Several years ago I had the opportunity to visit the Great Wall outside of Beijing. I was with a large group and we all climbed the first segment of the wall up to a lookout point, about 400 meters up. The steps were very narrow and steep, so most people, including me, turned around after that segment. There were a few ambitious people in the group who decided to keep going and trekked an impressive distance. Apparently, there was a lookout point further up that was breathtaking.
The group I descended with decided we needed something to commemorate the visit. My friend Troy came across a plastic medal in one of the souvenir stands. He wore it proudly and posed for a picture as we laughed about how superficial the award was. He said he was going to take it home proudly and tell everyone about the great feat he accomplished in China, leaving out the small detail about only climbing 400 meters.
Troy didn’t really care about reaching the summit, but if he had, the medal would have been exactly what it was: a plastic, meaningless metric used to approximate success while not actually representing success.
I thought about this story when recently speaking with a client about Customer Experience Analysis. The client was trying to define key performance indicators (KPIs) for the program, but hadn’t quite defined their end goal. I’ve seen plenty of Customer Experience programs suffer from the same fate; there wasn’t a clear idea of the purpose of the program, which made success ambiguous. To quote Stephen Covey, “Management is doing things right; leadership is doing the right things.” You may receive the medal, but fail to actually drive success for your organization with the program because you’re not focused on the “right things.”
The Purpose of Customer Experience Analysis is Revenue
Customer Experience Analysis should deliver a very clear outcome: more revenue. This happens when you help customers realize specific benefits from your solution.
I’d like to suggest the goal of a Customer Experience program is not to improve metrics like NPS, CSAT, and Customer Retention. Certainly you need to improve those as a means to the end, but those are predictive indicators of how likely you are to reach your end goal of increased revenue.
Having this bigger picture – driving toward more revenue – shapes a Customer Experience program in a very unique way. It focuses your company on understanding how your current experience is helping or hurting the top line. It resonates with executive management and gives urgency to the need to act. And it truly drives an experience that benefits customers because you are able to drive change that impacts how they are actually feeling, which they are expressing through their wallets.
A successful Customer Experience program delivers gains in four core pillars: Customer Retention, Revenue Realized, Revenue Retention, and Revenue Growth.
This outcome from Customer Experience answers the question, Will we survive a contract renewal with this customer? (Even if you don’t operate with contracts or “renewals,” you still want to understand if the customer will do business with you in the future.) In addition to a simple Yes or No, your analysis should tell you why or why not.
Calculating this for a single customer is dead easy. Are they still your customer? If yes, your retention rate is 100%. If no, it’s 0%.
To determine it for a larger group of customers or accounts, the calculation is still relatively simple:
(Number of customers at the end of the year – Number of new customers acquired) / Number of customers at the beginning of the year
For example, if you start the year with 60 accounts, acquire 35 more accounts during the year, and end the year with 75 accounts, your retention rate is: (75 – 35) / 60 = 67% customer retention
Why does Customer Retention matter?
This is a fairly obvious answer: because customers give you money. It costs more to acquire a new customer than retain a customer and loyal customers spend more.
But here are a few surprising stats we just determined at Primary Intelligence. When we asked more than 10,000 B2B buyers how likely they would be to recommend each of the vendors they considered, 70% of the time they were more willing to recommend the winning vendor. That’s not a very surprising finding – it’s pretty intuitive that people would be more willing to recommend the product they just purchased over the products they didn’t.
What is surprising is when we asked those buyers how likely they would be to consider each vendor for future business. The winning vendors were only more likely to be considered 45% of the time. Winners and losers were both equally likely to be considered 46% of the time. (You can see more findings from this study here.)
What does this mean? In a nutshell: your product might have won the day, but the customer may walk tomorrow. You need to make the experience of being your customer rewarding or risk competition.
Revenue Realized answers the question, Are customers spending less than anticipated? For example, if Sales books a $1M contract, but you only bill/collect on $900k, that extra $100k is planned revenue you did not realize, or yield.
The cause could be the implementation, which is a fixed fee, took longer than expected so the account didn’t hit the anticipated monthly billing until, say, three months after initial projections. Or perhaps customers over anticipated their actual usage needs, so hourly billings are well under what the sales rep booked.
This calculation, again, is fairly simple.
Actual Revenue Realized in a time period / Sales Booking for the same time period
For example, if Sales booked $5M in revenue to be delivered in Quarter 1 of this year and at the end of the quarter you had only delivered $4M, the calculation is: $4M / $5M = 80% revenue realized
Why does Revenue Realized matter?
Low Revenue Realized is the silent killer of your revenue goals. For example, if Sales books a $1M deal over three months but it takes Operations six months to deliver, you still earned $1M from the customer, but your yield is only 50% because this calculation is based on time. The notion is you could have earned another $1M during that second three-month period, but were unable because you were still delivering on the first contract. If you’re a services organization, your margin is also likely hurt by the increased expenses of taking twice as long to deliver.
In fact, the real reason Revenue Realized is a killer is because it throws off other internal planning and metrics. What if you were only ever able to bill $500k in the scenario above? Now you’ve paid sales commission and allocated resources based on a much larger amount AND you have to book another deal to reach your revenue goals. Ouch.
Revenue Realized is, in my experience, often not tracked as closely as it should be because it happens in the transition from Sales (who books the revenue) and Delivery/Operations (who realizes the revenue by performing the services). There is a slip in communication, or the original booking was not realistic, or the risk was never fully accounted for.
Revenue Retention answers the question, Are customers spending the same this year as last? Because it is tied to revenue, it is a more sophisticated version of the Customer Retention number. This is the number most investors and analysts will ask about because it reflects the actual value you were able to gain from customers in the form of revenue.
This calculation should be done on both an individual customer basis and across a group of customers. For example, you might look at the Revenue Retention of your top 100 accounts or accounts acquired in a given sales period.
(Spend from a group of customers this year) / (Spend from those same customers last year)
For example, if 15 customers collectively spent $40M in 2015 and those same customers collectively spent $38M in 2016, the calculation is: $38M / $40M = 95% revenue retention
Why does Revenue Retention matter?
If your account is slowly (or quickly) reducing how much they spend with your company each year (or any given time frame), you’ll need to replace that revenue with another customer or growth in another account, both of which are expensive activities.
Low numbers in this area point to potential larger issues with your product or customer experience. Companies will always spend money on products and services that deliver value. So, even if the customer assures you the experience has been great, if they are spending less, they are telling you about the true value of the experience with their wallets.
Revenue Expansion answers the question, Are we identifying upsell opportunities with clients? It is a simple measurement of growth which, it probably goes without saying, all companies need to do to survive. Additionally, to bring an account in the door, companies often bring them in through low-barrier entry products. Those products often do not have high margins or sustainability. This number often represents your ability not only to drive up revenue, but also to drive up profitability in the account.
You’ll want to track this for individual accounts as well as groups of accounts. A simple calculation for an individual account is:
(Spend in current year from a customer – Spend in previous year from a customer) / Spend in previous year from a customer
For example, if a customer spends $1M in 2015 and $1.5M in 2016, the calculation is: ($1.5M – $1M) / $1M = 50% revenue expansion
Why does Revenue Expansion matter?
When you track Revenue Expansion, you’re tracking the effectiveness of business development efforts, but additionally tracking how well your solution portfolio matches the needs of customers. If customers saw value in the first solution but are unwilling to expand into your other products, there may be a misalignment with customer needs.
Increasing this number will also increase the stickiness of your customers. The more products and services they use, the more likely you are to become embedded into their organization.