ROI of CX: How can NPS affect revenue?

Not long ago I shared a blog post entitled Calculate ROI of CX: a simple example where I used Customer Satisfaction (CSAT) as a Customer Experience metric and customer’s Average Spend as a business metric. Recently I was asked about the impact of another popular CX metric, Net Promoter Score (NPS), in the bottom line.

Most of you know that NPS measures the customer’s loyalty to the brand. It measures the customer’s “long-term” happiness, and tries to predict what customers will do in the future. And you also know that NPS is calculated by subtracting the % of Detractors, from the % of Promoters.

Measuring NPS, comparing your NPS to the competition’s, and bragging about a high NPS score might be fun. But in the end, it could be useless if you cannot show your senior leadership or C-suite how it impacts the companies bottom line.

Truth is loyalty means much more. Sure, you want customers to buy your product. But more than that, you want them to buy into your company – your values, your mission, and your care for each and every client – and when they do that, you will see a reflection in your NPS, and you will be well on your way to increased revenue and sustainable growth.

So, how do you prove your board that having a higher NPS impacts revenue and growth positively? You can start by stating that higher NPS scores usually result in 4 very tangible things:

  1. Higher Retention Rates
  2. Increased up-sell and cross-sell
  3. Lower cost to serve
  4. Lower marketing costs (due to word-of-mouth)

But let’s get to the fun part, of calculating the impact of NPS in the company’s revenue. So you can have some data and facts to backup your blurb. For this example I created a scenario of a company with 1 million customers, and used average spend as a business metric.

Let’s say that Promoters represent 54% of customers and spend $500 per year; And Detractors represent 14% of customers and spend $100 per year… NPS would be 40 and the revenue $348m

Now let’s say we were to convert 10,000 Detractors into Promoters… NPS would be 42 and the revenue $352m

Now let’s convert another 10,000 Detractors into Promoters… NPS would be 44 and the revenue $356m.

The correlation between NPS and revenue is obvious. And would allow us to conclude that by converting 3,75% of Detractors into Promoters, would move the NPS needle by 1 point, which would in turn increase the revenue by $2m in a year.

Note: An interesting study from Satmetrix shows that, among the various CX metrics, NPS has the highest correlation to profit and growth. You can also see from the chart below that CSAT seems to have the lowest correlation.

Calculate ROI of CX: a simple example

It is true (and recent research shows) that Customer Experience has finally gathered the attention of the executive boards, convincing the C-level that it’s crucial to invest in order to ensure customer-driven growth.

However, CX practitioners are wrong if they think that CEOs will back their initiatives, and CFOs will release resources, because studies say happier customers spend more. They need to know how much they can expect from the investment.

Return on Investment (ROI) of CX programs and initiatives is still something that makes some CX practitioners scratch their heads. But the truth is that calculating the ROI of CX isn’t much different from calculating it for any other investment.

I will share with you, one example that I have learnt, and should be straightforward to apply and use. You will need:

  • Experience Data (X-data) – which you are already gathering from surveys.
  • Operational Data (O-data) – which you have in your CRM or ERP systems.

Let’s use CSAT as a metric of reference (you could use any other, like NPS, CES)

  • From X-data, find Top 20% customers. Get Customer IDs and CSAT score
  • From X-data find Bottom 20% customers. Get Customer IDs and CSAT score
  • From O-data find the Yearly Spend for all those customers. Use Customer IDs

With that data, calculate the average CSAT and and the average yearly spend for the Top and Bottom 20%. Below is an example of the results you could get:

  • Top 20% customers – average CSAT 80 points – average spend $250/year
  • Bottom 20% customers – average CSAT 40 points – average spend $20/year

Next steps are:

  • Calculate CSAT difference in both groups (example above 40 points)
  • Calculate average spend difference in both groups (example above $135/year)
  • Divide one for the other to get result (example above $135 / 40 = $3.375)

Now you can tell the board of executives that: “for each additional CSAT point, we expect to drive an increased value of $3.375 per customer