Insights

The Remarkable Revenue Generation of CX

Customer Experience

Author: Lori Carr

What do you think is the most expensive mistake your company is making? If your organization is like most, its costliest error is overspending on customer acquisition at the expense of current customer investment. It’s no surprise that companies try to acquire new customers in the hope of growing revenue, but what may come as a shock is how much money and time they pour into attracting new customers versus the effort they put into retaining the customers they already have.

While new customers might seem more valuable, the unexpected truth is that current customers generate most of next years’ annual revenues (especially for firms using a subscription-based model). Failing to pay attention to existing customers is one of the biggest “lost opportunities” for revenue growth, affecting 95% of companies today. Why? Because, except in a company’s early growth stages, the majority of next year’s revenue comes from current customers.

Unfortunately, most companies don’t invest in, or strategically manage, their existing customer base at a level that reflects what they get in return. If companies spent half the time and money on existing customers that they do on acquiring new ones, they would grow much more quickly, and at a lower cost.

But creating long-term financial well-being with CX analytics doesn’t happen overnight. Six key insights can help your company monitor existing customers, measure the value they produce, reveal growth opportunities, and suggest new areas to explore that offer the most value for your investment. Below, we cover six critical ways to deliver on CX outcomes and the corresponding return on investment (ROI) that you can expect to receive.

 

1. Adopt a Long-Term View

One of the biggest reasons that CX initiatives aren’t perceived as worthwhile–and therefore, aren’t funded–is that companies are chasing short-term, unrealistic ROIs. Insistence on immediate results from improving CX metrics (and subsequently, revenues) only leads to disappointment. While there may be quick wins early in the process, it takes time to develop customer relationships, build trust, and see the long-term effects on your bottom line. The focus should be on CX strategy, maturing that strategy over time, and demonstrating value for both the company and customers.

 

2. Know the Value of Each CX Metric

Every business leader is interested in ROI. If you need to create buy-in for CX analytics, try broaching the subject from an entirely new perspective—start by saying that you know how to increase the company’s revenue.

Many people know how to calculate their customer retention rate, but few know its actual monetary value. At the most basic level, 1 point of retention can be quantified as 1% of the company’s overall gross revenue. If your $750M company wants to increase retention by 2% over the next year, that’s equivalent to increasing revenues by $15M. Framing your approach this way creates a much more compelling conversation around CX.

But the potential doesn’t stop at customer retention. Every CX metric has a value that can be connected to revenues, some in more direct ways than others. Connecting value to CX metrics and estimating that metric’s contribution to revenues is key to engaging leadership and proving value. It’s important to note that choosing the best metrics to connect to revenue can depend on the company’s industry, type of business, and priorities.

 

3. Focus on Retention and Expansion

Is your company hoping to grow? Preserving existing revenue is the easiest and most cost-effective way to expand. Current customers have already placed their trust in you; keep them loyal by helping them meet or exceed their goals with your products and services. And when it’s time for them to renew their plan or replenish their supply, they will turn to you first to buy more.

 

4. Promote Customer Lifetime Value (CLV)

CLV is the unsung hero of CX analytics. Here are the ways it makes a difference:

  • Lifetime value expands a company’s focus from hitting quarterly sales goals to providing long-term customer value. In the end, this switch generates more revenue, because it spans customers’ entire relationship.
  • Promoting CLV helps employees realize the significance of all customer interactions within a continuum of ongoing relationships, so they can be consciously nurtured.
  • Calculating CLV encourages the use of other CX analytics and enhances a company’s ability to model financial improvements and ROI in real dollars.

This is where the numbers will surprise or even shock you (in a very good way). In the example above, $15M in returns would be seen from a 2% retention increase in one year. What would that new retention value look like if the average customer relationship lasted 5 years? It would be $75M in added revenues over a 5-year period!

 

5. Initiate Profitable CLV (PCLV)

Now that you’ve seen the compounding power of retention and CLV, let’s examine it more closely. We all know that not all customers are equal contributors to revenue.

So, how can we determine which ones are profitable, only break-even, or are even unprofitable? That’s where PCLV comes in. Start segmenting your customers into different groups and measure their PCLV. For customers with high PCLV (i.e., profitable), concentrate on keeping them happy. Customers with medium to low PCLVs are prime candidates for gathering feedback. Try creating focus groups or sending surveys to determine why they are spending less than other customers.

 

6. Calculate CX ROI

One of the main reasons CX investments aren’t funded is that the ROI hasn’t been forecast or articulated upfront. But if you can measure the effects of CX investments, you can also measure their ROI. Spend the time creating appropriate forecasts and sharing them with executive teams. Their buy-in will set your CX initiatives up for success.

For the hypothetical $750M company above and its $15M estimated annual increase in retention, how much do you need to spend, and on which initiatives, to justify funding? If it costs $1.5M to implement specific initiatives, the ROI rate (gains – investment / investment) is 900%; in other words, your company will receive a return of 9 times the investment in 1 year. That figure is tough to turn down.

 

Taking the next step

Not putting customer retention at the top of a company’s priority and into your strategic growth plan is a common (and costly mistake). With this new perspective on the value of CX analytics and insights into how to use them to grow revenue with current customers, the next step is nurturing the opportunity.

If you’re ready to invest in CLV and realize that strong ROI, please contact us for further information.

 

Lori Carr leads RevGen’s Customer Experience practice. She is passionate about asking the tough questions that drive value for businesses and customers.

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