October 13, 2021

Why Customer Preferences Matter: The Impact on Business, Customer Loyalty and ROI

Erin McCart | Sr. Manager, Product Management
multiple devices

Actively managing preferences for customer communications started in the early 2000’s with companies promoting electronic delivery (eDelivery) of statements, bills and explanation of benefits to reduce their print and mail spend.  Since then, companies and consumers have been operating in a hybrid analog/digital world. For example, it wasn’t uncommon for companies to print and mail customer communications, fax them when requested, and email them too.

Fast forward 20+ years to the aftermath of a global pandemic that has greatly accelerated the long-running digital transformation process for organizations and consumers.  Out of necessity customers are now digitally savvy, using laptops, tablets and smartphones to communicate, purchase goods, and make payments.  Customers expect more from organizations with whom they do business, especially in the digital realm.  They no longer have patience for poor digital experiences. Customers need to be treated and serviced like they are #1.

In fact, according to Deloitte, customers are 80% more likely to make a purchase from a company that personalizes their experience by knowing their name, product preferences, payment method of choice, and preferred communication channel. In another study by PwC, it was found that 86% of buyers are willing to pay more for a great, holistic customer experience, and the more expensive the item, the more they are willing to pay. The opposite is also true.  According to Gartner, up to 38% of an organizations customers base will leave based on poor or bad personalization efforts.

As more companies have adopted some form of personalization to improve customer loyalty and attract new ones, it has created a new expectation threshold for personalized interaction among consumers. Companies can no longer get away with general advertisements to all potential consumers and successfully engage with some of them. Technology now allows for every interaction to be unique and personal, and consumers expect a personal connection with the companies with which they interact, even if it’s a digital one.

Benefits

The benefits of providing great personalized customer communications and experiences are tremendous and measurable:

  • Improves customer engagement
  • Increases customer retention
  • Reduces customer churn
  • Expands customer loyalty
  • Grows sales revenue
  • Increases profit margins

According to the Forbes article, “Does It Still Cost 5 Times More To Create A New Customer Than Retain An Old One?” personalization by itself can increase overall customer spending up to 500%.  In another recent Forbes article, “The Value of Investing In Loyal Customers”, the probability of selling to an existing customer is up to 14 times higher than the probability of selling to a new customer.  And existing customers are 50% more likely to try new products, and spend 31% more, on average, compared to new customers.  Not only that, if an organization can increase customer retention rates by 5%, it can increase profits by 25% to 95%.

The ROI of Personalization - Example 1

Let’s see what happens when I apply these statistics to calculate the return on investment (ROI) of personalization.

Pulling from the quoted statistics, the following assumptions will be used:

  • 6x more cost to acquire new customers. Therefore, in the examples below, new customer acquisitions and costs will be flat.
  • 31% of existing customers spend more than new customers.
  • 5% increase in customer retention can yield 25% increase in revenue.

I also used six common marketing metric formulas: Return on Investment (ROI), Breakeven Point (BEP), Customer Acquisition Costs (CAC), # of New Customers Acquired, Average Customer Lifetime Period (ACLP) and Live Time Value (LTV) of a customer.  To help me calculate them, I found one site particularly helpful, The Comprehensive Guide to Customer Lifetime Value. The site’s developer is Geoff Fripp, who teaches Marketing Metrics in the Master of Marketing program at the University of Sydney.

In this example, the company, prior to having the ability to personalize customer communications and deliver them to their customer’s preferred channel (Year 0), acquired on average 1,400 new customers per year with a CAC of $257.  Their customer retention rate was 80%, which according to ProfitWell aligns with industry averages.  Their average customer lifetime period was 5 years, but their churn rate was 1,800.  The company was losing more customers per year than they acquired.

The company acquired software to capture customer preferences and deliver personalized customer communications to their customers’ preferred communication channel.  In Year 1 it saw a 5% increase in customer spend and decrease in customer churn and increased their ACLP by 1.7 years.  This resulted in a Year 0 over Year 1 increase of 15%, which was $1,040,800 in total revenue.  By Year 3, the company started to acquire more new customers than losing them without increasing marketing and sales costs.

The cost of the software was $296,000/year.  The company’s ROI for the software purchase in Year 1 was 252% with a payback period a bit over 3 months.

The ROI of Personalization – Example 2

Using the same assumptions as above, let’s look at what personalization can do for a company that has a high cost to acquire new customers (CAC).

In Year 0 the company has 500 customers and $25M in revenue.  Its CAC to acquire a new customer is $7,500, which is 2x higher than its customer LTV.  On average the company acquires 100 new customers per year.  Their customer retention rate is higher at 84%, which increases the average customer lifetime period.  The company retains on average 20 more customers per year than it loses.  So, in this example, it appears that there isn’t a compelling reason to personalize customer communications, increase customer retention and improve customer loyalty.

If the company was to acquire software to personalize customer communications, keeps its customer acquisition costs constant, and experiences a 5% increase in customer retention yielding up to a 25% increase in revenue, then it could see in Year 1 an increase of $5.4M in total revenue.  That is a 18% increase over the previous year.  In Year 2, the company’s customer lifetime value will increase and be higher than its cost to acquire new customers.  In Year 3 it will 2x higher.

Assuming the cost of the software is $329,000/year.  The company’s ROI for the software purchase in Year 1 will be 1,561% with a payback period in 7 months.  Moreover, in Year 3 the company will have increased total revenue from $25M to $42.2M.

It Pays to Personalize Customer Communications

In both examples, the companies learned that personalizing customer communications based on customer preferences can have a dramatic and positive impact on the business, customer loyalty, and their return on investment.  In a customer first, digital world it is imperative that we provide customers an easy and consistent way to customize their communications across all communication channels.  If we do that, then we will increase customer engagement, improve customer loyalty and grow corporate revenue.

Contact us to see the ROI your organization could achieve by personalizing customer communications based on customer preferences.