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The ROI of CEM: Modeling Revenue Increases from CE Investments

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Recently I’ve been asked a few times to assist clients with developing Return On Investment models of what they can expect from increasing their commitment to Customer Experience Management. While those models are proprietary, Forrester has shared some of its working assumptions in a recent independent report and in commentary about that report.

Megan Burns, a principal analyst, recently blogged about her study, “The Business Impact of Customer Experience, 2010”. Forrester has its own proprietary CE metric, called the Customer Experience Index (CxPi), which measures a product or service’s usefulness, ease of use and enjoyability. I often recommend a Do-It-Yourself version of the index to clients.

Megan built a model to estimate the revenue impact of loyalty improvements, which correlate to improved CxPi scores. You don’t have to use CxPi to find value in the model; chances are you are using one or more of the classic loyalty metrics you’re looking to influence by provide better customer experiences: Willingness to Repurchase, Likelihood to Recommend and Reluctance to Switch.

First, complete the basic assumptions based on your own business:

• Number of your customers
• Average basic annual relationship value
• Average incremental relationship value

Start with Megan’s conservative estimates of loyalty behavior:

• % of customers willing to repurchase who actually do: 0.5%
• % of unhappy customers who actually switch business away: 1.0%

And of Word Of Mouth behavior:

• % of customers willing to recommend who actually do: 1.0%
• Average number of people told about a good experience over the past 90 days: 2.9 to 5.0, depending on industry
• % of customers driven to buy by a recommendation: 2%

The appropriate assumptions may be quite different for your brand and industry.

Incremental revenue will be the product of changes in each loyalty metric. You can create a simple approximation of Megan’s model by summing these:

• Repurchase revenue = Average incremental relationship value * % of customers willing to repurchase * % of customers willing to repurchase who actually do
• Lost revenue = - Average basic annual relationship value * % of customers not reluctant to switch * % of unhappy customers who actually switch business away
• Recommended revenue = Number of your customers * % of customers willing to recommend * % of customers willing to recommend who actually do * Average number of people told about a good experience over the past 90 days * Average basic annual relationship value

Harley Manning reports that the model “produces eye-popping projections of increased annual revenue as a result of a realistically attainable improvement in customer experience -- by industry. And when I say ‘eye popping’ I am not kidding. The increases range from a low of $40 million for large retailers to a high of $1.7 billion for wireless carriers.”

Forrester publishes a spreadsheet for clients to use to estimate incremental revenue. The report is available here: “The Business Impact of Customer Experience, 2010”. I’m pretty sure the ROI model that you build with it will cover the cost of this research!

See also:

• Customer Experience Management with the Forrester CxPi
• Forrester Customer Experience Index & Stock Performance
• Forrester Loyalty Metrics