What Is the Economic Value of a Better Customer Experience?
The customer base itself is a valuable financial asset, and should be treated accordingly.
One of the first and most difficult problems any company confronts when it tries to improve its customer experience is reconciling the time and expense required to deliver a better experience with the actual economic benefits of that improved experience.
In just the last few weeks I met individually with senior executives at several large and successful companies in a number of different countries, and each of them had come face to face with this problem. Because none of them had tried to quantify the actual economic value of a better experience, their efforts always took a back seat to the “hard” financial metrics that ruled these companies’ managements—quarterly sales, costs, revenue, and profit.
At one company, near the end of each financial period the product managers start selling whatever they can to whatever customers they can sell to, despite the company’s carefully laid plans to treat each customer more appropriately and individually, based on individual customer interests. And at another firm, when the profit numbers turned down during a recent quarter, the finance department simply restricted customer refunds, refusing to grant them much at all, even when prior policy would have called for them. Naturally, these actions significantly undermined the customer service initiatives at both firms.
No matter what your business is, you won’t make much progress toward delivering a better customer experience until you deal with this problem. The most straightforward way to do it, in my view, is to spend time and effort getting comfortable with and documenting the fact that the customer base itself is a valuable financial asset, and that good service will increase its value, while bad service will diminish it.
Customers create two kinds of value at a firm. Short-term value is created when a customer buys something, which is offset by the short-term cost to serve. But long-term value is created when a customer has a good experience, and then becomes more likely to buy in the future, or to recommend the company to friends or colleagues. Whether or not your firm actually employs sophisticated analytics to model the lifetime values of different kinds of customers, it can’t be denied that these lifetime values do, in fact, exist. Nor can it be denied that a customer’s lifetime value will go up or down as the customer’s attitude toward a brand improves or declines. And, the asset value of your customer base—often called customer equity—is simply the sum total of lifetime values of all your current and future customers.
At a bare minimum you need to persuade your investors, your board, and your senior executives that customer equity must be tracked. When financial metrics completely ignore the asset value of the customer base (as most do), they are fundamentally flawed. They don’t paint an accurate picture of your company’s true financial picture.
Suppose, for instance, a valuable customer called you with a complaint, but for some reason your firm didn’t handle the call well, and the customer hung up the phone in disgust. The moment the customer hung up, your company lost some of its economic value, because the future cash flow from this customer will almost certainly be lower.
Your company’s overall value is affected currently by changes in a customer’s intention or likelihood of doing business with you in the future. And the customer’s intention for the future is driven by the customer’s experience today.