Provocateur:

So, you’ve launched a customer experience (CX) initiative, or a customer-centric transformation, or maybe you’ve implemented Net Promoter Score (NPS) and you’re now measuring it at every juncture. You’ve hired some very capable staff, you’ve invested in a system upgrade, and acquired some data assets, but you’re just not getting the results you wanted.

The CFO, or the CEO, or maybe the board, will be asking you soon about how you plan to justify all that expense and effort. Worse, your rank-and-file employees will soon begin dismissing the project among themselves, sotto voce, calling it the “initiative du jour,” whispering to each other that after another quarter or two the whole thing will go away, and then things will go back to normal.

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In my own experience, a clear majority of initiatives designed to improve the customer experience don’t live up to their objectives. Some fail to generate rank-and-file support among customer-facing employees (an indispensable ingredient), while others are pared back because the data or systems required are never really made available.  

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But even when everything goes relatively smoothly, most customer experience improvement efforts remain vulnerable to a host of problems that stem from a failure to properly align a company’s accountabilities, incentives, and success metrics with the goal of CX improvement.

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Grassroots misalignment

There will always be inherent conflicts among different incentives designed to encourage workers to perform individual tasks—whether these tasks involve treating customers better, limiting expenses, bringing in extra sales, or managing others. Incentives offered to different employees or groups of employees will inevitably conflict with each other, because no matter how detailed and meticulous your system is, it’s mathematically impossible to represent reality with it. This means there will always be loopholes, unresolved conflicts, and gaps.

At the grassroots level, even the most well-intended metrics and incentives are often undermined by people simply pursuing their own economic interests in as direct a fashion as possible. For instance,

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• I once bought a car at a dealership that was trying to improve its customer service. I signed paperwork at the salesman’s desk for half an hour or so, and when we were nearly finished, he said there was one last paper, if I wouldn’t mind. He said the dealership was tracking the quality of service delivered, and if he did well he might even get a free trip. Then he put a one-page survey in front of me and asked if I was (wink wink) VERY satisfied with the service he had rendered, because if I wasn’t VERY satisfied, then he wanted to know what else he could do right now to ensure that I really was VERY satisfied.

• A colleague of mine works as a commissioned sales rep in the call center for a midsize retailer. He told me, confidentially, that half or more of the calls coming into the call center originate with customers who find the company’s website dysfunctional in one way or another. But he and the other reps have a solemn pact never to relay this feedback to the company, because if management ever finds out how bad their website really is then they might fix it, and if they did then the reps wouldn’t make as many commissions.

You can rid yourself of some of these “gaming the system” problems by adding more caveats and conditions, specifying more exacting circumstances, and more if-then conditions. However, individual incentives are like a game of Whack-a-Mole, and every new rule or restriction you build in will inevitably generate its own new opportunities.

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The best defense to grassroots misalignment isn’t a new set of rules and restrictions, but a change in the underlying corporate culture. You want a larger proportion of employees to be motivated by an intrinsically felt sense of purpose that is aligned with the company’s mission, rather than by extrinsic financial incentives, per se. When rank-and-file customer-facing workers want to improve CX, then you don’t have to require them to do so; just let them.

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Financial misalignment

Far more dangerous to your CX initiative than individuals gaming the system at the grassroots level—and more difficult to deal with—is the misalignment that results from not being able to ascertain the financial value of a better customer experience.

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The current costs of providing good service and all the other elements of a better CX can be tracked precisely, but the actual cash value of an improved CX will only show up later, when happier, more satisfied customers choose to deepen their relationships with you, or recommend friends to your brand, or remain loyal longer, or cost less to serve. And while you may know in your gut that improving the customer experience your company delivers will be financially beneficial in the future, how can you possibly estimate the value of that benefit today, to compare it to the costs incurred?  

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The only rock-solid way to achieve this is to use customer analytics to develop a useful customer lifetime value (LTV) model. You need to estimate the likely LTVs for various segments of customers, and then track how these LTVs go up and down with different activities or services. In essence, you want to know what the leading indicators of LTV change are. What things occur today that can reasonably be expected, based on history, to increase or decrease a customer’s lifetime value?

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Finding these leading indicators sounds harder than it is. I don’t want to minimize the complexity, but with today’s analytical tools customer LTV can be modeled and reasonably approximated in nearly any business category. The trick, however, is to use your own record of individual customer behaviors, along with attitudinal and other customer data (demographics, third-party data, etc.), to identify any past indicators that might be correlated with later LTV changes. Maybe the data show, for instance, that:

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• A 10% increase in surveyed customer satisfaction will likely result in a 3% increase in purchase volume among repeat buyers; or

• When high-value customers have a service problem, their likelihood of attrition within the next six months increases by 25%; or

• When millennial customers identify your brand positively in social media for the first time, their likelihood of referring others directly to it doubles.

In the above examples, a change in one customer attitude or behavior appears likely to result in an identifiable (and quantifiable) change in some future customer behavior. More important, the predicted behavior changes—purchase volume, loyalty, referrals of other customers—all represent variables that go into calculating LTV for the customers involved.

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Correlations like this will allow you to quantify the likely future value of these predicted customer behaviors, and to compare this future value with the current cost of running your CX initiative, on a customer-by-customer basis. Even when the numbers aren’t exact (and statistical inferences never will be), all you really need are enough indicators to have a decent approximation of the financial value of your various CX improvement policies.

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Fischer Black, one of the authors of the famous Black-Scholes equation for valuing stock options, once wrote that he would consider a market to be “efficient” if a firm’s stock price was always between 50% and 200% of its true economic value, based on its future cash flow. And the Black-Scholes equation has stood options traders in good stead for many years. This implied margin of error for a publicly traded stock price might not be a bad guide for evaluating how we estimate LTVs, either.

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The truth is, there are way too many things going on in the future for us to be able to predict with any confidence the actual behavior of any single customer. The pure randomness of any customer’s future behavior, as seen from the perspective of today, means that the only way a business can actually “calculate” customer LTVs is by applying statistical techniques to populations of customers and inferring their likely future behaviors from their known historical patterns and other indications. The analysis can be very sophisticated, but, as with stock markets, if your estimate of an individual LTV is within 50% and 200% of reality, you should probably count it as accurate enough, because what you’re really looking for are the kinds of LTV changes that can be expected from current actions.

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It’s important then to build enough of these approximations into the company’s financial planning system so that it fully takes account of the influence that the customers you serve have on your financial results—given that, collectively, your customers probably represent your single most valuable financial asset, as a business.

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At some companies, the CEO or board may try to take the issue of financial misalignment off the table by layering some type “non-financial objective” on top of all the other, financially measured objectives. For instance, it’s not unusual for a company to link financial incentives to improvements in customer survey results, including customer satisfaction or NPS. But while this certainly demonstrates management’s willingness to commit to the CX initiative, in my experience it is best viewed as a short-term fix. Because as soon as the company begins missing its numbers or suffering any sort of financial problems, the financial people will bring out the sharp pencils and slice away at any costs that cannot be quantitatively justified.  

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The point is, if you want your customer initiative to avoid the failure that almost surely awaits it, and to succeed in bad times as well as good, then you must be prepared to quantify its benefits, and not just its costs.

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So start now.

About the Author

Recognized for 25 years as one of the world’s leading authorities on customer-focused business strategies, Don Peppers is an acclaimed author and cofounder, along with Martha Rogers, Ph.D., of Peppers & Rogers Group. His latest endeavor is the formation of CX Speakers, a new company delivering workshops, keynote presentations, and thought leadership consulting that is focused on customer experience. ​

Peppers, coauthor of the legacy international best-seller The One to One Future with Martha Rogers, recently released his 11th book, Customer Experience: What, How and Why Now, a collection of essays using real-world examples that discuss customer experience, as well as corporate

culture, strategy, technology, and data analytics. Peppers is a Top 10 Marketing Influencer on LinkedIn and has been cited as number one on Satmetrix’s list of the Top 25 most influential customer experience leaders, one of the “Top 50 Business Brains” by Times of London, and as one of the 50 “most important living business thinkers” in the world by Accenture’s Institute for Strategic Change. Find him at @DonPeppers and on LinkedIn.