CX, unlike other areas in a business such as sales and marketing, is a much more intangible factor which, when done correctly, yields a strong return on investment (ROI). The ROI, however, is often scrutinized by financial departments within organisations.
Proving to executives that CX programs contribute to the bottom line is key to increasing profitability through increased customer experience and satisfaction.
Measuring Success and Return on Investment
There are key factors and relationships which come together to produce the ‘Service Profit Chain’ (SPC). For easy reading, we have simplified the process below:
An organisation’s CX strategy will be successful once they are able to create a link between profitability and key drivers – that being, positive experiences result in more/return customers.
A series of inputs, throughputs, and outputs make up the Service-profit chain. Due to the various interrelationships the service-profit chain can be considered a system which – just like the human body, in fact, thrives on negative feedback loops to evolve and make changes and adjustments for ultimate performance.
Allowing customers the opportunity and platform to provide negative feedback through a good complaints management system allows the organisation to make changes within their ecosystem which will as a result benefit the customer and aim to prevent further negative feedback.
The key factors and relationships of the Service-Profit chain are explained in depth in our White Paper which can be found here.
Inputs, throughputs and outputs
To fully understand the SPC it is therefore useful to understand the various inputs, throughputs, and outputs, as well as their interrelationships.
These can be physical such as employees, raw materials, technology, facilities, and infrastructure or inputs designed to directly affect customer perceptions (such as, brand equity and communication) or even employee-focused constructs such as employee satisfaction, commitment, and performance.
Throughputs transform inputs into outputs and encompass mediating constructs—key customer perceptions at the attribute and overall level.
Outputs in the service-profit chain include customer loyalty behaviours and financial outcomes. Customer satisfaction has been proven to be related to both customer intentions and subsequent market behaviours.
The importance of understanding these key relationships within the service-profit chain lies in the ability to create a link between profitability and key drivers – that being, positive experiences result in more/return customers.
Relationships between key factors in the service-profit chain
Profit and growth are the simplest measures of success and the key output factor.
How the ROI of CX can be assessed as a whole in relation to the service-profit chain
CX programs aim to gauge sentiment and customer perceptions which are fed directly back into the system to make improvements and positive changes which impact business practices and increase customer loyalty and retention.
- Customer loyalty is driven by customer satisfaction improved through effective CX programs. Retaining existing customers is less costly than recruiting new customers and customer retention through satisfaction due to amended outputs as a result of an effective CX program is a step closer to displaying ROI to executives.
- Customer satisfaction is driven by the perceived value customers have of the product or service based on the results vs cost analysis of a product or service.
- The value proposition or products and services lies in the ability of satisfied employees to deliver value through their productivity.
- Productivity in employees is bred through employee loyalty where employees are dedicated to delivering value long-term in the organisation.
- Employee loyalty is evident when employees feel positively toward their jobs due to organisational internal quality leading to employee satisfaction.
Calculating ROI of CX programs
Essentially, the cost to serve per customer would consider the cost of the CX program allocated to each customer (amongst others). Further to this, one would need to look at the revenue generated for that customer to calculate customer profitability:
Customer profitability = Revenue per customer – Cost to serve per customer
The ROI could then be calculated by looking at pre and post program customer profitability:
Customer profitability POST – Customer profitability PRE = Gain from investment
ROI = (Gain from investment – Cost of CX program)
Cost of CX program
Oftentimes the data to complete this calculation successfully is seldomly available. This requires consideration of other metrics
ROI models that follow attrition rates of detractors who have not been through service recovery:
Another mechanism sometimes applied by CX practitioners is to follow the attrition rates of the cohort of responders who rate 6 and below on the NPS scale, commonly referred to as detractors.
To demonstrate this, a control group must be isolated who are not exposed to the service recovery process. This is described in the graphic below.
With many touchpoints and varying factors involved during the customer journey, it may be difficult to pinpoint exactly where and by how much CX programs prove their worth. What can be said is that their success lies in the definitive rise in revenue when companies opt to invest in their CX strategy. This rise in revenue is prompted by increased customer loyalty and repeat business coupled with committed staff contributing to less staff turnover costs and a workforce committed to delivering value, consistently to an organisation’s customer base.