3 metrics for measuring the business value of customer experience

January 19th, 2021

Customers are the lifeblood of any business. Find out how improving your customer experience can help your business to grow.

Most business owners understand that good service breeds happy, repeat customers and brand loyalty. But many may not know just how to calculate the Return On Investment (ROI) happy customers provide for their business. 

Understanding just how much value your customer experience and customer satisfaction is affording your business can aid your company to not only strive financially, but help to grow your customer base. 

Here are three key tips to identify the business value of customer experience for your company. 

1. Customer lifetime value

Customer lifetime value, or CLV, is one method used to identify the value of customer loyalty and experience. Using the CLV formula, you can calculate just how much value that customer may bring to your business and whether you’re spending too much or too little to acquire them. 

The most simple way to do this is to calculate the revenue earned from this potential repeat customer (annual revenue per customer multiplied by the average customer relationship in years) minus the cost of acquiring this customer. 

For example, a hair salon calculates that the annual revenue their average repeat customer brings in is around $1,200. The business has been around for a number of years, and they hope they can keep the customer for another 5 years at least. When you factor in marketing costs, hourly staff expenses and even free products provided to the customer, it may cost up to $1,000 to acquire this customer. 

The formula then looks like:

($1,200 *5) - $1,000 = $5,000 

Therefore the business’ CLV may be estimated at $5,000. Knowing this may impact your business operations in a number of ways. This includes: assessing whether you need to spend more or less on marketing and advertising, whether you could increase or decrease your prices, and to help with your budgeting and forecasting. 

2. Net promoter score 

Another method of assessing the experience of your customers to help identify the business value of your customer service is through a net promoter score (NPS). Put simply, NPS is the percentage of your customers who would or wouldn’t recommend your business to their friends or family. 

This information can be found by providing a feedback survey on how likely the customer may recommend your business to family and friends on a scale of one to ten. 

This scale is then divided into three categories:

  • Promoters (graded your business 9 - 10)
  • Passives (graded your business 7 - 8)
  • Detractors (graded your business 6 or below)

Then, you subtract the percentage of detractors from the percentage of promoters to get a final NPS score. For example, of 100 surveyed people, 8 graded a business between one and six, 15 graded it as seven or eight and 77 graded it as nine or ten. The percentage of detractors (8%) was subtracted from the percentage of promoters (77%) to give the business a final NPS of 69. 

As a small business owner, you now have a better understanding of what kind of customer experience you’re providing, and the rate of which your customers may assist in word-of-mouth leads. A low score can encourage businesses to reassess their current practices, or even make small changes like amend website errors and put more budget towards UX. 

3. Customer churn rate

Your customer churn rate, also known as the rate of attrition, is the percentage of customers that either do not make repeat purchases or cancel their recurring service with your business. By understanding your customer churn rate, you will have a better understanding of the products and services you are providing customers and where any weak spots are in your business practices. If your business is subscription based, this formula can be especially valuable. 

This is calculated by dividing the total number of lost customers by the total number of new customers for any set period of time. For example, your yoga studio works on an ongoing membership program. In the last quarter it lost 4 customers, but gained 18. Therefore the churn rate would be 22%, indicating the business is providing a good customer experience.

How can these formulas better identify the business value of customer service?

Put simply, research has indicated that revenue growth is affected by customer service. 

A 2018 report into customer experience found that 73% of companies with above-average customer experience “perform better financially than their competitors''. Further, 84% of businesses that strived to boost their customer experience reported an increase in revenue. 

Retail Customer Experiences also recently reported that brands that perform customer service the strongest bring in 5.7 times the amount of revenue as businesses that offer subpar customer service. 

Further, research from NewVoiceMedia into U.S. based businesses recently found that the main reason a customer switches brands is because they feel “underappreciated”. The result of which is an estimated $62 billion is lost by businesses each year due to poor customer experiences, as a result of potentially poor customer experience management.. 

If your business is not prioritising customer experience, consider making 2021 the year that you do. 

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