A happy customer is a more valuable customer

Article A happy customer is a more valuable customer | August 18, 2022 | Time to read: 7 minutes

A happy customer is a more valuable customer:

Calculating the ROI of your CX-initiatives

Everyone wants their customers to be happy. Happy customers spend more, come back more often and share their positive experience with others. Investing in CX is therefore a no-brainer. Yet, convincing your stakeholders to put their operational budgets towards your initiative requires a business case. One that proofs its value for the customer and the business. In this article, we explain how to use data to build a compelling business case backed up by evidence. 

“By repeating the process and enriching the calculation with new data, your CX approach becomes more and more intelligent and effective.”

A happy customer is a more valuable customer

Your organisation puts the customer first and is willing to invest in CX. And as a CX professional, you likely have many ideas that could positively impact your NPS or other CX metric. Your management, however, expects a business case backed up by data that your investment will not only improve your CX but pay off for the business, too. To make that case, CX specialists have to establish a direct link between CX and the Return on Investment (ROI). Between customer feedback and operational outcomes, whether it’s an increase in the customer value, decrease in churn or lower operational costs. That relationship can be found in your data. The result is known as the ‘return on CX’.

 

Four steps

There are four steps to calculating the return on CX. To get started, it’s best to keep your calculation relatively straightforward. Then, when you get the hang of it, you can repeat each step, gradually adding more data. No matter how much data you use, however, you can use the outcomes to build an excellent business case for your CX initiative.

Steps to:

  1. Assess the current customer value of all your customers. Preferably down to the individual customer.
  2. Create CX groups and calculate the average customer value per group.
  3. Determine the main drivers of CX.
  4. Calculate the return in euros.

 

  1. Assess the current customer value of all customers

To build your business case, it is key to demonstrate that changes in your CX have a measurable impact on your business value. To do this, you first calculate the current value of your customer base. Preferably down to the individual customer.

You can simply use the revenue per customer for your calculation. But if you want to take it a step further, you can calculate your margin per customer by subtracting your costs. These may be procurement costs, service costs, acquisition costs (marketing and communication) and other types of overhead. This is optional. Keeping it simple and using just the revenue data will yield realistic and predictable outcomes. But as you expand your calculations with more data, you gain a sharper and more complete picture of your customers.

 

  1. Create CX groups and calculate the average customer value per group

Next, you divide your customers into CX groups. If you use NPS as your CX metric, one way to group your customers is by their NPS classification: detractors, passives and promotors. Or you can group customers by their actual NPS score of 0-10: all 0s together form a group, all 1s form a group, etc. We’re using these examples because they are:

  • Objective – data determines which group a customer belongs to.
  • Meaningful – they say something about the customer’s experience.
  • Fluid – customers can move between these groups as their experience changes.

For our purposes, we’ll use the actual NPS scores. Once you’ve established your groups, you can calculate their average value. Simply add up the value of each individual customer and divide it by the number of customers in that group. The result will look something like this: there are 50 people who rate us a 10 and their average value is €1,000, there are 100 people who rate us an 9 and their average value is €900, etc.

 

  1. Determine the main drivers of CX

To establish your business case, you also need to show that your proposed changes to a customer journey or touchpoint will in fact improve the CX. To build on our example, this means that we need to show that our initiative will positively impact NPS, which is associated with higher customer values.

In this step, you’re determining what drives your CX. You can achieve this through driver-based modelling. Driver-based modelling aggregates your data and analyses the relationships in the data. The outcome of your driver model is a prediction of how a change in an individual customer journey or touchpoint will affect your NPS. A driver model can tell you, for example, that improving your credit application journey is likely to increase your NPS. That prediction is rooted in data. By applying driver-based modelling, you get more out of the data you’re collecting and gain powerful insights to help you establish your business case.

In our example, we’re determining the drivers of the NPS score, our CX metric. But you can also look at drivers of churn or cross-sell, which also have values associated with them that you can calculate. You can even look at the relationship between your initiative and overhead, such as the number of calls to customer service. If you’re able to attach a value in euros to each call or other type of overhead, you can calculate the cost savings as a result of your initiative.

 

  1. Calculate the return in euros

In step 2, you established your CX groups and determined the average customer value for each group. In our case, we calculated the average value for each NPS score of 1-10. But as we’ve mentioned, it’s possible to attach a value to churn, cross-sell and costs as well.

In step 4, you connect the dots. The driver model has shown that improving a specific journey or touchpoint – in our example the credit application journey – will result in an increase in NPS. Let’s say 100 customers with an NPS score of 8 move to an NPS score of 10. You know that the average customer value is €800 for an NPS score of 8 and €1,000 for an NPS score of 10. That’s an increase of €200 per customer and total increase in business value of €20,000.

And there you have it: you’ve calculated your return in euros. You can establish the business case that improving the credit application journey drives the CX and that this change in CX delivers value for your business.

 

An ongoing process

By repeating the process and enriching the calculation with new data, your CX approach becomes more and more intelligent and effective. In the ideal and most complete scenario, you’re capturing your entire customer lifetime value. But even the first step towards this scenario provides useful insights. Begin with one data point and you’ll get realistic, truthful results. You may not see the full picture, but the numbers add up. Even with little data and differentiation, it is possible to reveal demonstrable relationships.

 

Is your organisation ready to see the full picture? Or are you just getting started and making your own calculations?

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