The Economics of CX
Well-considered design changes our lives.
CX: What, why, how.
Customer experience (CX) involves meeting or exceeding a customer’s expectations by means of designing and implementing well-considered processes throughout the customer’s journey. Subsequently, the objective is to increase customer satisfaction, loyalty, and advocacy - all of this translates to increased retention, higher viral growth kickers, and elevated LTV.. In other words, the goal of CX is to ensure that the customer gains the maximum amount of positive feelings during every interaction between customer and company to improve the immediate and long term health of your business.
In our hyper-pluralistic, uber-competitive (pun intended) tech landscape, it is critical to view CX as a powerful differentiator and as a sustainable advantage between an organization and its competitors.
Hypothesis. Well-designed CX increases the LTV of each customer.
Evidence 1. Optimal CX increases the amount that consumers are willing to pay.
Studies show that 86% of customers will pay more for a product if they believe the customer service is better than that of a cheaper competitor.
By means of well-designed CX, organizations can raise prices by changing the price expectations of the consumer. CX puts upward pressure on the price that customers are willing to pay for a product; therefore, allowing organizations to test the price sensitivity of its customer/user base to increase revenues. Economists call this consumer surplus, or the difference between the price that consumers pay and the price that consumers are willing to pay. Fundamentally, increasing the price that consumers are willing to pay allows organizations to raise their prices and increase revenue per user; therefore, increasing LTV.
While there are many ways to increase the revenue per user/customer, CX is one of the lowest hanging fruits to accomplish this task without any major product updates, supply chain shifts, or operational analyses.
Application. Let’s take a step back from tech for a second and evaluate one great example. Equinox has a killer CX (not so much in the digital arena). From meeting with a lead to engaging members a year after signing, Equinox enchants customers with amazing CX. This all goes to show that Equinox is not in the fitness industry - they are a hospitality company. Subsequently, even after they raise their prices regularly and unapologetically, Equinox’s CX increases member’s willingness to pay; thus, allowing them to increase their revenue. If you’re an Equinox member, then you know that they raise your rate by $10-15 each year - this is a pretty preponderate increase when you do the math ($120-$180 revenue per member increase each year or approximately 5-10% depending on the monthly rate).
Reversal. Amazon seeks to change pricing perceptions by decreasing the price that consumers are willing to pay. Amazon’s strategy behind this lies in their willingness to take the hit and decrease their margins if they eat up market share.
Evidence 2. CX makes the demand for a product more inelastic.
Elasticity is the measure of the degree to which changes in price affect purchasing behavior. Elastic markets are characterized by those with many close substitutes (for example, iPhone cases - when the price of one type of iPhone cases increases, you will likely buy another type because there are so many options). Inelastic markets normally do not have close substitutes and often have high barriers to entry. Some of these would include gasoline and organic food. Making the demand for a product more inelastic occurs when the slope of the demand curve becomes steeper (a more negative value) while the supply stays the same. Changing the elasticity of demand lies in creating a distance between close substitutes, therefore allowing your organization to decrease the relative competition of your product and increase prices.
CX is one of the easiest ways to accomplish this, even if your product is inferior to that of a competitor because it puts upward pressure on demand by increasing the value that consumers yield from consuming your product.
Notice how small changes in the slope of the demand have preponderate effects on the price that consumers are willing to pay? Well-designed CX puts upward pressure on the demand curve while simultaneously make it steeper.
Application. Whole Foods/Amazon is brilliant at this strategy. They have separated themselves from their substitutes with their beautiful storefronts, marketing tactics, and well-designed CX, subsequently, they are able to charge $6 for asparagus water.
Digital Analyst Brian Solis says, “Customer experience is becoming a serious competitive advantage. While price is important, convenience, selection, insight, integration are all part of the construct of modern commerce and what customers value.”
They have convinced their purchasers, both actively and passively, that their products are different from those at other grocery stores. In this scenario, increases in price do not significantly decrease purchasing behavior, which allows them to increase revenue and profit.
Evidence 3. CX increases customer retention.
On the ecommerce side of things, optimal CX translates to increased consumer confidence in their decision to shop at a particular organization; therefore, increasing the number of items per transaction and boosting the frequency at which customers shop.
Application. Buffer, the social media planning software, has plenty of ready substitutes that do literally the same exact thing, but their CX retains users. They have a worldwide team that ensures 24/7 support regardless of timezone issues - if you’re like me and plan your content calendars at 1:22 AM, this is a game changer that has made me a customer for life.
Note to Buffer: Because you have suitably differentiated yourself with well-designed CX, I would advise boosting your valuation by increasing prices. Dharmesh and Hiten Shah will thank you.
Evidence 4. CX increases the viral growth kicker (VGK).
Well-designed CX also increases the viral growth kicker for your product. When consumers have positive feelings towards your brand, they are significantly more likely to share their experience on social media and elsewhere. Optimal CX creates these positive feelings, subsequently augmenting your marketing strategy and decreasing your CAC.
Application. Asos has established such a great CX, that their customers are excited to tell their friends about it. Customers know when to expect sales and how to contact support. Plus, their two day shipping (yes, under the blanket of CX) makes them insanely easy to talk about with other people. I’m much more inclined to shop with Asos - and urge my friends to do the same - because of their stress-free, highly approachable CX.
See below how Asos almost immediately responds to unsatisfied customers in their comments section. Their team has created a highly approachable CX that makes it easy for consumers to seek resolution - this keeps them coming back.
Leveraging Service Design and CX in the Acquisition Process.
Well-designed CX should be one of your top selling points
I’m a UA professional and obsessionist, so I couldn’t leave this part out. Emphasizing CX in the user acquisition process is one of the best ways to improve the results of any campaign. In our hyper-pluralistic, uber-competitive (pun intended) tech landscape, it is critical to view CX as a powerful differentiator and as a sustainable advantage between your organization and competitors.
At chickpea, we always A/B test CX as a touchpoint at launch. See below how we would test ads for Buffer (messaging only):
Ad 1: A better way to manage your social media. Buffer makes it simple to schedule posts, analyze performance, and manage all your accounts in one place.
Ad 2: Up at 2 AM planning your social calendar? We get it. Buffer makes it easy for you to get inspo, talk with support, and ensure your social is on the right track 24/7.
See the difference in tone between Ad 1, which highlights pieces of functionality, and Ad 2, which highlights the CX?
Go on, say hello.
Woah, that was a lot of info.
If you have any questions on any of these topics, I would welcome the opportunity to sit down for coffee or hop on a quick call. Or, simply email me.