“We don’t have the budget for that.”

These are seven words that’ll make any businessperson’s heart sink.  You’ve got an idea for an improvement project, training program, or guest speaker – something that you passionately believe will help your organization level up…  only to be told by those holding the purse strings that the cost is too great to proceed.

It’s a dynamic that’s especially familiar to those working in the customer experience arena, given that many CFOs (and other C-suiters) harbor skepticism about the true value of CX differentiation, viewing the benefits as soft and intangible.  As a result, CX investments often get undervalued (or downright rejected) in capital allocation decisions.

While there is a preponderance of data demonstrating the ROI of customer experience, sometimes those statistics can be disregarded as too abstract by the people making funding judgements.

What many organizations fail to appreciate, however, is that even small improvements in customer engagement can yield outsized financial returns.  Companies tend to evaluate CX enhancement projects and educational programs relative to direct, visible costs – without viewing those costs in the context of the resulting (and highly quantifiable) business benefits.

CX-Driven Revenue Growth – The Three R’s

The economic benefits of a great customer experience go well beyond revenue growth (happy customers, for example, don’t complain as much – thereby reducing the cost to serve).  However, to keep this analysis simple, we’ll focus exclusively on the revenue side of the equation, which a great customer experience influences from three perspectives:

• Retention: Happy customers exhibit greater loyalty, so they stick around longer and consequently generate more revenue for your business.

• Reengagement: Happy customers are more receptive to cross-selling — broadening their relationship with your business, driving increased wallet share and even more revenue growth.

• Referral: Happy customers rave about you to others, steering them to your business and creating entirely new revenue streams as a result.

Now, here’s the math behind CX ROI that many organizations miss:  For businesses of any material size, incremental advances in any (or all) of these three levers can drive financial returns in surprisingly significant ways.

Thanks to the compounding effect across both time and the customer base, even improvements of just a few basis points (1 basis point equals one one-hundredth of a percentage point, or 0.01%) can potentially generate millions of dollars in additional revenue and profit.

In that context, spending tens of thousands of dollars on CX educational programs (or even hundreds of thousands on bigger CX improvement projects) looks like a bargain by comparison.

How To Calculate CX ROI

To better illustrate this dynamic, we’ve developed a CX ROI Calculator (embedded at the bottom of this article).  If you key in some basic characteristics about your business (e.g., annual revenue, number of customers), then you can do some simple “what if” scenarios to quantify the financial impact of small basis point (bps) improvements in the 3 R’s.

Consider these two examples to get a sense of the financial gains that ensue from even very modest enhancements in the customer experience:

Case #1:  A typical mid-sized B2B business

Annual revenue:                              $30 million

Active customers:                            200

Avg customer lifetime:                    7 years

Gross margin:                                    55%

If this B2B business improved each of the 3 R’s by a mere 20 bps, then over the course of the average customer lifetime it would boost the company’s sales by $1.3 million and its profits by $693,000.  That’s from just a 0.20% increase in retention, reengagement, and referral!

Ratchet up each of the 3 R’s improvement to 50 bps and the financial gains are even more striking:  Sales would increase by $3.1 million and profits by $1.7 million.

Case #2:  A typical mid-sized B2C business (characterized by a larger base of lower-value customers)

Annual revenue:                               $80 million

Active customers:                            50,000

Avg customer lifetime:                    4 years

Gross margin:                                    35%

If this B2C business improved each of the 3 R’s by 20 bps, then over the course of the average customer lifetime it would boost the company’s sales by $1.9 million and its profits by $672,000.  In the 50 bps scenario, those numbers rise to $4.8 million and $1.7 million.

To be clear, all of the above scenarios are rather conservative, as they don’t account for expense savings that ensue from a better customer experience (e.g., higher referral rates translate into lower customer acquisition costs).  In addition, a 20 bps improvement in these measures is miniscule, and a 50 bps improvement is larger but still quite realistic.  Just imagine what the numbers would look like with the more significant advances (100 bps or more) that accompany comprehensive, well-executed CX improvement initiatives.

Actually, you don’t need to imagine – you can see for yourself!  Use the ROI Calculator at the bottom of this article to view various scenarios for your own business.

Building The Business Case For CX Investment

If you’re lobbying for new CX investments – anything from a keynote at an all-employee meeting to a comprehensive consulting project – use the CX ROI Calculator to help make your case:

• If possible, establish a baseline for your organization’s 3 R’s. This is helpful for understanding how much runway exists for improvement (e.g., if your retention rate is already 99.99%, then that’s not going to be a meaningful lever for you).

• Enter basic information about your business into the CX ROI Calculator (annual revenue, size of customer base, average customer lifetime, and gross margin).

• Model a few conservative improvement scenarios across the 3 R’s (between 25-100 bps is a reasonable starting point) and see how much of an impact each has on the financial returns.

• Compare the calculated returns to the size of the CX investment you’re proposing. This can provide invaluable context when you’re trying to persuade others to support your initiative, because the break-even threshold can often be startlingly small.

• Be sure to frame the output from the CX ROI Calculator as a sensitivity analysis, rather than a guarantee. The goal is less about precise quantification of outcomes and more about demonstrating how small improvements in the 3 R’s can yield returns that far eclipse the original investment.

The Biggest Cost You’re Not Considering

Finally, there’s one more point worth stressing when justifying customer experience investments, and that’s the cost of doing nothing.

Forgoing that CX education program, journey mapping exercise, or experience design project might seem like the safe approach when budget constraints loom.  The reality, however, is that your competitors aren’t standing still, and your customers are not becoming more patient.

For this reason, it’s important to recognize that just as small improvements in the 3 R’s can drive outsized financial gains, small declines in them can drive losses of the same magnitude.  When viewed in that context, the seemingly “safe” route of doing nothing starts to look far more risky.

Watermark Consulting CX ROI Calculator

Model the annual and lifetime revenue impact of small improvements in customer retention, reengagement, and referral rates.

Company assumptions

CX improvement scenarios

Annual impact — first-year revenue gain from each lever

Lifetime impact — full relationship value from each lever

How the calculation works

Methodology: Retention: the fraction of customers equal to the basis-point improvement is retained for one additional year. Annual gain = those customers × annual revenue per customer. Lifetime gain = those customers × full LTV (annual revenue per customer × customer lifetime). Reengagement: a proportional increase in revenue reflecting deeper cross-sell and higher wallet share across the existing customer base. Annual gain = improvement fraction × base revenue. Lifetime gain = annual gain × customer lifetime, reflecting the assumption that an improved customer relationship sustains higher engagement for the duration. Referral: the fraction of customers equal to the basis-point improvement each refers one new customer per year. Annual gain = new customers × annual revenue per customer. Lifetime gain = new customers × full LTV. All figures are illustrative; actual results depend on business model, customer concentration, churn dynamics, and other factors.

Jon Picoult is the founder of Watermark Consulting and author of the Wall Street Journal featured book, “From Impressed to Obsessed.”  A former Fortune 100 executive, Princeton-trained in Cognitive Science, Jon helps global brands use the psychology of “memory sculpting” to drive ROI and turn customers into lifelong fans.  Follow Jon on LinkedIn / Instagram, or subscribe to his monthly eNewsletter.