Today, you would do well to avoid reading an article about the importance of customer experience in achieving almost all desirable business outcomes: acquiring more customers, retaining existing customers, making them spend more or reducing complaints and associated costs.
That all sounds wonderful, but moving beyond theory to understand how and why different aspects of customer experience influence customer behaviour and ultimately drive commercial outcomes, is difficult.
Over the past 15 years we have helped companies deliver experiences that have quantifiably improved their financial performance: from increased conversion and channel shift to the development of new revenue streams. We know from experience how to do this. However, we wanted to understand in more detail why changes in customer experience have these desirable changes in customer behaviour – looking specifically at different industries, ages and genders. Understanding the ‘why’ in more detail enables us to create better experiences that drive greater commercial outcomes for our clients.
In August 2016 we ran a survey of over 2000 British consumers. We strove to answer questions such as: how important is experience relative to price, and why is this the case? How and why are different age groups responding to new experiences? How and why are industry-specific changes affecting product and service choices of consumers? What are the commercial opportunities for companies who invest in deeply understanding, and designing for, their customers?
In this article we explore the high-level themes arising from our initial research, which has led to our re-assertion that Experience Matters. In forthcoming posts, and with additional research, we delve into more detail on particular aspects of customer experience, customer behaviour, industry specific changes and age-group differences.
Paying more for a better experience
The most obvious way of connecting customer experience with financial impact is by analysing the connection between experience and customer price expectations (later we also look at how experience can impact new customer acquisition).
We wanted to understand in particular how different aspects of experience impact customer propensity to pay higher prices for a product or service. To achieve this we broke down customer experience into buying and sign-up experience, payment and billing options, product and service features, customer services (for solving problems) and ease of completion tasks.
Percentage of customers who would pay more for an experience that exceeds expectations
We found that up to 46% of customers said they would be willing to pay more for an experience that exceeds their expectations in some way.
Furthermore, between 3 and 4% of customers are willing to pay over 20% more if one aspect of the experience exceeded their expectations.
‘Product and service features’, followed by ‘Customer service’ ranked most important in increasing customers’ willingness to pay higher prices. However, each of the categories surveyed were significant and it is clear from these results that if all aspects of a customer experience exceed expectations then the propensity to pay higher prices would be even greater.
These findings are not a huge surprise: back in 2014 HBR reported that in a transactional business (e.g. retail) those customers who rated their experience the highest actually spent on average 140% more than those who rated their experience as poor. Similar results were found when analysing data from a leading subscription business - customers with the highest experience scores stay as subscribers for an average of 5 years longer than customers with the lowest scores.*
There is a clearly a case for investing in experience based on generating increased spend and loyalty from existing customers. However, we believe that the important word in our survey question is ‘exceeds’ (expectations). Just satisfying customers, or meeting their expectations does not open-up opportunities for increasing customer spend or ARPU. Understanding competitor experiences, creating an experience strategy and continually innovating can create opportunities to increase top-line revenues.
Millennials would pay even more
Forbes declared that 2016 was to be the ‘Year of Millennial Customer’**, and for good reason: Millennials (age 18-34) already represent more than 25% of the UK (and US) population and their share of consumer spend is rapidly growing***.
Percentage of customers who would pay more for an experience that exceeds expectations
What makes this particularly important for experience design is that Millennials, more than any other age group, are much more willing to pay for a better experience than other age groups. And this holds true across every aspect of a product and service experience we surveyed.
However, why is it that Millennials are prepared to pay more for great experiences than other age groups? Recent research*** has shown that, in contrast to previous generations, Millennials are more likely to value experiences over the possession of material goods. They also have a greater focus on being healthy, enjoying work and living a balanced life. Our research shows that they are prepared to pay more to reach these goals than older generations
Designing for the Millennial customer is becoming increasingly important. Targeting the Millennial desire to simplify their life, whilst achieving more and staying healthy, will build loyalty, open-up opportunities for tiered and freemium pricing, and also help identify new revenue streams.
Experience drives company, product and service recommendations
Word of mouth, online and social media recommendations are an important driver of customer acquisition in almost all industries. We wanted to find out more about what drives a customer to proactively tell friends, family and colleagues about a company, product or service.
From surveying 2000 consumers we found that ‘Experience’ had a similar level of recommendation influence as ‘Value’ and ‘Trust and reliability’.
When considering that ‘Experience’ in this context can also be seen as a driver of both ‘Value’ and ‘Trust and reliability’ we believe that experience is the most important factor in encouraging product and service recommendations.
Factors influencing a customer decision to recommend a company
Relative importance of customer experience factors in driving recommendations
We also wanted to understand whether certain aspects of a customer’s experience were more important than others in generating recommendations. As with our analysis on willingness to pay earlier, we found that all aspects of customer experience have a significant impact on customer propensity to recommend a company, product or service.
Product and service features and customer service have the highest level of influence, however, as with the pricing analysis above, all categories are significant in generating recommendations.
All aspects of customer experience need to be given equal weighting in the experience design process in order to maximise customer recommendations and crucially, experience should to be considered as whole rather than by looking at individual touchpoints or specific parts of customer journey
A ‘good enough’ experience is no longer enough
In many industries with high barriers to switching service provider (e.g. banks or utilities) a ‘good enough’ customer experience has until recently been enough: as long as a well-known competitor has not offered a similar product at a significantly lower prices, customer churn stays low because:
- The difficulties involved in switching company, product or service mean that customers only make the effort to switch if they have unusually bad experiences, and;
- The competitor experience on offer is unlikely to provide significant variation or benefit
This is represented in the figure below:
So, as long as unusually bad experiences are limited to a small percentage of the overall customer base, and experience differentiation from competitors is poor, the damage to revenues and reputation is limited. This has led to a historical underinvestment in experience, and product and service innovation, in industries with high barriers to switching.
However, from our survey we can see that customers actually equally rate having a bad experience with their current provider company and a better available experience at a competitor (roughly) equally when deciding whether or not to switch companies.
For companies such as retailers, where customer spend is more discretionary and barriers to switching are low, this is not news. For many years we have been helping companies such as John Lewis, Dell and Sainsbury’s monitor the experiences of their competitors and optimise their own experiences. Relatively small adjustments often result in huge changes in conversion and the success of companies such as John Lewis and Asos has been built on strong investment in all aspects of customer experience.
This level of customer experience competition is also now appearing in other sectors. For example, recent EY research**** in the telecoms and media sector showed that whilst 32% of customers believe there is little or no differentiation between traditional service providers, the propensity of customers to switch providers has increased by 4% in the past 3 years
Add to this the impact of new entrants from adjacent markets and the risk of customers switching, or cancelling subscriptions, increases dramatically. EY-Seren’s recent work with a global media client showed that, against traditional competitors, the relative NPS (Net Promoter Score) was ‘good enough’, or roughly ‘on par’.
However, when we analysed verbatim customer feedback for sentiment and compared this against sentiment towards new market entrants (including OTT and on-demand players) we found that the relative NPS of our client plummeted.
Another notable sector facing similar disruption is consumer banking: the recent CMA and PSD2 developments in the UK will make it easier for customers to switch bank account. In addition, new competitors such Monzo and Atom bank are creating new, innovative experiences that are beginning to entice customers away from the more established banks. There is a ‘perfect storm’ of customer experience competition brewing in consumer banking and we have only recently begun to see the more established players investing in creating innovative new experiences.
Companies in all industries, and especially those previously protected from customer churn by high barriers to switching and poor experience differentiation, can win market share and reduce churn by competing with experiences offered by non-traditional competitors, rather than traditional competitors. We believe that finding ways to provide truly differentiatedand innovative experiences will be the defining characteristic of the most successful companies in the next 5 years.
Experience Matters for all of us who work at EY-Seren because great experiences have the power to change people’s lives and make the world a better place. In this research we have also shown that Experience Matters because:
- There is a demonstrable link between great experiences and ability to charge more for products.
- The growing share of the market dominated by Millennials puts a great emphasis on experience.
- Great experiences drive product and service recommendations.
- A ‘good enough’ experience is no longer sufficient to keep existing and attract new customers.
In future articles we will delve in to more detail on the ability of experience design to deliver cost reductions, and we will uncover more behavioural insights that help us design end-to-end experiences that create value for both customers and businesses.
* Analysis was based on data from 2 specific companies, so the sample size was small. Some findings, such as length of time customers would stay a subscriber for, were extrapolated from the available data sets. Based on our experience we believe that similar results can be found with other companies.