How to Measure the Financial Impact of Your Customer Experience

Written by: Carolyn Egelman | Medallia

Chances are, you intuitively understand the value of a great customer experience. But when it comes to making customer experience a priority across your organization, intuition is rarely enough.

Regardless of whether or not company leaders believe that good experiences are good for the company, it’s the initiatives that can be demonstrated to have a tangible impact on the bottom line that inevitably get the most attention.

But the impact of customer experience doesn’t have to be a battle of opinions. There are several ways for you to prove — and quantify — the impact it will have on your own bottom line. Medallia has helped many leading brands gain this understanding; the following is an analytical approach that we’ve found to be most effective.

The goal of a financial linkage analysis is to understand and compare how customers behave after various experiences with your company. For example: when a customer has an experience that turns them into a promoter, how much do they then go on to spend over the next year? What about after an experience that made them a detractor? Conclusions like these allow you to estimate how a customer will change their spending with you based on the quality of an experience that they’ve had with your company.

Of course, on the revenue side, spending is just one many critical behaviors you can track. Depending on your business model, the outcome variable could be renewals or return visits. Or perhaps it’s not the top line that you’re interested in modeling — in which case, behaviors like calling a call center can help you estimate how the customer experience affects your cost-to-serve.

By analyzing the impact of these behaviors, your company gains the ability to make important decisions like:

Predicting the impact of customer experience investments. If you know that a 1-point NPS improvement increases a customer’s future spending by X percent, and that a certain process improvement will yield an NPS increase of Y points, you can estimate how much additional revenue the improvement will bring in. You can also compare multiple investments in this way to decide which one to prioritize, based on which will have the greatest revenue impact.

Prioritizing customer segments to target. Which increases spending more — turning a detractor into a passive, or a passive into a promoter? If the former is true, the most pressing thing to focus on might be an initiative that rescues customers who’ve received the worst experiences. You can come to similar conclusions about many types of customer segments, such as loyalty club members or first-time shoppers.

So how should you go about completing such an analysis?

Answering these five questions will help you plot your course:

1. What behavior will we focus on?

We have already described several customer behaviors that directly impact revenue or cost-to-serve. Your choice of which one to track should stem from your company’s unique business priorities. However, for transactional businesses, the most important behaviors are often variations on customer spending or return visits. For subscription business, meanwhile, important behaviors include renewals, upgrades and cross-sells.

2. Can we track individual customers?

Many financial linkage analyses use data on individual customers’ spending habits and customer satisfaction scores. However, this isn’t the only approach. Location-based businesses can track behavior on a store-to-store level, while B2B companies can do so by account.

3. How much data do we need to get an accurate result?

The first consideration here is the time horizon that you’ll work with. You need to be able to track how satisfied individuals customers are, and then allow enough time for them to make the decision to give your company more (or less!) business. For example, a retailer will likely be able to work with a shorter time horizon than a B2B outsourcing company, where renewal decisions are made on the scale of years.

The second consideration is the total amount of customers you need to collect data on. This depends on many factors. If it’s important to account for seasonality differences in your business, you’ll want your dataset to include at least one year’s worth of customer interactions.

4. Which customer segment or segments will we focus on?

Comparing customers from the same segment — for example, how much they spend with you, how long they’ve been a customer, or whether they’re members of your loyalty program — give you a more accurate understanding of their behavior. Remember that the more segments you want to look at, the larger dataset you’ll need in order to accurately understand differences.

5. What data analysis method should we use?

The right answer depends on how much customer data you have. With limited data, you can segment customers into high-level segments and take a summary statistics approach, which allows you to make conclusions like: “on average, promoters spend 10% more than detractors.” With a richer data set, meanwhile, you can do a regression analysis , which allows you to account for factors like channel, demographics, and types of product purchase. This kind of analysis allows you make statements like: “accounting for differences in channel and geography, promoters spend 15% more than detractors.”

It’s worth noting that great financial linkages analyses take time, as well as a fair amount of iteration. But the results are well worth the effort. Understanding how your customer experience impacts critical behaviors can drastically improve how your company makes investment decisions — and can raise the profile of the customer experience amongst company leaders. This is an important element of keeping customers at the center of your business.