CX Science: a 1pt increase in customer satisfaction lowers your cost of selling by US$130 million
We can hardly overstate the importance of providing excellent customer experience. A study after study, academic and business alike, including our work at Gemseek, show that CX and CSAT are a powerful driver of financial performance, and a sustainable one at that. Companies that achieve a higher level of customer satisfaction enjoy higher stock-market returns, higher market shares, higher profitability, and more stable cash flows.
Until recently we knew much less of customer satisfaction’s impact on cost-based measures though, especially on Cost of Selling. Logic dictates that companies providing more satisfying customer experience would need to spend less than others to achieve the same results, but we didn’t have numbers to back this proposition up. In a study just published in the Journal of Marketing, Lim, Tuli, and Grewal provide the first empirical investigation on the topic and substantiate the intuition that cost of selling is lower for companies that achieve higher customer satisfaction. The numbers they provide paint a compelling picture – read on.
Cost of selling: the concept
Cost of selling holds a considerable share of most companies’ expenditures, especially for those firms in the less capital-heavy sectors. It’s all about how much money should a company spend to make a customer buy a product and comprises two basic elements: cost of persuasion and cost of convenience.
Cost of persuasion refers to “engaging sales personnel to serve as product/service experts to customers, implementing a marketing plan to enhance brand image, or purchasing banner advertisements to promote a new product/service.”
Cost of convenience “involves activities that make it easier for customers to purchase a firm’s offerings (e.g., Berry, Seiders, and Grewal 2002; Bronnenberg 2015). For example, firms offer delivery services to customers to reduce the time and effort required for them to travel to a store or offer ancillary services such as providing flexible payment terms.”
Customer satisfaction and cost of selling
Lim, Tuli, and Grewal gathered and modeled two decades worth of data, including 1.207 observations from 128 companies.
Their major finding: a 1-point increase in customer satisfaction (as measured by the American Customer Satisfaction Index) leads to 3% lower cost of sales, or a decrease of about US$130 million.
This should come as no surprise – higher satisfaction breeds higher repurchase behavior, lower price sensitivity, a greater willingness to pay, and more word of mouth. All of this makes it easier to acquire new customers, simply because they would need less convincing. In addition, the higher success rate in the sales process should also lower the commissions required to reward sales people. This cost of persuasion component contributes the most to the decrease in cost of selling as customer satisfaction increases.
The other component, cost of convenience also adds to the negative relationship between CSAT and cost of selling, as happier customers are if more willing to tolerate inconvenience to acquire the company product. Still, as the authors put it, “… although satisfied customers tend to be loyal (Gustafsson, Johnson, and Roos 2005), a firm’s ability to encourage actual repurchases may still be limited if it does not offer sufficient convenience.”
For everyone involved in the customer satisfaction domain (which would ideally be everyone in the business world) this is excellent news, for now we know exactly how much our efforts to increase customer satisfaction are worth for cost-saving. The maths companies need to do then boils down to whether the cost of increasing customer satisfaction by 1-point is lower compared to the significant savings. I hope this helps you make a compelling case for investing more in what matters the most – your customers and meeting their needs.
My best wishes for a great day ahead!