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The ROI of Great Customer Service

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4 Jun 2019

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ROI of Customer Service

In the world of online business, where everything is ruthlessly measured, one of the slipperiest metrics to quantify is the ROI of delivering great customer service.

Certainly, there’s no shortage of eye-popping statistics trumpeting the importance of customer service and overall customer experience.

Here are just a handful:

  • 96% of consumers worldwide say customer service is an important factor in their choice of loyalty to a brand. (Microsoft)
  • American companies lose $1.6 trillion annually due to customers experiencing poor customer service and switching to competitors. (Accenture)
  • 57% of customers have stopped buying from a company because a competitor provided a better experience. 62% say they share bad experiences with others. (Salesforce)
  • 93% of customers are likely to make repeat purchases with companies who offer excellent customer service. (Hubspot)
  • 84% of companies who invested in improving customer experience saw an increase in revenue and 79% experienced cost savings. (Dimension Data)

If you own your own company, these stats may just reinforce what you already know: Delivering quality customer service is good for business.

At SEOButler, providing our clients with outstanding service keeps them coming back for more. It also gets customers endorsing our work. Word-of-mouth referrals account for much of our new business.

Too often, businesses focus solely on new customer acquisition at the expense of keeping existing customers happy. This is despite studies that show it costs five times as much to attract a new customer than to keep an existing one.

If you’re a digital marketer or agency owner, it pays to have a clear understanding of how customer service impacts your bottom line.

After all, customer service is a core facet of the overall customer experience. In a landscape where it’s harder than ever for businesses to compete on price or product, improving customer experience has become increasingly essential for companies seeking to boost brand loyalty and retention.

As Tiffany Bova, VP and Distinguished Analyst at Gartner, put it: “Customer experience is the last source of sustainable differentiation and the new competitive battleground.”

You may also notice that all the statistics above derive from surveys. While useful for gauging consumer sentiment, these studies don’t get us much closer to determining the actual ROI of customer service.

The truth is, until recently, little quantitative data on customer service ROI existed. Companies have traditionally been reluctant to share their sales and CRM data—and understandably so.

It took the advent of social media as a customer service channel to offer new insights into putting a dollar value on the sometimes intangible benefits of keeping your customers happy and engaged.

Later on in this post, I will share with you how a research manager at Twitter and his team leveraged the analysis of real-time engagement between customers and brands to deliver groundbreaking insights into the ROI of customer service—and how to improve it.

But first, let’s examine more traditional methods of gauging the ROI of customer service and customer engagement.

What is ROI?

ROI—or return on investment—has become so much a part of the common parlance of business, it’s easy to forget that it’s an actual equation. And a simple one at that:

The ROI of Great Customer Service

For example, if you had two sales reps, each earning $100K per year, and they generated a combined $1 million in revenue, your return on investment is a healthy 400%: ($1,000,000 – $200,000) / $200,000) x 100.

Of course, this is just a crude example. For one thing, while this instance does illustrate how the basic ROI calculation works, in the real world, investment costs like advertising and marketing would also need to be factored in to give a more accurate assessment of ROI.

So, what to do when calculating the ROI of customer service? While you could potentially calculate the investment cost by adding up the amount of money you spend on support staff, how do you calculate the revenue they generate?

Therein lies the paradox of calculating the ROI of customer service. Many analysts define businesses as being comprised of two different types of units—cost centres and profit centres. In this model, cost centres only generate expenses and don’t directly contribute to profitability. Traditionally, customer service is considered a cost centre—meaning it doesn’t directly create profits for your business.

As a business owner or manager, this probably feels inherently wrong. No doubt you’ve experienced instances where you’ve either lost a customer or retained one based on the customer service they received. Clearly, that has an impact on the bottom line, but how do you measure it?

Here are the most common metrics analysts use to try to gauge the effect that customer engagement and customer loyalty have on profitability.

Measuring Customer Engagement

Let’s start by defining customer engagement. This is crucial.

Customer engagement guru Esteban Kolsky of thinkJar found, in a study, that “75% of brands report that they are measuring customer engagement, but cannot define what it is.”

Author Paul Greenberg has defined customer engagement as “the ongoing interactions between company and customer, offered by the company, chosen by the customer.”

Kolsky himself recently came up with a more nuanced definition: “[Customer] engagement happens, over time, when ever-changing stakeholder-defined outcomes are resolved to their satisfaction. At every touchpoint, every time, by leveraging information, using optimised processes, on a dynamic technology platform.”

CUSTOMER ENGAGEMENT vs CUSTOMER EXPERIENCE

Although customer engagement and customer experience are often used interchangeably, many argue there is a difference. Greenberg wrote extensively about the distinction here.

A commonly accepted definition of customer experience is: “The entirety of the interactions a customer has with a company and its products.”

Since the most prevalent tools analysts use to measure customer engagement and customer experience are the same, for the sake of simplicity, I will refer to both as customer engagement.

Clearly, customer service plays an essential role in shaping customer engagement and consequently, customer loyalty.

What follows is a brief rundown of the most effective and often used metrics for measuring customer engagement and loyalty. While I won’t delve into great detail, I will point you in the right direction for further reading on each method.

Net Promoter Score (NPS)

Net Promoter Score (NPS) is one of the most widely used methods of measuring customer engagement and loyalty. More than two-thirds of Fortune 1000 companies use the Net Promoter System, according to management consulting firm Bain, who pioneered the concept in 2003.

You determine NPS by asking your customers what Bain calls the ultimate question:

The ROI of Great Customer ServiceRespondents are asked to rank their likelihood of recommending a business on a scale of 0 – 10, with 10 being extremely likely and 0 being not at all.

No doubt, you’ve come across NPS surveys like this when doing business online, and you may well use them yourself. The ubiquity of NPS has led some to question its effectiveness, but it remains one of the most widely used metrics for measuring customer engagement and loyalty.

Bain classifies customers into three categories, based upon how likely they are to recommend your company:

  • Promoters (9 or 10): Promoters are the customers that every business wants. They’re your company’s biggest cheerleaders and are likely to remain loyal to your business over time. Bain estimates that promoters are responsible for over 80% of word-of-mouth referrals for most businesses.

    At SEOButler, we’ve experienced concrete results from turning customers into promoters—it’s been one of the foundations of our success. We do this through delivering exceptional products and service.

  • Passives (7 or 8): Passives have a lukewarm response to your business. They are what Bain calls “passively satisfied.” They’re OK with the job your brand is doing—for now.

    Passives are (unsurprisingly) less likely to recommend your company or to make an additional purchase from you in future. Crucially, they are also far more likely than promoters to jump ship for a competitor if a better deal comes along.

  • Detractors (0-6): If you’re collecting NPS responses after a customer service interaction (as many companies do), and your customers are scoring you at 6 or below, you have your work cut out for you. At best, detractors are dissatisfied customers, at worst, they’re angry ones.

    Detractors are thought to be responsible for over 80% of negative word-of-mouth and are the most likely to stop doing business with you or leave you for a competitor. They’re also tend to be difficult to deal with, which can be time-consuming and demoralising for your team.

Once you have tabulated your NPS survey results from customers, your Net Promoter Score is easy to calculate:

The ROI of Great Customer ServiceSimply subtract the percentage of detractors from the percentage of promoters. This will leave you with a number between -100 and 100. That is your NPS.

For example, if you surveyed 100 of your customers and came back with the following results: 40 promoters, 50 passives, and 10 detractors, your NPS is 30 (40% – 10% = 30).

It should go without saying that you should strive to get your NPS as high as possible. Increasing the number of customers who are promoters of your business can have a significant positive impact on your bottom line.

Providing excellent customer service is one way to turn passive customers and even detractors into promoters. Each  interaction with a customer also gives you a valuable opportunity to collect NPS data.

What is a Good NPS?

Not surprisingly, NPS varies considerably by industry. Temkin Group (recently acquired by Qualtrics) has been tracking the NPS scores, by sector, of major companies in the US for years. Here is a chart showing recent results:

The ROI of Great Customer Service(Source: Temkin Group)

Ultimately, NPS has the most value as a metric when you use your own historical results as a benchmark. If your NPS continues to improve, that’s a clear indicator that your customer service and overall customer engagement initiatives are paying off.

If, however, your NPS shows a decline, it’s probably time to rethink your customer engagement strategy. Improving customer service is typically an excellent place to start.

Customer Satisfaction (CSAT)

Another commonly used measurement of customer engagement, Customer Satisfaction (CSAT) asks customers to rate their satisfaction with a product, service or interaction by asking some variation of the following question: “How would you rate your overall satisfaction with the (product/good/interaction) you received?”

The ROI of Great Customer ServiceCSAT is typically expressed as a percentage and the formula to calculate it is quite simple. Only results of 4 (Somewhat satisfied) and 5 (Extremely satisfied) and the total number of responses are used to calculate CSAT. This is because customers who rate a business as either 4 or 5 are more likely to be retained.

The ROI of Great Customer Service

For example, if you surveyed 100 customers and 60 of them chose 4 or 5, your CSAT score is 60%.

CSAT can be a more flexible metric than Net Promoter Score as you can ask customers about their level of satisfaction at multiple stages of the sales or support process. NPS is considered a much better gauge of overall loyalty and engagement as it reflects a customer’s relationship with a brand over time.

CSAT may be the simplest and most direct way of measuring customer satisfaction, but don’t underestimate its usefulness. Userlike has a valuable blog post on how to get the most out of your CSAT surveys.

As with NPS, measuring your CSAT score against your previous benchmarks is the most useful way to use the metric to improve your sales, support, and other business processes.

Customer Effort Score (CES)

The new kid on the block when it comes to measuring customer engagement and loyalty, the principles behind Customer Effort Score (CES) were first laid out in 2010 in an article in Harvard Business Review.

One of the most commonly-heard adages in the customer service world is “Underpromise and overdeliver.” Just as prevalent is the idea that you should “delight” your customers.

What the authors of “Stop Trying to Delight Your Customers” found in their extensive research largely contradicts those maxims.

Here are a few examples:

  • 25% of customers are likely to say something positive about their customer service experience
  • 65% are likely to speak negatively
  • 23% of customers who had a positive service interaction told 10 or more people about it
  • 48% of customers who had negative experiences told 10 or more others

These numbers indicate that the impact of a negative customer service experience is likely to far outweigh the benefits of a positive or “delightful” one.

The whole article is a must-read if you’re interested in improving your customer service ROI and overall processes.

If you don’t have time to read the whole thing, the main takeaways are:

  • “Delighting customers doesn’t build loyalty; reducing their effort—the work they must do to get their problem solved—does.”
  • “Acting deliberately on this insight can help improve customer service, reduce customer service costs, and decrease customer churn.”

CES was created to measure loyalty based on the effort a customer has to expend during a customer service interaction. Researchers have found it to be a more accurate predictor of customer loyalty than both CSAT and NPS—significantly so: “[CES is] 1.8x more predictive of customer loyalty than customer satisfaction (CSAT) measures, plus it is two times more predictive than Net Promoter Score (NPS).”

To measure CES, ask your customers the following question:

The ROI of Great Customer ServiceThis question has gone through several iterations over the years, and after much testing, Gartner found this wording to be the most effective.

Unlike NPS or CSAT, the formula for calculating CES isn’t fully established. Retently offers a helpful article on the different methodologies, as well as suggestions on how to craft the wording of your CES question here.

For the purposes of this article, we’re going to go with Garner’s recommended CES formula:

The ROI of Great Customer Service

For example, if you surveyed 1,000 customers, and 500 of them rated your performance as 5 or higher, your CES is 5 on a scale of 1 – 10 (or 50 on a scale of 1 -100).

Another helpful way of calculating CES is to determine the average score your customers have given you:

The ROI of Great Customer ServiceIn this case, you would add up each individual score (from 1 – 7) and divide it by the total number of responses.

For example, if you surveyed 10 customers and their combined total score is 43, your average CES rating is 4.3.

What is a Good CES?

Partly because CES is so new and partly because methodologies differ, there are no published benchmarks by industry like there is for NPS. But as with NPS and CSAT, the best way to measure whether your customer service is improving is by comparing it to your historical results.

One crucial statistic to keep in mind (one that illustrates the central premise of CES) is that research from Gartner shows that while moving a customer from 1 to 5 on the CES scale improves loyalty by 22%, any further increase (from 5 to 7 for example) leads to only a 2% additional increase in loyalty. Therefore, your goal with customer service shouldn’t be to “delight” your customer, but to make their interactions as seamless and effortless as possible.

A healthy CES also has a positive effect on NPS. Studies by Gartner show that NPS is 65 points higher for top-performing low-effort companies than for high-effort companies.

Getting back to ROI, Gartner found that, “Low-effort experiences reduce costs by decreasing up to 40% of repeat calls, 50% of escalations, and 54% of channel switching. Overall, a low-effort interaction costs 37% less than a high-effort interaction.”

Lowering your customer service costs while boosting customer loyalty is a win-win in anyone’s book.

Customer Service in Dollars and Cents

Thanks to social media, consumers have more ways to air their grievances in public than ever before. This amplification of customer’s voices comes at a time when their expectations of brands are skyrocketing. According to a study by Microsoft, 54% of consumers worldwide say they have higher customer service expectations than just one year before. That figure increases to 66% for consumers aged 18-34 years old.

Not only does the explosion of social media as a customer service channel give the public additional options for making their complaints heard loud and clear, but it also offers researchers new insights into the importance and value of delivering great customer service.

Driven by the lack of quantitative research on the ROI of customer service, Wayne Huang, Research Manager at Twitter, and his colleagues, devised a groundbreaking study for the Harvard Business Review.

The study analysed over 400,000 customer service interactions on Twitter. These interactions consisted of public tweets by customers to the top five major airlines and top four wireless carriers in the US from March 2015 to April 2016.

Huang and his team studied tweets of all kinds, including questions, comments, and complaints. Then they studied the ensuing conversation that took place (if any) between the brands and their customers. Each conversation was codified based on characteristics such as whether the tone was angry or upbeat or if the interaction was complimentary or disparaging.

Subsequently, Huang reached out to these customers on Twitter and asked them to take a brief survey to determine whether their experiences with customer service influenced how they valued the brands. The survey was conducted up to six months after their initial tweets.

The goal of the survey was to determine: “[If] a brand provides better customer service, will customers reward that brand with greater loyalty or pay a price premium?”

This is what they found:

No Such Thing as a Wrong Answer

One of the key takeaways of Huang’s study is that it pays to engage even your angriest customers. Customer service reps may be limited in their ability to solve an irate customer’s issue, but responding with empathy—rather than ignoring the complaint—also pays dividends.

Wireless customers who received any response to a negative tweet were willing to pay $6 more per month—even when their issue wasn’t resolved. Those who received a response and had their issue resolved were prepared to spend $8 more per month than customers that received no reply.

It’s also crucial not to ignore your company’s biggest fans. The most substantial increases in willingness to pay came from those who had tweeted positively about the brand and received a response. These customers were willing to pay $28 more for a future airline ticket and an additional $12 a month for wireless plans from the brand who responded to their compliments.

Always take the opportunity to thank your cheerleaders as well as respond to complaints.

Build for Speed

When it comes to customer service, timing is everything. One might argue that this is more crucial on a medium like social media where people are accustomed to instant gratification, but Huang makes the case that his findings apply to all customer service channels.

Having said that, the degree to which timeliness affected customer loyalty and willingness to pay may surprise you.

As you can see from the graphic below, customers that received a response on Twitter in five minutes or less were willing to pay almost $20 more for an airline ticket in future. When the company responded after an hour or more, that figure dropped to $2.33—a decline of 88%!

The ROI of Great Customer Service(Source: Harvard Business Review)

In the real world, budgetary and other constraints (think time-zones) may prevent you from responding to customer queries in a timely fashion—let alone in five minutes or less.

The key, according to Huang, is to exceed customer expectations, regardless of the channel.

Research shows that: “The average customer expects companies to help them within 5 minutes by phone, within 1 hour by social media, and between 1-24 hours for email.”

One mistake you could easily make is waiting until you have a solution to a customer’s problem before contacting them. Huang’s study shows that even if you can’t resolve an issue right away, quickly letting a customer know that the matter is being investigated had the same impact on their willingness to pay as shown in the graphic above.

If the timeliness of your customer service responses can be improved—regardless of channel—Huang’s study offers compelling evidence that this can be a profitable investment.

Make It Personal

Personalisation has been a buzzword for digital marketers for years now, but Huang’s study shows that when it comes to customer service, making it personal can really pay off.

When customers received a signed or initialled response—as opposed to an unsigned one— they were willing to pay $14 more for an airline ticket and $3 more for a monthly wireless plan.

Any number of surveys corroborate the importance of personalisation, such as this one from Salesforce. It found that “84% of customers say being treated like a person, not a number, is very important to winning their business.”

It may seem like a tiny gesture to personalise your customer service responses, but people genuinely like to know that they’re dealing with a real person who empathises with their issue. Huang’s study shows that they’re also willing to pay a higher price for that kind of attention.

Final Thoughts

As more and more customer service data becomes publicly available—through social media and other channels—researchers will undoubtedly come up with new and innovative ways of measuring the ROI of great customer service. We’ll be sure to update this post with any exciting new developments.

In the meantime, I hope this exploration of existing methodologies—along with the latest cutting-edge research—has given you some insight and inspiration into how to measure and improve your customer service performance.

After all, keeping your hard-won customers happy can really pay off. Frederick Reichfeld—the inventor of the Net Promoter Score—found that increasing customer retention rates by just 5% increased profits by 25% to 95%.

Do you have any innovative methods of measuring customer service ROI for your business?

Come across any exciting research or stats that we may have missed?

Let us know all about it in the comments!

The ROI of Great Customer ServiceSEAN SHUTER
SEOButler’s Editor-In-Chief, Sean has been writing about business and culture for a variety of publications, including Entrepreneur and Vogue, for over 20 years. A serial entrepreneur, he has founded and operated businesses on four continents.

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