Why Better Customer Experience Is Associated With Higher Revenue

Customer experience (or CX, for short) is a relatively new concept. It was more or less introduced in this article in the Harvard Business Review in 1998. But it’s become one of, if not the, key focus for many businesses over the last few years. Some companies are now naming chief experience officers and reconsidering the entire customer-facing apparatus of their business, all for the sake of better experiences. It’s a major undertaking – one which brings up a big question: What real value will a stronger customer experience bring? Is it worth it? 

What, exactly, does CX involve?

Before getting into why customer experience matters, it might be useful to define terms. Customer experience, simply, is the sum total of all interactions a customer has with your brand. Yes, customer experience and customer service are similar; but no, they’re not the same thing. Customer service is one of the most important components of customer experience –  but customer experience is broader. It also includes, for example, the user interface and design on your website, and everything a customer perceives when she’s in your store, from the ease of finding products, to how salespeople talk to her, all the way down to the lighting. And it’s important to note that a good customer experience is in large part a question of how interactions with your brand make your customer feel. You can optimize on paper all you want, but if your efforts don’t create positive emotions or feelings in the mind of your customer, it won’t have much of an effect on your bottom line.

Focus on the 3 E's of #customerexperience to drive loyalty. pic.twitter.com/aOfiNAuZqt

— Forrester (@forrester) August 18, 2016

So, plenty of different factors contribute to customer experience. But does a better customer experience really lead to more revenue? Don’t costs spiral when you try to differentiate on service, personalization and other key experience elements? Doesn’t the proliferation of information and products available online mean that loyalty is dead, that people will jump to the next new thing they read about or the lowest-priced item in the category? Well, according to the research, no. A good deal of serious study has examined the effects of CX, and a better customer experience has consistently been shown to be associated with higher revenue, across industries.

The evidence for building better experiences

Research agency Forrester studied the connection between customer experience and revenue across a range of industries. Companies that were particularly strong in customer experience were categorized as CX leaders; the weakest companies were CX laggards. Forrester found that overall, for a five-year study period, CX leaders saw 17% revenue growth, while CX laggards saw only 3% growth. The gap was even more pronounced in certain industries, such as retail, where the top companies in terms of customer experience outperformed others in revenue growth by 26%.  The gap was even present in the airline industry, where CX leaders had a 5% advantage in revenue over others. This fact is pretty remarkable when you think about it: In an industry where customers are highly price-sensitive, and thin profit margins have been pushing more and more companies to focus on reducing service costs, those airlines that deliver stronger experiences are still outperforming their competitors. We can guess that means that even for airlines, any costs that may be incurred in improving customer experience are more than made up for by an increase in customer lifetime value.

Singapore Airlines has been consistently rated as one of the strongest airline brands for CX

Research published in the Harvard Business Review does even more to detail that customer experience can be a key value driver for brands. In the words of the researchers:

“After controlling for other factors that drive repeat purchases in the transaction-based business (for example, how often the customer needs the type of goods and services that the company sells), customers who had the best past experiences spend 140% more compared to those who had the poorest past experience.”

The researchers also looked at the how customer experience affected businesses with recurring revenue models (subscription services, essentially). For the subscription-based businesses they studied, they found that customers who gave a company the lowest customer experience rating would, on average, remain a customer of that company for one year longer. The customers that gave the companies the highest ratings, however, would remain customers for six more years on average.

Improved CX: Increased revenue, decreased costs?

Companies considering making efforts to improve customer experience might believe that better CX will lead to growth in customer lifetime value while still worrying that the costs of improving service could negate those benefits. When one US telecom giant revamped its CX, however, it didn’t find that to be the case at all. In fact, the company ended up saving 33% on service costs by increasing focus on its customer. An emphasis on creating better experiences paid for itself, simply by cutting the number of contacts (and time, and money) needed to resolve issues. Add in the revenue benefits of increased loyalty, and you’re winning twice, financially. This isn't the first time it's been said, but, in light of the evidence, it bears repeating: It's not a matter of whether you can afford to invest in customer experience; it's whether you can afford not to.