Large companies operating in mature markets, including those within the banking and telco industries, are faced with increasing challenges and pressures to differentiate. With customer retention rates linked to experience, what is the financial value for those companies achieving differentiation through superior customer experience; and what are the risks for those who are leaving this stone unturned?
Large industry players, in any mature market have arguably struggled to effectively address and incorporate cost leadership and focus into their strategies. For those wanting to achieve cost leadership, competition and regulation are likely to have already eroded margins. What’s more, the scope to effectively impact their cost base to significantly cut prices is limited. Large companies have also often struggled to focus on niche markets as by their nature they must address the mass market, and both consumer understanding of the product suite and economies of scale for service delivery may be impacted if a service portfolio becomes too granular.
With this in mind, what is the one focal point through which firms operating in competitive mature markets can genuinely differentiate? The answer is through great customer experience. Proprietary research by KAE not only demonstrates that different verticals in the UK receive very different feedback from consumers, but that similar firms within the same vertical differ quite considerably.
Improving customer experience offers more than a good PR and a slightly abstract promise that churn will fall. There is, under these circumstances, a demonstrable impact on the financial profile of an average consumer if you are able to reduce the cost of acquisition. This can be calculated using a simple model that, somewhat simplistically, assumes a fixed cost of acquisition for a subscriber. The write down of this cost against margins will fall as the proportion of newer customers within a user base falls – ultimately leading to a larger user base in which the margin per user is higher.
Recent research by KAE has shown that 32% of all retention decisions in the US consumer banking industry (both to stay and to leave) are linked to customer experience. Other factors include channel usage, demographics and of course most importantly, the product. An interpretation of this data would therefore imply that overall churn can be reduced by almost a third if all customer experience issues are addressed.
The model outlined above, and when calculated based on US banking earnings and current churn rates predicts overall earnings growth of up to 6% if an idealised customer experience improvement programme was run over the next 24 months.
While this is a theoretical maximum based on the data from our research, the linking of improved customer experience to realisable and measurable improvements in financial performance should be food for thought for companies struggling to identify their next avenue for growth.
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