EDITOR’S NOTE: Because extended enterprise learning involves multiple disciplines, we sometimes ask other experts to share their insights with our readers. Today we feature engagement metrics advice from Laura Patterson, President of VisionEdge Marketing. Laura is widely recognized as an authority in marketing measurement and performance, content management, marketing operations and data analytics.
Why Do Engagement Metrics Matter?
In 2008, independent think tank Institute for the Future published a groundbreaking analysis, “Engagement Economy: The Future of Massively Scaled Collaboration and Participation.” This concept quickly gained traction and is now considered a cornerstone of customer-centered marketing and digital transformation.
The Engagement Economy rests on the fact that people and things are now continuously connected. This means marketers must focus on understanding how people interact with their brand, their products and their organization, across all touch points.
Of course, this also requires a different approach to measurement. We need to focus less on lead generation and more on valuable interactions that strengthen relationships. In other words, according to Gallup research, engagement metrics matter.
The Engagement Economy demands a different mindset – one that is intensely focused on creating customer value. For example, successful organizations are committed to:
- Flipping the value chain, so customer needs, wants and priorities drive organizational investments in products, services, content and communication channels.
- Optimizing customer experiences with processes, systems and tools that make it possible to engage customers on their terms and reinforce those relationships over time.
- Developing a customer strategy based on purchase readiness and long-term loyalty.
3 Powerful Engagement Metrics
To thrive in the Engagement Economy, organizations must be prepared to demonstrate how their efforts resonate with customers and tie back to the bottom line.
As marketing strategists, we’re often asked, “What is the best way to measure engagement?” Truthfully, there is no magic one-size-fits-all metric.
However, we do recommend that customer-focused professionals consider three broader engagement metrics. Each of these has financial implications that can serve as a useful barometer for a program’s performance and strategic contribution:
1) Share of Wallet
Business growth comes in two fundamental ways: When you acquire new customers and when you expand your overall footprint among those you already serve. Expansion takes several forms. For example, customers may:
- Buy more of a product they previously purchased from you, thereby increasing their volume of usage;
- Buy more of a product to use in a completely new way;
- Buy new products they haven’t previously purchased;
- Any combination of the above.
Each of these scenarios contributes to an increase in what is referred to as “share of wallet.” The total amount a customer spends in any given product category is considered the “wallet.” Share of wallet, then, is a ratio that compares how much a customer spends with your organization vs. the customer’s overall spending in that category.
For example, assuming a customer spends $100,000 a year on software, but only $10,000 a year on software from you, your company’s share of wallet = 10%.
This metric helps organizations understand where added value may exist within their customer portfolio. In other words, you can identify your most loyal and profitable customers, as well as those with greatest growth potential.
Note that when evaluating this metric, both the ratio and actual values are important. The first reflects existing share of wallet, while the second indicates potential value.
2) Customer Stickiness
Most research supports the claim that acquiring new customers is more expensive than retaining current customers.
For instance, some studies suggest that a 2% increase in customer retention has the same effect on profits as cutting costs by 10%, and a 5% improvement in retention can increase profits 25-125%, depending on the industry.
There is also solid data suggesting that companies with high customer retention grow faster. Therefore, it’s important to know just how “sticky” your customers are. You can determine stickiness with engagement metrics that evaluate both customer churn and customer retention rates.
1) CUSTOMER CHURN
A simple churn calculation looks like this:
Churn Rate = Customers lost during a specific timeframe/total customers during that same timeframe
While it is important to understand the rate at which you’re losing customers, you’ll also want to calculate associated lost revenues.
2) CUSTOMER RETENTION
Calculating your customer retention rate is slightly different.
First, identify the total number of customers at the end of a given timeframe. Then subtract any new customers acquired during that period. Divide this number by the total number of customers at the start. And finally, multiply by 100. Specifically:
Retention Rate = [(Number of customers at the end of a time period) – (Number of customers acquired during the time period)/(Total number of customers at the start of the time period)] *100
The key to understanding stickiness is knowing how many customers are defecting, and why – as well as how many are staying, and why. Customers may leave for different reasons than those who stay. However, their respective rationales don’t have to be exact opposites.
For example, many customers might stay because switching is extremely difficult. While others may choose to leave because technical support is poor. It is important to consider both sides of the equation.
3) Customer Lifetime Value
Without customers, you don’t have a business. Therefore, it’s important to recognize that customers are your organization’s most valuable asset. The longer a customer remains loyal, the more value that customer creates, both in terms of real revenue and hopefully referral business.
Customer Lifetime Value (CLV) is a measure that represents the financial value of a customer over the entire life cycle of that relationship. Determining which customer types/profiles yield the highest CLV helps organizations prioritize customer experience investments.
There are various ways to calculate CLV. But essentially, CLV is built on this core equation:
CLV = (Frequency of Purchase) X (Duration of Loyalty) X (Gross Profit)
It’s worth noting that best-in-class organizations are significantly better at influencing this metric than their competitors.
Shifting From Lead Generation to Customer Engagement and Retention
If your organization hasn’t yet embraced an Engagement Economy philosophy, brace yourself. Moving from a traditional lead-generation mindset to customer-centered behaviors and engagement metrics can be an uphill battle.
When companies have invested many years of experience working in a particular way, it’s hard to shift in another direction. That’s why it helps to approach this process as a full-scale cultural change initiative.
Although it takes much more than engagement metrics to become a customer-centered company, you can begin building a case for change. Start by gathering available data and establishing benchmarks for the metrics outlined above.
EDITOR’S NOTE: This post has been adapted, with permission, from a post published on V3 Broadsuite.