Understanding customer experience ROI

Author: Rosemin Anderson

Subject Matter Experts: Isabelle Zdatny & Topher Mitchell

What is customer experience ROI?

To answer this question, you first need to know what ROI is. ROI is one of several financial metrics that is used to assess the quality of an investment. It can be applied to prospective initiatives in order to determine whether to make a given investment. It can also be applied to historical initiatives in order to assess whether they were good investments.

While customer experience initiatives can create value for customers and employees, individuals often want to know how a given initiative has created value for the business. Calculating ROI is a great way to do this.

It is also important to note that ROI needs to be assessed in the context of actions. While many people ask questions like, “what is the ROI of customer experience?” or, “what is the business value of a CX program?” a better question is “what is the ROI of this specific initiative?” While you might estimate the potential value that a CX program might bring to your organization, value realized must be assessed based on specific actions. No action = no value.

Assessing the ROI of customer experience initiatives can be useful for a number of purposes. For example:

• Securing Investment: Clearly demonstrating the financial return on customer experience investments can help secure the necessary budget and resources for future initiatives.
• Prioritizing Efforts: Understanding the monetary impact of different customer experience initiatives allows you to prioritize those with the highest potential for ROI.
• Demonstrating Accountability: By measuring and reporting the ROI of customer experience initiatives, you can demonstrate the effectiveness of your efforts and the value they bring to the organization.
• Building Cross-Functional Alignment: Quantifying the ROI of customer experience initiatives helps bridge the gap between different departments and align everyone around the common goal of delivering value to customers and the business.

Free eBook: ROI of customer experience in 2024

The cost of poor customer experience

XM Institute™ research has found that $3.7 trillion of 2024 global sales are at risk due to bad customer experiences, proving the value of taking action to improve customers’ interactions with your business. An astonishing half of customers cut spending after a poor experience.

Investing in customer experience can help to guard against providing poor experiences, increasing the likelihood of customers returning and extending customer lifetime value.

Calculating customer experience ROI

Customer experience initiatives can generate ROI in various ways.

The basic formula for customer experience ROI is:

(Benefit of initiative – Cost of initiative) / Cost of initiative

Let’s break this down further:

• Benefits: This includes any increase in revenue and decrease in costs. This might include improved customer acquisition, increased customer spend, decreased customer churn, and decreased cost to serve.
• Costs: This includes all expenses related to designing, implementing, and managing the initiative. It might include expenses for software, services, headcount, and more.

For example, if your company invests $50,000 in a customer experience initiative and realizes a $100,000 increase in profit due to higher customer retention and sales, the ROI would be:

($100,000 – $50,000) / $50,000 = 100% ROI

Challenges in measuring customer experience ROI

While the concept of ROI is straightforward, measuring it can be quite challenging. Multiple factors contribute to its complexity, for instance:

• Attributing impact: Estimating the benefits attributable to customer experience improvements can be like untangling a knot. Revenue growth and costs are affected by a variety of factors, such as marketing efforts, product enhancements, overall economic conditions, and more. Isolating the impact of a customer experience initiative may require specialized expertise and capabilities.
• Long-term impact: Some customer experience benefits, like improved brand reputation, better customer lifetime value and increased customer loyalty, can take time to pay off. These long-term effects can be difficult to estimate, potentially undervaluing the true impact of your customer experience initiatives.
• Data collection and analysis: Gathering accurate, comprehensive data on customer behavior can be difficult. It can take time to acquire it from data owners, some of whom may be unwilling to share it. Your organization may not even be collecting the data you need yet. You might also struggle to identify which data is needed. You may also need to rely on customer feedback, which can take time and effort to collect.

Planning ahead for these challenges will make this exercise far easier than trying to address them after you have already driven your initiative.

Customer experience ROI metrics

Though it can be tempting to just measure customer experience with financial metrics such as costs and cashflow, often there are other factors that can help to illustrate the specific ROI of customer experience. Here are  three types of metrics that are frequently used to determine the impact of customer experience investment. These are:

Vanity Metrics, e.g. customer satisfaction metrics such as CSAT and NPS

Though these are often a common starting place for many businesses, vanity metrics are not able to measure the direction or magnitude of the results of your investment when considered in isolation. However, they can be used to establish the general sentiment of your customers – and if these improve over time (i.e. they report a higher level of customer satisfaction), this can help you to gauge the general impact of your efforts.

Performance Metrics, e.g. customer churn rate

This type of metric can indicate the direction of the results you’re seeing, but isn’t necessarily useful in measuring the magnitude of results. They can, however, be a good indicator of measuring progress towards the outcomes you’re looking for. As an example, a reduced churn rate indicates a positive trend.

Forensic Metrics, e.g. customer lifetime value

This type of metric helps you to understand both the direction and magnitude of the results of your efforts. Having both an absolute and a relative metric to track can help you see the causation of your results, and are very valuable in helping your team to prioritize the actions they take.

Best practices for measuring customer experience ROI

Despite these challenges, measuring ROI is a critical activity for any CX program. Here are five tips:

1. Begin with the end in mind: Before diving into metrics and data, clearly define your objectives. What specific business goals are you trying to achieve through your CX program? Are you aiming to increase revenue or reduce costs? Which metrics specifically do you aspire to impact? You can start by assessing how much value your organization is putting at risk due to poor customer experience, which will help you figure out where there is the greatest opportunity for customer experience to make an impact. By establishing clear objectives upfront, you can tailor your approach to align with these goals.
2. Identify and track relevant business metrics: To show your customer experience efforts are creating value for your organization, identify and track business KPIs that represent value to your organization and are directly influenced by customer experiences. These metrics will be used when calculating ROI.
3. Focus on driving action: No action = no value. Don’t get stuck in analysis paralysis. Use your insights to identify areas for improvement. Work with your stakeholders throughout the organization to implement targeted changes. Assess the impact of these changes on your chosen metrics to refine your approach over time.
4. Use a control group: Identifying correlations between customer experience improvements and business outcomes can be a great way to generate new hypotheses, but to show value realized, you need evidence that you caused a change in business metrics. Once you have identified an action you would like to take, put in place a control group to compare against. By deploying your initiative with a well-defined control group, you can better isolate the impact of specific customer experience changes on the outcomes you care about. This will help you make a more credible case for the ROI of a customer experience initiative.
5. Create a compelling ROI narrative: Whether you are looking to secure buy-in for a customer experience initiative or communicate the impact of an action driven by your program, it’s crucial to communicate the ROI in a way that resonates with stakeholders. How you communicate this will depend on the context. For example, to forecast the expected value of a customer experience investment to secure budget, you might develop a detailed business case, whereas to communicate the value realized from actions you’ve done, you could use XM Institute’s Value Chain framework.

Going beyond customer experience ROI

While ROI is a critical measure of customer experience success, customer experience can generate non-monetary outcomes as well. These benefits can play an important role in driving long-term growth, fostering resilience, and building a sustainable competitive advantage. In fact, these non-monetary benefits can create a flywheel effect that ultimately leads to improved financial performance over time:

• Increased agility: In today’s rapidly evolving business landscape, agility is essential for survival and growth. A customer-centric culture, empowered by robust mechanisms to collect customer feedback and data-driven insights, enables companies to quickly adapt to changing customer preferences, market trends, and disruptive technologies. By proactively listening to customers and acting on their feedback, organizations can identify emerging opportunities, mitigate risks, and stay ahead of the competition.
• Enhanced brand perception: A strong brand perception is a powerful asset that can play a role in long-term growth and profitability. Positive experiences and satisfied customers create a positive brand image and reputation, which can foster customer loyalty and attract new customers. When customers perceive your brand as trustworthy, reliable, and customer-centric, they are more likely to choose your products or services over competitors, even at a premium price.
• Creating value for customers: Building strong, lasting relationships with customers is the cornerstone of sustainable growth. When customers feel trusting, appreciated, and understood, they are more likely to become loyal advocates for your brand. XM Institute found that, compared to factors like success and effort, emotion is the most highly correlated to key loyalty behaviors such as likelihood to recommend, repurchase, trust the brand and more. They will not only continue to do business with you but also recommend your products or services to others, generating positive word-of-mouth and organic growth.
• Creating value for employees: Engaged employees are the foundation for great customer experience and strong business results. A positive customer experience environment fosters a sense of purpose and pride among employees, as they see the direct impact of their work on customer satisfaction. When the employee experience makes them feel valued and empowered, they are more likely to be motivated, productive, and innovative.

Join customer experience leaders with Qualtrics®

Customer experience leaders offer great interactions to their audience that also have a positive revenue impact. The data shows that businesses that actively work on their customer experiences (CX leaders) enjoy better business outcomes (i.e. customer retention, cross-selling, employee retention, cost reduction and more) when compared to businesses that do not prioritize this (CX laggards).

Read our latest eBook on the customer experience ROI now to understand how to avoid common pitfalls when investing in customer experience, and how to drive the actions that will have a measurable impact on your business.