Putting a Valuation on Customer Experience Success™
Over the years, I have pondered the inability of companies to wrap their minds around the idea that the customer not only matters but that there is an extrinsic value to their relationship to the customer. So, I began to formulate an equation that derives a comparative valuation for any company’s customer experience. This valuation formula for customer experience success™ was finally solidified with the marvelous introduction of two-way interactivity, begun with the internet, where the customer and potential customer became much more valuable than simply the sale you are able to derive from them.
Again, as with the Customer Experience Metrician™ (see earlier posts), this is the first time ever you will see in public print an actual formula for placing a valuation on the customer experience. We express our gratitude to the many clients over the years who have graciously worked with us to derive their own personalized version of this equation. We could not have done it without you and the deep access you allowed us within your companies (you know who you are – thank you!).
The Customer Experience Success™ Equation
So, without further ado, here is the Customer Experience Success™ valuation equation.
Immediately you will notice the “Etc.” within the end of the one line of the equation. If you really thought I’d post a complete working version of our proprietary intellectual capital which underpins our company’s ability to help our clients gain an amazing competitive advantage . . . well, I’m not sorry to disappoint you! And no thanks, I do not need a peer review to know this works. Repeat clients over many years doing extremely well in the marketplace are the only proof of concept I’ll ever need.
I learned the hard way through my development of the NetRaker IndexTM and other proprietary processes for the internet just how quickly the new world of communications allows imposters to undeservedly capitalize in all forms from the originator’s efforts. If song artists think they have it rough, try making your living creating business intellectual capital!
Now that that’s been clarified, let’s work our way through the equation that is here. The symbology is as follows:
CE(v) = The valuation of a company’s total or partial customer experience. This is a comparative valuation between 0 and approximately 1.00. It is a function of:
^
P(a) = The propensity to deliver meaningful action favoring the client company. Specific action varies by industry and company (see earlier post “Moneyball for Business” for a refresher on the six overall objectives). This is largely driven by:
R(u&a) = Awareness, recall and familiarity with the company on both an aided and unaided basis. It’s the top of any funnel that follows so of course it has to be included.
BΔ = Many researchers know and preach about the expectation gap. What is less known is that the positive or negative halo effect from previous experience, real or imagined, with a brand image is far more influential on the final outcome of evaluations of a company’s actual performance. Therefore, the delta between initial brand perception and post experience must be captured.
^
ρ(Q) = Aw shucks, once consumers went interactive we thought we didn’t need to worry about the quality of our product or service anymore. Bummer – it still really matters! This is the probability of a high evaluation of quality for the product or service being rendered.
^
ρ(S) = And here’s one for all those vendors pushing evaluations of the service portion of businesses. Yes, that still matters too – a lot! This is the probability of a high evaluation of service levels.
^
ρ(I) = Here’s where all those hard web analytics (see earlier post to understand difference between hard and soft analytics if you’re joining us late) have their place in the sun. BUT, without the addition of soft analytics in combination with hard analytics, this is just “footsteps in the forest” stuff, interesting, but limited in actionable usefulness. This is the probability of a high evaluation of the interactive experience (i.e. website, mobile, others in the futureJ? Hard and soft metrics).
AD(f) = We expect advertising frequency, channels, and messaging to have an impact. Therefore adjustments have to allow for understanding the amount of outreach effort relative to the amount of credit so that outcomes can be standardized.
TM` = This equation has to reflect the various target markets a company is pursuing with its products or services.
CH` = This equation has to reflect the various delivery channels of the product or services (i.e. retail, web, phone, geographic differences, industry, etc.).
(i) = In order to standardize for comparison sake, you must index! Therefore, that is what we do with all the above.
If you’re with me so far and you’re feeling pretty good about what your company does, you probably do not really understand what’s involved here (not trying to be sarcastic or demeaning at all, just put on too many educational seminars), but that’s ok. Our research and experience shows very low double digit percentages of companies are even thinking about this level of customer knowledge and analytics let alone implementing any program encompassing all of the above (and it’s not even the full list!).
But, let’s say you are, here’s where that percentage of companies dips into the single digits.
∑C(i) = All of the above has to be benchmarked against the known competition’s indexes for their ability to deliver against customer perspectives.
Whoa, you kiddin’ me? That’s like . . . really expensive! Our professional response is “no duh.” If it was easy and cheap everybody would be doing it and it would no longer be a “value” equation either! This is where we get a kick out of reading the long lists comparing companies’ Customer Satisfaction Indexes (CSI’s) or Net Promoter Scores (NPS’s) across industries. Who cares if you’re a retail establishment that beat out most financial institutions? Apples and oranges people, apples and oranges.
T = Things change. It’s the forever constant. Therefore all of the above has to be maintained on an on-going basis over time.
- e = Ah, this is where it really helps if your customer experience partner understands the ability of a company in your industry to draw value from customer experience enhancement.
What do I mean by that? Think of the most non-customer experience oriented business or organization you know of – anything come to mind? Yet, it still exists doesn’t it? How does that work? Usually because . . . the most meaningful factors for that business’ success are exogenous or outside of their direct control OR a regulatory body exerts major exogenous control over the actions of the business. Let me say it even clearer – if we woke up tomorrow to the old style of Marxist control that once governed Russia – NONE of the above would matter in the least!
Let’s see how this works though in our own country in today’s governances. Without going through all the details, if you ran the above equation for convenience stores, the outcome is a very low customer experience valuation, CE valuation = 0.04 (the 0.04 is on a scale of 0 to approximately 1.00).
Why? Because no matter how well one outperforms the competition relative to the customer experience in this industry, there are just too many exogenous factors that make up a consumer’s decision as too which convenience store they will pick. Hence the truth in the age-old adage (for convenience stores) of location, location, location. This is why that adage is a far truer gauge of a specific chains’ success than the customer experience they deliver.
Could this change? Possibly. A global oil and gas company is experimenting right now with a new convenience store/gas station concept that is branded and positioned exclusively as the “green” option for consumers. With the growing importance of this position to over 47% of the U.S. population (see our Global Warming Monitor press release www.arthurgroupinc.com/news.html) this might tilt the customer experience valuation because the exogenous factor is mitigated somewhat. In the end though, this is a major uphill battle. It will still be a gas station and a convenience store with an as yet unproven market position for the masses. But . . . without that attempted change, this entire industry is set for continued mundaneness and no retribution for uncaring customer experiences.
Let’s look at another favorite example, that of public utilities. They serve the public, right; I mean it’s even in their industry title? They sure do a lot of customer satisfaction work so they must be able to differentiate on customer experience. Hmmm, really? This entire industry’s premise is driven by heavy regulatory requirements, oversight and regulatory commissions, etc.
I am not joking when I say I’ve watched an unnamed utility pitch its regulatory commission for an additional $800 million in revenues (not actual figure so quit Googling) to be raised through charging a slight increase to its customers, both business and residential. Between you, me and a lamppost, that utility had no idea what it was actually going to use approximately $500 million of that $800 million for! But it put together a great pitch and won the increase. And you thought only software engineers sold vaporware.
The customer experience equation for public utility services is binomial in nature. When your home is in the dark – you’re not satisfied. When your home is well-lit, warm and comfortable – you’re satisfied. The overall customer experience valuation for an leader in this industry results in a CE valuation of 0.06.
I know, barely above that of a convenience store. There are customer satisfaction firms out there pitching case studies regarding how increasing customer satisfaction makes a difference to a public utility. I’m not saying those case studies are wrong; I believe the people putting them together believe them to be true. However, the simplistic nature of a customer satisfaction index does not allow it to catch the customer experience valuation component for this industry. I know the utility companies trot out their high satisfaction scores every time they ask for an increase from a regulatory commission, but from a business perspective in terms of how the industry operates and how money is garnered, CSI’s are more of a feel-good mechanism for the industry than directly related to the business of being a utility.
Is there a case where a good customer experience can be more valuable for a public utility than in general? Glad you asked that, yes there is. If a public utility were to move their customers’ payment function from the current paper system of check writing to online, the cost savings are a real business objective for a public utility. In that specific area, there is a meaningful customer experience valuation: CE valuation = 0.64.
Now, we’re talking! A meaningful customer experience valuation. Now the scores, indexes and differentiation from other utilities (not really competitors given how geographies are assigned but comparative to “relative” competition) mean something.
Let’s look at the other end of the spectrum. Companies born online, living or dying by their website presence and online brand. The customer experience valuation for an industry leader in one specific online industry is: CE valuation = 1.00.
Ever wonder why those website analytic employees honestly believe their career path will end up with them being CEO’s of all type of companies? This is why. They have grown up in an industry where it really, really, really matters to get customer experience right! There are no excuses for not getting the information, there are no excuses for not using the information, there’s just no excuses period. You either know how to do this very well or you are on the low end of the totem pole when it comes to customer preference and the net is all about the 5/90 rule. Five percent of the companies within an online industry will capture 90 percent of the gross margins. Customer experience valuation really matters here (see earlier post “Where customer experience came from” for more background).
My Reasons
My reasons for sharing this equation are both simple and not so simple. The simple reason is to prove that yes, customer experiences can be measured and a meaningful metric applied to them. A meaningful metric taking into account the actual complexities of the customer experience interchange rather than a single metric showing a firm’s customer response on one dependent variable vector such as customer satisfaction. And for the not so simple reason; to show that much more thought and expertise needs to be applied to the current structure of customer information systems than is happening.
Forrester’s Bruce Temkin wrote a research report last year called “Obstacles to Customer Experience Success” (he did not know he was infringing on our trademarked program, we forgive him that one oversight). When you understand he was interviewing executives within companies with Customer Experience somewhere in their titles or responsibilities and that almost all the companies believed customer experience is important, it’s quite enlightening that less than half had any enterprisewide system in place. Less than one-quarter had a leader in charge of cross-platform efforts. And most importantly, “The most prevalent problems are lack of a clear strategy and limited budgets. When we looked at the difference between firms with a disciplined approach and those that were more undisciplined, there was a wide gap in the use of primary user research. To overcome these hurdles, firms should get more customer insight and put someone in charge.” (My emphasis added)
To which we stand and applaud the basis of what we have been implementing within companies for over the past decade. It is for the very reasons I have bolded in the preceding quote that we require an application and evaluation process from companies interested in our customer experience success™ program. It is for these reasons that only single-digit percentiles of company applicants meet our stringent criteria to participate in our customer experience success™ program.
Over the years, we’ve seen and heard enough behind closed doors that, knowing how those leadership attitudes are carried out in public and the impact on a company’s success or failure rate, we know ahead of time which company is actually capable of getting and implementing the process successfully. Personally, I’m convinced that most business leaders love to complain, blame, hand-wring, and all sorts of other nonsense rather than step up to the plate and commit to a process that earns them the on-going respect of their customers and strongly hedges their bets for survival. For the majority of companies, we offer a plethora of market research, usability and customer experience tools and projects that will meet their immediate information needs while not obligating them to something they cannot completely adhere to. It’s better for them and better for us.
While not at all new to any research practitioner, I like to use the examples directly out of Kaplan and Norton’s book “The Balanced Scorecard” to make this point as simplistically as possible when I do seminars or executive speaking engagements. Just to further show the gap between the knowledge business leaders have versus the commitments they are willing to make to do the right thing. Show me a group of business leaders striving for worthwhile impact for their companies and they will swear on the holy grave of their favorite dog they are doing everything possible to meet the Scorecard’s customer perspective input requirements since its gain in notoriety.
This following exercise I take them through is fun, enlightening and troubling. If you have actually read the book (most executives have not), there is quite a list of market research project requirements developed as requirements for gaining customer perspective inputs for the Balanced Scorecard. In my speaking, I initially ask for a show of hands of everyone who believes the Balanced Scorecard’s principles on customer perspective and believe they follow them. Pretty much every hand in the audience is up at this point.
Then, I start going through the list of market research project specifications (not even usability or customer experience) one at a time. If you do the specified project function, you can keep your hand up. But if you are not doing the specific one I mention, you have to drop your hand, regardless of how many after that specific one you are doing in your company. I start with the easy and obvious ones and progressively move to the more complex and costlier ones. The ones that require real commitment.
I have yet to see an audience of executives that can keep their hands up through half of the list of requirements specified in that book! The vast majority are sitting on their hands just one-third of the way into the list. By the end of this exercise, amazement abounds at how much effort they should be putting into gaining the customer perspective. Last time I checked the book; there were not a lot of optional project specifications listed. They are pretty much “requirements” to capture the necessary customer perspective for their company’s business strategy and decision-making.
There is so much discussion taking place now regarding “how do we measure things from the customer perspective?” “What metrics are going to be useful for our business moving forward?” “What about the new technologies that could be gaining consumer acceptance?” “What happens when the net is so ubiquitous that it’s not even referred to as the net anymore?” These, among a myriad of other similarly phrased questions, have led me to realize that while we’ve had the luxury of working closely with some of the best “best practice” companies in their respective industries, most companies are overwhelmed by what our clients call the “breadcrumb meatloaf” of metrics available to them.
Every vendor, especially website analytics vendors, claims to have found the next amazing single metric that will make or break a company. The acceptance and growth of one-stat wonders (see my article, The Myth of Customer Satisfaction, Net Promoter Scores – and other one-stat wonders at www.arthurgroupinc.com/news.html) indicates a never-before-seen eagerness on the part of a growing percentage of business leaders to understand how the customer impacts their business.
Unfortunately, as in past efforts with TQM and other processes, it is usually an eagerness to fix the knowledge gap with the simplest and least expensive process they can find. And, those that do embark on filling the knowledge gap within their companies through one-stat wonders such as Customer Satisfaction Indexes (CSI’s), Net Promoter Scores (NPS) or Customer Experience Indexes (CEI) or whatever the web analytics vendor is throwing at them (“the best four questions ever asked”) get exactly what they pay – not much. Certainly nothing that will actually impact their business and make sense with the reality they are facing.
So, I’m presenting this equation as my input to the on-going discussion of what companies should do moving forward. First, to prove customer experience success™ has a valuation, and secondly to show it takes real effort, commitment and much more than any single methodology or metric – hard or soft – can accomplish.
