What exactly was ROI again?
Return on Investment – one of the business metrics par excellence. But where does this ROI come from? Bang for the buck is what you hear more often in English.
Thus, for every single euro, you ask how much return it brings. How many euros have I earned by investing that single euro?
Let’s take a closer look at the metric in conjunction with customer satisfaction:
- Relevance of ROI in Marketing: In a 2010 study, 77 percent of marketing managers surveyed say ROI is a very useful metric for them.
- Relating business growth to CX: Although customer experience (CX) is an area where we often go qualitative, it is also becoming more and more quantitative. Forrester Research has calculated, for example: Companies that are “experience driven” have 25% more revenue growth.
- And yet: CX leaders do not always perform better in all industries. Therefore, ROI should not be the only criterion by which you judge your CX activities. It’s about being strategic, measuring right, and communicating right.
And that’s exactly what I’m going to show you below.
Making customer satisfaction KPIs the yardstick for business success.
ROI is, of course, not the only metric executives and controllers use to judge whether a measure was a success or a failure.
In the same way, they look at the following metrics, for example, to make judgments about customer satisfaction:
- Amount of new customers
- Customer lifetime value
- Amount of leads
Depending on the industry and the task, other metrics are added.
As the person responsible for CX, you can also contribute essential metrics so that it becomes clear that customer experience is decisive for the company’s success – a realization that is becoming more and more widespread.
At best, you’ll be preaching to the choir if you demonstrate that customer satisfaction metrics (such as NPS or CSAT) are equally valid measures of business success. To do this, you link them with operational data such as the leads mentioned or the number of new customers.
Let’s start at the very beginning: With the calculation of the ROI. This is super simple for single measures:
ROI = (profit increase – costs) / costs.
A simple example:
You find out in a customer survey that customers don’t understand how to get your product up and running. Therefore, more than 50% call the service hotline. You hire a technical editor and a graphic designer and have an illustrated manual created and printed. You enclose these with all delivered products. Cost: 60,000 euros.
You measure again: 90% fewer customers call customer service in the next quarter. Profit increase due to cost savings as a result: 190,000 euros.
With a quick calculation, you determine the ROI for this customer satisfaction measure:
(190.000 € – 60.000 €) / 60.000 € = 2,2 €
This means that for every euro you invested, you got back €2.2.
Basically, the ROI ratio is:
- If the ROI value is below 3 or even below 2, economically minded people are usually not yet satisfied – because if they invest their euros elsewhere, they may get more out of it.
- If you are above 3, you will also satisfy controlling and skeptical colleagues.
If this supposedly simple calculation makes you wonder where you get the basic key figures for the calculation – I will go into this in the chapter “Problems of ROI”.
Application of ROI
The higher up executives are in the hierarchy, the more important ROI is to them. For example, it is often the basic metric for allocating the marketing budget. After all, you can spend an infinite amount of money on marketing. But you should spend the money where it will have the greatest impact.
Here’s an example of how ROI calculations have shifted some of the marketing budget in recent years:
Large companies now often work with influencers not celebrities. That means there are fewer million-dollar contracts for individuals known to the masses, such as movie stars or top athletes.
Instead, marketing departments pay very many influencers much smaller amounts, often just a few thousand euros – or maybe they just get free products. Nevertheless, these influencers are just as well-known in their circles and enjoy even more trust than celebrities. So, in sum, you as a company achieve more with less total spend, the ROI of influencer marketing is higher.
Problems of the ROI
As simple as the formula of ROI is, it is difficult to get the right values to put into the formula. Let’s look again at our case with the service manual:
In the quarter after the start of the measure, 190,000 euros less were spent on the service hotline. Even in this statement, there are two important factors you can tweak: The time period and the savings:
- About the period: Why a quarter of a year? If you look at half a year, the ROI is suddenly twice as high. Or you consider a whole year. Or only 2 months.
- About the savings: In our use case, your hotline operates an external company that charges by the minute. Thus, the calculation is not difficult. But if the service hotline is internal, the colleagues might use the newly gained time differently:
Customer service colleagues take more time to better advise callers. As a result, customers are more satisfied and may buy more. As a result, the profit increase of your measure can even be significantly higher.
Or the colleagues may use the time they gain for more coffee breaks – the sales volume does not change at all as a result of the measure. Or it increases again, because the colleagues are less stressed and are sick less often. You see, the closer you look, the more difficult it becomes.
- The costs are also not clear. In the example, you spent 60,000 euros on graphic designer, editor and printing. But what about the extra time it takes for staff to wrap up the manual as well?
And what about the time you needed to supervise the two service providers, organize and control the printing?
What about the customer survey? Without it, you wouldn’t have found out that customers could use guidance. Wouldn’t you have to consider the cost of that as well?
As you can see, the ROI is seemingly an unambiguous number, but its calculation for individual measures is complex, somewhat subjective and subject to error.
Among others, the following points are criticized:
- One-dimensional ratio: some scientists criticize the ROI as too one-dimensional. It does not consider long-term effects, especially on the brand and on environmental and social aspects.
- Difficult to attribute measures: In the area of customer experience and also marketing, we have the problem that we can hardly measure the success of our measures in isolation. This is because there are almost always measures running in parallel.
In our case with the instructions for customers, it could be that the web team has improved the search function of the website. Of course, this also influences the number of calls to the service hotline. Or it could be that the hotline staff have been trained and customers can therefore get their problem solved with one call, when they used to need several. Or the product itself has been improved. Or the buyer groups have changed – there are now more technically savvy users, which also reduces the number of support cases.
Advantages of ROI
Now if you think ROI is too hard to determine to be useful, you’re wrong. Let me show you the problems so you know what to look for. ROI should always be interpreted with caution. But it can give you valuable guidance in selecting the most promising measures.
And it can help you demonstrate the value of your work to colleagues and managers.
It is important that you hold the reins and select the right values to determine the ROI. The following section will help you to do this.
Hands on: Easily determine the ROI of your customer experience measures.
Which operational metrics are suitable for ROI measurement?
So how do you choose which operational metrics are appropriate for your case? You ask yourself what impact your CX activities have. In other words, what are you trying to improve in the first place:
- Do your activities lead to more new customers? Probably not, sales and marketing activities usually influence that more.
- Do your activities lead to less support effort?
- To more repeat purchases?
- More customers buying additional products?
- To the purchase of more expensive products?
Typical metrics that may be considered are:
- Turnover per order
- Frequency of order
- Turnover per customer
- Percentage of returns
- Share of support requests
- Cancellation rate
- Re-order rate
- Amount of recommendations (e.g. customers recruit customers)
- Amount of positive mentions in (social) media
Which CX metrics are suitable?
You’ll probably have an easier time choosing which metric to use to measure customer satisfaction. Typically, you’ll look at one or more of these:
- Net Promoter Score (NPS): simple customer survey of the likelihood of recommending the company or product on a scale of zero to ten.
- Customer Effort Score (CES): Simple customer survey about how easy or difficult it was for the customer to perform a particular activity.
- Customer Satisfaction Score (CSAT): Focuses on the positive responses to a customer survey to determine the percentage of satisfied customers.
Then there are a few more like Things Gone Wrong (TGW) or Quality of Customer Interaction (QCI). If you’re already collecting such more specific metrics anyway, they may be good candidates to bring together with operational data.
If not, feel free to stick with one of the three established metrics mentioned above. In this article, I’ll stick to the Net Promotor Score in the next paragraph, show you how to calculate the NPS and use it cleverly further.
Combining operational metrics with CX metrics
Now it gets exciting, because you relate the two selected metrics step by step.
Step 1: Segment and calculate NPS:
In general, it’s always good to segment customers according to a CX metric and then see where the differences are in the operational business metrics.
In your last customer survey, you collected NPS for your existing customers, 10,912 responded.
With that you have your segmentation: you divide the customers into promoters, indifferents and distractors.
For example, you have:
Net Promotor Score is in the case:
22% promoters minus 9% distractors, i.e. 13.
Step 2: Measure actual referrals:
Now you look at how often customers actually make a recommendation. The prerequisite is, of course, that you have a “customer-recommends-customer” program (B2C), or that the sales employees ask new customers who recommended them (B2B).
Then you have the necessary information and can assign it:
That’s already a first success: You can prove that the customers who say they would recommend you to others actually do so.
If you can’t prove this correlation and the recommendation rates are roughly the same in all groups, then there may be something wrong with your metrics.
Check the collection of both operational metrics and CX metrics. Also try to see if you are more likely to succeed with other metrics – this is usually the case.
Step 3: Calculate the value of the recommendations
But you don’t stop at this one number. Rather, you now calculate what the recommendations are worth:
To do this, you need the average annual revenue per customer. To simplify, take your profit (€79,298,989 in our example) and divide it by the number of customers (71,281 in our example):
79.298.989 € profit / 71.281 customers = 1.112,48 €.
Since you cannot yet know whether the newly acquired customers will be promoters, indifferents or distractors, you take the average value for all your customers. In the example, this is the €1,112.48 per year calculated above – so this is the value of one new customer.
Now let’s assume that your CX measures are successful and you can increase the share of promoters to 30%. This means that instead of just 294 new customers, you now have 393 (at a constant referral rate of 12%)- that’s 98 more. It doesn’t sound like much, but it makes a big difference in the additional profit:
98 new customers * 1.112,48 € = 109.415,05 €.
Step 4: Calculate the ROI of the customer satisfaction measures:
Now you put the generated revenue in relation to your measures by calculating the ROI ratio. For example, if your CX measures cost €25,000, the ROI of this measure is:
(109.415,05 € – 25.000 €) / 25.000€ = 3,4
This is an excellent value and probably every decision maker in the company will give you the green light for such CX measures with such figures.
Arguments thanks to historical data
What do you do if you don’t want to wait that long for your CX measures to take effect or if you don’t get a budget?
Then you calculate with historical data. If we stay with our use case, you take the currently determined NPS and compare it with the NPS from a year ago – thus you link the sales and customer figures from today with the corresponding values from a year ago.
Four CX metrics mistakes you should avoid
Mistake 1: ROI of CX measures as an objective
If possible, you determine the ROI at the beginning of your journey. This is because it gives you a tool to drive CX forward in your organization. You have good arguments and can ensure that you continuously improve. This will also allow you to examine which areas of the CX are particularly worth tackling for improvement.
Mistake 2: Glossing over the numbers
Caution is advised at one point: CX metrics such as NPS or CSAT are only meaningful if they are measured correctly. After all, they are supposed to reflect customer satisfaction – if they are artificially increased, it won’t do any good.
For example, if employees discourage dissatisfied customers from answering the NPS question, then the value of the NPS will increase without you having more satisfied customers. Something like this can happen if, for example, bonus payments are linked to the Net Promotor Score.
Mistake 3: Looking only at the profit
A very important point is: Don’t just ask how much more revenue or profit your measure to increase customer satisfaction will bring. Rather, always ask: How much cost will you save through your CX measure?
For example, if you increase the number of promoters, you will get more referrals. At the same time, you will probably have more sales due to more frequent purchases by satisfied customers. And, here comes the savings effect: you get fewer support requests and have to put less effort into customer recovery.
An important question to ask is also always: what are the costs if you don’t implement CX measures?
Mistake 4: Only what has an ROI pays off
What’s also close to my heart, as important as I think metrics are, is that they’re not everything. Just because you can’t prove ROI for a measure doesn’t in any way mean it’s not useful, or perhaps even vital, to your business.
After all, what is the foundation of your company’s success? That you offer products that customers buy. To develop such products, you need to know your customers well, preferably better than they know themselves, and certainly better than your competitors.
However, getting to know customers, understanding their needs and problems is something for which a profit cannot be meaningfully determined. What is the ROI of interviews with users? How much profit does a customer journey map create? It’s not something that can be quantified.
Qualitative aspects are generally hard to measure. But that doesn’t mean that you can neglect such things.
Bonus tip: Don’t take the question about ROI personally.
There’s a danger that, as a CX executive, you may take the ROI question as a slight on your own work. If a boss asks you to quantify your contribution to the company’s success, it doesn’t immediately mean they don’t recognize the value of your work.
Answering the question about ROI with general studies on the benefits of CX is of little help in such a case. The manager is probably only interested in how resources can best be used in the current project or company. In other words, the individual measures.
Therefore, see such a question more as an opportunity. Maybe even more jobs will be created if you convincingly demonstrate the ROI.
Conclusion: Know the ROI of your customer satisfaction measures, this helps you and others.
Any customer satisfaction measure is better than none. But if you can also determine the ROI for some CX measures, it will help you to make the best use of your efforts, time and resources.
Always ask yourself: How much can I achieve with each CX measure? What is the best-case improvement I can achieve? How important is it to the largest number of customers?
From that, you look at what operational metrics and what CX metrics you need to measure to map that.
This not only gives you a tool for prioritization. It also gives you a way to demonstrate the value of your work and drive CX even further within your organization.