ve shared is distilled from dozens of interviews of CX experts and practitioners worldwide, along with surveys completed by members of the CustomerThink online community.

Yes, CX can have a role in a company’s success, on the top and bottom line. Talk to your executives and colleagues and I’m sure you’ll find that most everyone agrees it’s a good idea to improve the customer experience. But unless a CX initiative creates internal winners, their support will just be lip service.

To recap the key findings:

  • Don’t assume that because managers say CX is an important strategy that they will fund CX initiatives based solely on improvements in customer satisfaction. Most won’t, especially at the operations level.
  • Not every stated KPI is truly a driver of organizational success. Dig to learn the goals and metrics that matter most to your potential sponsors and stakeholders.
  • The CX paradigm is all about growth driven by increases in customer satisfaction. But cost and efficiency benefits are easier to prove, especially in the short term.

Most important, treat ROI as an essential element of any CX initiative, regardless of whether sponsors require“hard numbers.” Even if ROI is not needed now, it will be later. The key steps to proving CX value are:

  1. Get to know your prospective sponsors and stakeholders. Spend time observing, or if possible, doing their jobs. Don’t preach CX, listen and learn what drives their success. This process should stimulate ideas where CX can add value and reveal potential sources of benefits.
  2. Identify your best prospects for CX sponsorship, and tailor an ROI strategy to them. Senior management may receptive to linking customer satisfaction to revenue, but marketing, sales, and customer service managers will want to see how their key metrics will improve.
  3. Estimate CX benefits and costs, and present them in a format already used internally. External proposals can provide clues about what benefits appeal to executives. Be sure to include intangible benefits and reduce perceived risk with endorsements, pilot projects, and implementation plans.

Take advantage of the help available in the CX industry, including the Customer Experience Professionals Association which offers training and certification in “Metrics, Measurement and ROI” as one of six key skills. Independent CX consultants and analysts can help enormously, as can CX technology vendors with their years of experience justifying solutions. CustomerThink.com is a free online resource where many of the world’s top CX experts share their insights for success. Reach out to our authors, connect with them, and learn from their years of experience.

Still, no class or training program will create relationships within your company. That’s your job. Don’t stop evangelizing CX, but balance it with listening and creating value for your business. That’s the fuel that will propel your CX efforts for years to come. Good luck!

Bob Thompson
CustomerThink Founder and CEO