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What is the Customer Experience Economy, and why is it so important for a company’s bottom line?

Andrej Csizmadia

Andrej Csizmadia

Last modified on July 7, 2021 at 2:28 pm

Intuitively, many of us know that providing a better customer experience is valuable for our business. Loyal customers return to buy from us again or are simply more interested in our brand’s offerings than those of our competitors. These types of customers also buy more products and are less sensitive to changes in price, and occasionally bring in new business with their recommendations. Moreover, loyal customers are cheaper to assist in the long run, because they use your service infrastructure less. Economic analyses of these customer experiences seek to demonstrate the value of these behaviors with solid financial data.

Companies make and prioritize investment decisions based on the economic return that can be obtained. Therefore, performing a Customer Experience Economy analysis is about supporting our intuition with data, to demonstrate why improving the customer experience is a successful financial strategy. It’s all about finding the right validation of our presentiments.

Economy of the customer experience, a base for a successful financial strategy

What is the Customer Experience Economy, and why is it so important for a company’s bottom line?

Many independent studies demonstrate the economic impact of providing a distinctive and outstanding customer experience. For example, for six consecutive years, many companies have been referencing the annual customer experience ROI study conducted by Watermark Consulting. The approach is very interesting. Watermark has examined the total cumulative performance, according to the S&P 500 Index, of the top ten companies in Forrester Research CX Index ranking, in order to compare it with data from the bottom ten companies.

As an example, in 2015, the study showed that the portfolio share prices of the Customer Experience Leaders (the top 10)  in the S&P 500 Index outperformed the portfolio share prices of the Customer Experience Laggards (the bottom 10) from 2007 to 2014. In fact, Customer Experience Leaders had a cumulative total return of 72.3% in the S&P 500.

What is the Customer Experience Economy, and why is it so important for a company’s bottom line?

How much money are we talking about?

Millions of dollars are at stake. Another Forrester Research study on the revenue impact of the customer experience concluded that just a single point increase in the Customer Experience Index (CXI) represents over $175 million more in revenue for a wireless service provider. In the case of a luxury car manufacturer it’s a $118 million growth, and up to $65 million for a luxury hotel chain. A 10-point gain can represent more than a $1 billion increase for many companies.

 Therefore, great customer experiences can deliver tremendous strategic and economic value to a business in a way that is difficult for its competitors to replicate. As new studies confirm the link between customer experience and revenue, the business world is beginning to understand that it must take a much more active role in addressing the needs of its customers.

However, there is still a long way to go. This is because organizations maintain cultures organized only around financial benefits. In my opinion, customer experience executives fail to speak this language. It is natural for us to speak in terms of customer satisfaction, loyalty, customer corridors, experience breaks, and other terms specific to our discipline. But we have a hard time talking in terms of return on investment, revenue, and profits. 

And that’s a huge mistake.

Correcting this mistake starts with documenting our strategies more solidly in terms of the financial return we expect. That is, we need to take a hard look at the Customer Experience Economy.

The war between bad benefits and good benefits

What is the Customer Experience Economy, and why is it so important for a company’s bottom line?

Unfortunately, not all of the money that goes into a company’s accounts is good. It’s a topic discussed in-depth in the first part of “The Decisive Question 2.0”, a book by Fred Reichheld and Rob Markey that is a must-read for Customer Experience professionals. Reichheld says that for companies, there are good benefits and bad benefits.

In the storm of decision making and prioritization amidst pressure to grow, gain market share, and stick to a budget with strict cost controls, no company is immune to the temptation of bad profits. These never appear as such in the company’s accounts, but they are easy to recognize. They are the kind of profits that are generated from costs only and most often built on poor customer relationships.

Whenever a customer feels lied to, mistreated, ignored, coerced, pressured, exploited, disappointed or disillusioned, the profits from that customer are bad. No company can expect to sustain its growth with bad profits. Abused or deceived customers will sooner or later abandon your company or even contribute to further financial losses by sharing their nightmare customer experience with their friends and family or even a broader audience.

 Bad profits can become a sort of addiction, and is often the main mistake that our financial friends fall into. It is an error in judgment. While a superior experience represents better income, better income does not always mean we are providing a better experience.

Does anyone remember the Blockbuster case?

Blockbuster was the largest chain of video game and movie rental services in the world. A real giant with feet of clay. At its peak in 2004, Blockbuster had over 60,000 employees and 9,000 stores worldwide. 

They were leaders in the industry.

A few years earlier, in 1997, a man in his thirties rented the movie Apollo 13 from a Blockbuster store. He had to pay $40 for a late return fee. This experience led him to ask: Why don’t these stores work like a gym by having a monthly flat rate? Shortly afterward the man started Netflix, armed with a disruptive idea and 750 million dollars from the sale of one of his software companies.

Companies like Blockbuster didn’t change their business model because they were financing their growth with bad profits. Debt collection agencies were chasing consumers who failed to return a movie on time and didn’t want to pay a crazy high penalty fee of $40 or more. And the money they were making that way was increasing. Until a competitor emerged and challenged this outdated model. Netflix acted differently and decided to trust its clients. No more lawsuits, no more charges for late returns, no more debt collection agencies. Their customers soon returned that trust.

What is the Customer Experience Economy, and why is it so important for a company’s bottom line?

It comes as no surprise that Blockbuster lost significant revenue over time. It filed for bankruptcy on September 23, 2010. This bad profit company couldn’t compete with the business model introduced by Netflix. On April 6, 2011, it was sold to Dish, and what was left of the former movie rental giant was dismantled, leaving only a dozen stores up and running.

What did Netflix do differently?

Netflix’s bet on the customer has allowed it to overcome several obstacles. Even when the DVD rental market fell, Netflix comfortably led the transition to the digital world. According to Statista, Netflix had over 182 million paying streaming subscribers worldwide in 2019. Of these subscribers, 69.9 million were from the United States. The company is a leader in digital customer experience. Care to guess why? Well, it is one of the companies that invests the most in analytics and improving the customer experience. They have a deep tradition of measuring experience and employing this information in every business decision.

So what is the Customer Experience Economy analysis?

The Customer Experience Economy is any study or analysis that looks at the connection between delivering a distinctive and outstanding customer experience and an organization’s revenue or profit.

In conclusion, it encompasses models for analyzing the true impact of Customer Experience on the finances of a business. Data derived from Customer Experience Economy analytics helps one prioritize improvement projects and initiatives based on their financial return (ROI).

What is the Customer Experience Economy, and why is it so important for a company’s bottom line?

Good benefits are obtained by following the golden rule: “Treat others as you would like to be treated.” It’s an enthusiastic collaboration with customers that earns them. Good benefits are those that are obtained thanks to customers who:

  • Want your brand to grow
  • Provide feedback, both good and bad, to make sure you improve
  • Can’t live without your brand
  • Choose your brand over any competitor
  • Are genuine advocates who spread good words about your brand
  • Use your brand to show that they are part of something much bigger than themselves, a community
  • Are less sensitive to the prices you define or variations in them
  • Actively recruit new customers
  • Are more likely to use multiple products or accept new offers
  • Require less support because they are familiar with your products

In general, this is the essence of a Customer Experience Economy analysis. From the data and opinions of customers, we seek to demonstrate the power of good benefits and the risks of becoming addicted to bad ones.

Thus, Customer Experience Economics breaks down the language barriers that separate executives working on the customer experience from their peers in finance. They provide a framework for translating from the soft language of experience to the hard language of finance and profit.

In this sense, few executives can resist approving Customer Experience initiatives when they come armed with the right financial arguments. The economic power that comes from having loyal and devoted customers must be demonstrated in this way.

Don’t forget that outstanding customer experience starts with the right customer service. You need the right tools to assist your customers and meet their expectations. 

LiveAgent, a piece of end-to-end Customer Support Management software, is the only solution that you need. The implementation of this software guarantees that all customer service departments are well equipped to help your customers with any issues they encounter on their customer journey. 

LiveAgent consultants will be happy to help and present all the possibilities that can be offered by our software. Schedule a demo call or test our live chat software during a 14-day free trial.

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