Recently, I read a fascinating article, “CX Metrics Aren’t Customer-Centric, But Should Be. Learn How,” by Peter Fader and Sarah E. Toms. The authors show how combining customer switching costs with CX metrics and then looking at the results on a customer-by-customer basis through the lens of customer lifetime value (CLV) will result in meaningful insights about structuring your CX program to obtain the biggest bang for your money. But first, let’s define these three terms.
Definitions
Switching costs – Here is Investopedia’s definition:
… the costs that a consumer incurs as a result of changing brands, suppliers or products. Although most prevalent switching costs are monetary in nature, there are also psychological, effort- and time-based switching costs.
Customer Experience (CX) – Here is Gartner’s definition:
“… the customer’s perceptions and related feelings caused by the one-off and cumulative effect of interactions with a supplier’s employees, systems, channels, or products.”
And customer satisfaction (CSAT) is based on how these perceived feelings compare to the customer’s expectations.
Customer Lifetime Value (CLV)
There are many definitions of CLV and just as many ways to calculate it. The most straightforward way to think about CLV, and figure it, is as follows:
CLV = Profit from initial purchase plus the net present value of the profit from all future purchases.
The calculation of CLV depends on two critical assumptions for each customer:
- How long will they remain as your customer
- How much will they spend every year they are your customer
And even if they have a multi-year contract with you, there is still uncertainty about ongoing revenue at the end of the contract’s term.
The best way to deal with the assumptions and the calculation of CLV in total is for you and your CFO to discuss what you are trying to accomplish. You can get her advice and possibly have her produce the CLVs for all customers when needed. And don’t worry about the accuracy of the calculation; the only thing that matters is that the measures are consistent and that you look at the trend over time.
The Insights
In general, we tend to link CX and customer retention tightly. But Fader and Toms created one chart that dispels that notion. The chart takes into consideration the real impact of switching costs on retention. In the B2B space, CX strongly influences how your customers feel but not how they will behave.
In the B2B space, if we support Capital Equipment, the switching costs are generally high. Consider a machine part of an automated production line where switching costs will include high downtime and disruption and a CapEx write-down. Of course, suppose your product fails to work as expected or is so unreliable that it cannot be depended on. In that case, the switching cost is of no consequence (except for the career of the person who made the purchase recommendation).
The switching costs are generally low in the B2C space or with low-cost items used by B2B businesses. For example, suppose you issue a portable volt/amp meter to each service engineer, and you start getting complaints from the engineers about how the meter’s shape makes packing their equipment difficult. In that case, you can replace them individually by spending only the cost of the new meter.
I think the labels for each of the six areas on the chart are clear and do not need further discussion here. However, read the original article if you want more insight into the boxes.
Action Plan
List all of your accounts and then slot them into their box. This is where you integrate CLV into your thinking. I will assume that you are in the B2B space and are supporting capital equipment, so we are talking about the top row of the chart. Let’s look at each individually.
Caged Loyalists – These folks love you; their loyalty is yours to lose. On a customer-by-customer basis, you must try to identify any behaviors or product issues that annoy them and fix them! No magic here and no significant changes are required on your side.
Neutral Hostages – There is an opportunity here. Human nature is such that, left on their own, these people will become Hostile Hostages over time. If they have a relatively large CLV, then it is worth a significant effort to solve and correct their problems. Your goal must be to move them to the Caged Loyalist box long before they are due to upgrade or replace your product.
Remember, you are making a decision for your service business and the whole company. If they have a low CLV, the effort to save their account may not be worth the cost. Before making this decision, you should discuss your thinking with the CFO and Head of Sales partner.
Hostile Hostages
On a case-by-case basis, you have to answer two questions:
- Is it possible to move these people into the Neutral Hostage or, better yet, the Caged Loyalist box?
- Is it worth the cost?
Even though these people are the hard cases, you should still discuss them with your CFO and Sales Head and get their agreement to support your decision. Otherwise, you risk being the goat when the account buys its next-generation product from your competitor and Sales decides to list “poor service and support” as the cause of the defection on their Lost Business Report.
Conclusion
Use switching cost and CLV together to decide your efforts to move your customers to higher CX results. It takes some real work, but the return should be worthwhile.
About Middlesex Consulting
Middlesex Consulting is an experienced team of professionals with the primary goal of helping capital equipment companies create more value for their clients and stakeholders. Middlesex Consulting continues to provide superior solutions to meet the needs of its clients by focusing on our strengths in Services, Manufacturing, Customer Experience, and Engineering. If you want to learn more about how we can help your organization improve your customer’s experiences, please contact us or check out some of our free articles and white papers here.