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How to Measure the Cost of Poor Customer Experience

blue signThe following is an excerpt from The Guaranteed Customer Experience: How to Win Customers by Keeping Your Promises, by Jeff Toister.

Customer experience pioneer and bestselling author Jeanne Bliss suggests businesses calculate their "customer math" to understand the impact of customer experience on the bottom line.

"At the end of the day," says Bliss, "we are in business to grow our business." Many companies obsess about customer acquisition, but Bliss recommends companies also pay careful attention to customer retention.

"The key is to do a common version of the math," says Bliss. She suggests members of the executive team, including the chief executive officer (CEO) and chief financial officer (CFO), meet to agree upon a single net customer value metric and a consistent way to run the calculation. That metric, says Bliss, needs to be reviewed just as frequently as other important business drivers, whether it's at a weekly executive meeting or a monthly business review.

The metric has three components:

  • Customer Base: What is our customer value at the start of the period?
  • Acquisition: What is the value of new customers?
  • Churn: What is the value of customers we lost?

Calculate your change in net customer value by adding the value of new customers to the customer base you had at the start of the period (week, month, quarter, etc.) and subtracting the value of customers you lost during the same period. (You'll find a worksheet to help you in the workbook at guaranteedexperience.com/workbook.)

Start with the number of customers at the beginning of the period being tracked, and multiply that by your average customer value.

This is easy to do in some businesses, such as the software-as-a-subscription industry, where customers pay a set price per month to access your software. The value of your customer base would simply be the number of paying customers multiplied by the average price those customers paid.

The calculation can get a little complicated in other types of businesses. A consumer products company might have a line of ten products that are sold to various wholesale customers at a discount and sold direct to consumers at the full retail price. Other companies have multiple business units that each sell to completely different customers.

Nevertheless, Bliss recommends companies create a metric that represents the company's entire customer base. Looking at business units or product lines individually without seeing the big picture can hide customer experience issues that span the entire organization.

"The CEO needs to care, as an enterprise, are we earning and keeping more valued customers than we're losing," says Bliss. "That means we all have to have one common version of new, lost, or lapsed, and be consistent in how we roll it up and present it to the CEO. It doesn't mean that individual product categories can't present their numbers, but we've got to roll it up."

Once you've identified the value of your customer base at the start of the period in question, calculate the value of customers you added for that time period. This calculation is run the same way as your customer base, by multiplying the number of new customers added times the average value of those customers.

Finally, calculate the value of customers lost by multiplying the number of lost customers by their average value.

Now you’ll have the three data points you need to create your net customer growth metric. The formula looks like this:

customer base + customers added - customers lost = net customer value

Observing the change in net customer value over time gives you a more accurate picture of the impact that promises, and broken promises, have on customer acquisition and retention.

Here's a simplified example. Let's imagine that a company had 10,000 customers at the start of the month. Those customers averaged $50 in monthly revenue, or $500,000 total. Spread out over a full year, that equals $6,000,000 in projected annual revenue.

During the month, the company adds 1,000 new customers. That seems pretty good, since that equals 10 percent growth in just one month. The chief marketing officer would probably be tempted to trumpet this success in their monthly report!

But wait: we need to calculate the value of the customers added. Those 1,000 new customers were incentivized with a special discount, so their average monthly value was just $25, or $25,000 total. Those new customers are substantially less valuable than the $50 average of the existing base. This might set off alarms among the executive team, since offering substantial discounts to entice new customers can be a sign that the company's value proposition is not enough to bring in customers at full price.

Here's where accounting for the value of lost customers paints an even more complete picture. During that same month, the company lost 500 customers. Unlike the new customers, the lost customers were largely paying full price, and most had added additional products and services. The average monthly value of the customers the company lost was $75, meaning those customers had been spending more than the $50 average. That puts the total value of lost revenue at $37,500 ($75 x 500 customers).
Now we have the data we need to calculate the change in net customer value for the month:

$500,000 (current base)

+ $25,000 (new customers)

- $37,500 (lost customers)

$487,500 net customer value

Despite adding 1,000 new customers, the company's net customer value actually decreased by $12,500 for the month in this example. That 2.5 percent decline is far more telling than just looking at customer acquisition alone.

This metric can make executives uncomfortable. For example, the chief marketing officer for the company in the previous example might feel threatened if the addition of 1,000 new customers was not celebrated and was instead called into question. Product development, operations, and customer service leaders might be tempted to blame each other for lost customers, rather than working together to identify and fix the root cause. Make sure you involve the entire executive team, including your CEO and CFO, so the net customer value exercise produces a credible metric that everyone understands and agrees on beforehand.