I’ve spent more than two years enabling companies to connect with and learn from their users anywhere in the world. Over more than 15,000 conversations, I’ve learned a bit about empathy – its role in the product development process, its impact on marketing success, and its inseparable connection with innovation.
The challenge with empathy, and especially CX leaders tasked with implementing an empathy program in their companies, is that the tangible results are hard to identify. Business success is always a combination of factors, and carving out the percentage of lift that empathy provided is frankly impossible to do. So what, then, is the ROI of empathy?
To understand the ROI of empathy, we first have to understand its role in the customer experience.
Empathy is CX
I’ve talked about what empathy is, why it’s a critical skill for product managers, and how to institute it in your product team. It’s a big part of my success as a product leader, but it’s not limited to product development.
Outside of product management, empathy is a core component of Customer Experience. CX is having a moment, with both Qualtrics and UserTesting recently rebranding as CX companies. And the market is taking notice, as evidenced by the Qualtrics acquisition and the Medallia IPO.
It’s not just happening amongst tech companies. We’re seeing a shift across the board for companies to become more customer-centric. So much so that the Business Roundtable, a group representing the nation’s most powerful chief executives, recently came out and said their core responsibility is no longer just shareholder value; the needs of customers, employees, suppliers, and communities must be balanced with stock price. In other words, CX, EX, and other “X”s matter more than ever.
The Revenue Impact of CX
CEOs wouldn’t be committing to CX if it didn’t result in a positive outcome for them. Good CX translates to real revenue. And by “good CX,” I’m not talking about personalizing emails with the user’s first name. Yet that’s largely the state of CX today. According to Qualtrics, only 8% of consumers are more likely to engage with a brand that uses their first name, whereas 78% of marketers report that using customers’ first names is the only type of personalization they use.
Customers are demanding more, and the payoff is huge. Forrester’s research shows “The ROI on even small increases in CX Index score continues to be significant. For a big-box retailer, a 1-point improvement can lead to an extra $244 million in incremental revenue, while a decrease in CX Index score can slash revenue and profit just as dramatically.”
It was through a targeted CX program of listening to customers that Greyhound Lines discovered a dead simple change that increased their NPS by 12 points in a week. In their Dallas terminal, the janitorial staff was all female during the busiest hours of the day, meaning the mens restroom was never cleaned because it was never empty. Through talking to customers, managers uncovered the need, met the need, and instantly increased satisfaction.
That change in NPS translates to huge revenue impact. On average, an industry’s Net Promoter leader outgrows its competitors by a factor greater than two times.
The Secret to Preventing Churn
To calculate the ROI of empathy, look no further than the cost to replace a lost customer. A fundamental goal of CX is to prevent customer churn. In a world where data portability is now deemed a right of digital citizens, not a luxury, switching costs are lower than ever for consumers and, correspondingly, the threat of churn is at an all-time high.
Companies must put in the work to retain customers, and when they do, the payoff is big. HBS found that in apparel e-tailing, repeat customers spend more than twice as much in months 24-30 of their relationships than they do in the first six months. Bain & Company shows that increasing customer retention rates by 5% increases profits by 25% to 90%.
Ryanair demonstrated this when they led with empathy in their Always Getting Better program in 2014. By addressing customer pain points throughout the travel experience, Ryanair increased profits from 867 million euro to 1.24 billion euro in 2016 and landed themselves on a Most Empathetic Companies list for their efforts.
Though switching costs are low for users, the cost to replace them is staggering. HBR says that acquiring a new customer is five to 25 times more expensive than retaining an existing one, depending on your industry.
The Spark of Innovation
In addition to increasing the value of existing customers by preventing churn and enabling growth through high NPS, empathy is a foundational element of innovation. How so? Microsoft CEO Satya Nadella says empathy is a critical quality in a CEO. “It is a wellspring for innovation,” he says, “since innovation comes from one’s ability to grasp customers’ unmet, unarticulated needs.”
Gene Farrell, CPO of Smartsheet, knows this better than anyone. When he was at Coca-Cola, sales of soft drinks in restaurants was a failing business line. To turn this around, he started with empathy. “To be successful in product innovation, start with the customer and work backward,” Farrell teaches. “Only by truly understanding your customers can you deliver products that they will love.”
What unmet need did he uncover? A desire to customize one’s drink, which led to the wildly successful Coca-Cola Freestyle machine. The results were striking: Installing a Freestyle machine led to increased beverage sales for restaurants by 17- 20 percent, and increased Coca-Cola sales volume by 30-40 percent in those locations. What’s more, about 25 percent of consumers who knew about Freestyle said they chose which restaurant they went to based on whether it had a Freestyle machine.
The ROI of Empathy
When you zoom out to look at the role of empathy in business, it’s hard not to see the tangible results it brings. Empathy leads companies to keep the customer at the center of their decisions, which leads to a better customer experience. That improvement in the customer experience reduces churn, which can increase profits 25-90%. It also frees up marketing and sales teams to focus on retaining customers, which is 5-25 times less expensive than replacing those same customers.
Empathy is also a core component of innovation, which almost 85% of corporate strategy execs call “very important.” 35% of high performing companies are “first movers,” and disruption is regularly taking down behemoth companies (ahem Thomas Cook).
The next time someone asks you why they should spend time on empathy, ask how long they’d like to stay in business.
This article originally appeared on LinkedIn and was featured in Modus.