What, Why and How to Measure Customer Experience?

Customer experience encompasses a customer's holistic perception of their interaction with a company, shaped by every touchpoint from initial discovery to post-purchase service. It's pivotal in driving loyalty, satisfaction, and advocacy, as positive experiences lead to repeat business and referrals, while negative ones can significantly harm the brand reputation and customer retention.

You know how sometimes you go to a store or a restaurant, and everything is just terrible? Maybe the workers are rude, the service is slow, or the food is gross. That’s a bad customer experience. 

But when everything goes smoothly, the workers are friendly, the service is quick, and the food is delicious. That’s a good customer experience! Companies want you to have a good experience, so you keep returning and maybe even tell your friends about it. Plus, they’ll make more money if you keep buying from them. They’re saying, “Hey, we want to make you happy, so you don’t go somewhere else and give them all your money instead!”

To create a great customer experience (CX), companies must first understand its importance and know how to measure it. This blog post will also discuss the most popular metrics for measuring customer experience.

• What is Customer Experience?
• Why is Measuring Customer Experience Important?
• Some Statistics Related to Customer Experience
• How to Measure Customer Experience | Metrics

What is Customer Experience?

Customer experience, or CX, is the sum of all customer interactions with a company. It comprises every touchpoint a customer has with a company, including marketing and advertising, sales, customer service, and product use.

Let’s say you visit a website to purchase a pair of shoes. The website is difficult to navigate, the product descriptions are vague, and the checkout process is slow and confusing. You’re frustrated and end up abandoning your cart without completing the purchase.

In this case, the company’s customer experience was negative. This can be measured through a low customer satisfaction score or a high customer effort score. Then these metrics would indicate that the company needs to improve its website’s usability, product information, and checkout process. As a result, this will help the company to provide a better customer experience and increase conversions.

Why is Measuring Customer Experience Important?

Measuring customer experience is essential for building the right CX Strategy for your product to meet customer expectations. It can help in the following aspects.

Identifying areas for improvement

Measuring user experience and customer feedback can help businesses identify areas that need improvement.

For example, Apple’s product design, customer service, and ecosystem have been improving yearly. There are major updates in terms of tech and design, and they keep user feedback in check. So, this results in giving a boost to their sales.

Increasing customer loyalty

A company’s success relies on generating customer loyalty and repeating business, both fostered by positive customer experiences.

For example, Apple is not just creating products. In fact, it is forging a lifestyle that breeds a particularly strong brand loyalty among Apple devotees.

20% of owners of both an iPhone and iPad say that “switching ecosystems would be harder than switching banks”. They are also loyal. Nearly 85% of iPhone owners plan to buy another one. 

Differentiating from competitors

A great customer experience can set a company apart and attract new customers.

For example, in the smartwatch category, Apple is the winner by far. The Apple Watch enjoyed a global market share of 52.5% in Q2 of 2021, compared to just 11% for Samsung.

Maximizing revenue

Satisfied customers will likely spend more money and refer others to the company.

For example,  the iPhone is Apple’s most profitable product, year in, year out. Released in 2007, iPhone sales account for around 49% of Apple’s total sales in 2022.

Some Statistics Related to Measuring Customer Experience

• 66% of customers expect companies to understand their needs (Hubspot)
• 72% of customers share their positive experience with at least six people (Zippa)
• Customer-centric companies are 60% more profitable than companies that aren’t (Hubspot)
• Up to 89% of consumers switch to competitors after a poor customer experience (Zippa)
• When purchasing, 64% of consumers consider customer experience more important than price (Zippa)

How to Measure Customer Experience | Metrics

There are numerous CX metrics that companies can use to evaluate customer experience. So we have compiled some of the important ones.

Customer Satisfaction Score (CSAT)

Customer Satisfaction (CSAT) is a metric that measures how satisfied customers are with a specific interaction or experience. To measure CSAT, businesses frequently use a 1 to 10 rating scale. A higher score indicates higher satisfaction. The advantages of CSAT include:

• Provides a clear understanding of customer perceptions and opinions about the product or service.
• Helps identify areas that need improvement and allows companies to take corrective actions.
• Also, helps build brand loyalty by showing customers that their opinions are valued.

At the same time, it has limitations in the scope and interpretation of scores and may suffer from low response rates.

How to Calculate CSAT

• Determine the time period and sample size for the survey.
• Develop a customer satisfaction survey and select a rating scale (e.g. 1-5, 1-10).
• Then collect customer responses and calculate the total number of respondents (N).
• After that, calculate the total number of positive responses (P), which are the number of respondents who gave a rating of 4 or 5 on a 5-point scale or any other predetermined positive rating on the selected scale.
• Then calculate the CSAT score using the formula: CSAT = (P/N) x 100%
• Finally, analyze the results and identify areas for improvement based on the feedback.

Example

• Time period: May 1 – May 31, 2023
• Sample size: 500 customers
• Customer satisfaction survey question: “On a scale of 1-5, how satisfied are you with our product/service?”
• The number of respondents who gave a rating of 1: 20
• Number of respondents who gave a rating of 2: 30
• The number of respondents who gave a rating of 3: 100
• Number of respondents who gave a rating of 4: 200
• Number of respondents who gave a rating of 5: 150
• Total number of responses (N): 500
• Total number of positive responses (P): 200 + 150 = 350
• CSAT score: (350/500) x 100% = 70%
• Analysis of results. The CSAT score of 70% indicates that most customers are satisfied with the product or service.But, the feedback can be used to identify areas for improvement to increase customer satisfaction even further.

Net Promoter Score (NPS)

By requesting customers to rank on a scale of 1 to 10 how probable they are to suggest a company to friends or colleagues, the Net Promoter Score (NPS) gauges customer loyalty. Businesses then categorize customers into Promoters, Passives, and Detractors. Businesses determine the Net Promoter Score (NPS) by finding the difference between the percentage of Detractors and Promoters.

Advantages of NPS include:

• Provides a simple and easy-to-understand metric to measure customer loyalty and satisfaction.
• Enables companies to track changes in customer sentiment over time and evaluate the effectiveness of their efforts to improve customer experience.
• Also, helps prioritize improvement areas based on customer feedback and suggestions.

But, it has limitations in terms of not providing specific feedback and may not be useful for certain industries.

How to Calculate It?

Here’s a summary of how to calculate the Net Promoter Score (NPS):

• First, determine the time period and sample size for the survey.
• Then, develop a customer satisfaction survey and ask, “On a scale of 0-10, how likely are you to recommend our product/service to a friend or colleague?”
• Categorize the responses into three groups: detractors (0-6), passives (7-8), and promoters (9-10).
• After that, calculate the percentage of detractors (D) by dividing the number of detractors by the total number of responses (N) and multiplying by 100%: D = (Number of Detractors / N) x 100%
• Then calculate the percentage of promoters (P) by dividing the number of promoters by the total number of responses (N) and multiplying by 100%: P = (Number of Promoters / N) x 100%
• Then, calculate the NPS score by subtracting the percentage of detractors from the percentage of promoters: NPS = P – D.
• Lastly, analyze the results and identify areas for improvement based on the feedback.

Example:

Let’s understand this with an example: 

• Time period: January 1 – January 31, 2023
• Sample size: 200 customers
• Customer satisfaction survey question: “On a scale of 0-10, how likely are you to recommend our product/service to a friend or colleague?”
• Number of detractors (scores 0-6): 50
• The number of passives (scores 7-8): 70
• Number of promoters (scores 9-10): 80
• Total number of responses (N): 200
• Percentage of detractors (D): (50/200) x 100% = 25%
• Percentage of promoters (P): (80/200) x 100% = 40%
• NPS score: 40% – 25% = 15%
• Analysis of results. The NPS score of 15% indicates that the company has more promoters than detractors, but there is still scope of improvement. So, the feedback can be used to identify areas for improvement in the product or service.

Customer Effort Score (CES)

To gauge customer experience, CES evaluates the convenience or inconvenience customers encounter when trying to accomplish a particular task. That can be buying a product or reaching out to customer service.

Businesses typically ask customers to rate their effort on a scale of 1 to 10. A higher score indicates lower effort.

Some of CES’s advantages include

• Identification of friction areas in the customer journey.
• Correlation of friction areas with customer loyalty.

 Also, it is limited in providing insight into overall customer satisfaction and may be too specific for some industries.

How to Calculate It?

To calculate Customer Effort Score (CES), follow these steps:

• First, determine the time period and sample size for the survey.
• Then develop a customer satisfaction survey and ask: “On a scale of 1-5, how easy was it to resolve your issue/request?”
• After that, collect customer responses and calculate the total number of respondents (N).
• Post that, calculate the percentage of respondents rated 4 or 5 on the 5-point scale (or any other predetermined positive rating). Let’s call this percentage P: P = (Number of Positive Responses / N) x 100%
• Then, calculate the CES score by subtracting the percentage of positive responses from 100%: CES = 100% – P
• Following that, analyze the results and identify areas for improvement based on the feedback.

Example:

• Time period: March 1 – March 31, 2022
• Sample size: 150 customers
• Customer effort survey question: “How easy was it to solve your problem with our product/service?”
• The number of respondents who answered “Very Difficult” or “Difficult”: 30
• Number of respondents who answered “Neither Easy nor Difficult”: 20
• Number of respondents who answered “Easy” or “Very Easy”: 100
• Total number of responses (N): 150
• Percentage of customers who found it difficult (D): ((30+20)/150) x 100% = 33.3%
• CES score: 100 – 33.3% = 66.7%
• Analysis of results: The CES score of 66.7% indicates that most customers found it easy to solve their problems with the company’s product or service. But, the feedback from customers who found it difficult can be used to identify areas for improvement. This is to make the experience even easier for customers in the future.

Customer Lifetime Value (CLV)

Customer lifetime value (CLV) quantifies the complete worth of a customer to a company during the entire duration of their association. And, it considers the total amount of money a customer will spend, how often they purchase, and how long they will remain a customer.

And, some of the advantages of CLV include the following.

• Helping businesses prioritize high-value customers.
• Identifying opportunities for cross-selling or upselling.
• Predicting future revenue.

But it isn’t easy to calculate accurately. It does not account for intangible benefits such as brand loyalty or word-of-mouth referrals.

How to Calculate It?

So to calculate Customer Lifetime Value (CLV), follow these steps:

• Determine the time period you want to calculate CLV for.
• Then calculate the average revenue per customer per time period.
• After that, calculate the gross profit margin for each customer per time period.
• Then determine the retention rate for customers during the time period.
• Following that, calculate the discount rate.
• Use the formula: CLV = (Average gross profit per customer per time period) x (Retention rate) / (1 + Discount rate – Retention rate).
• And then repeat for each time period to get the CLV for each customer over their lifetime.

The formula for calculating CLV is:

CLV = (Average Order Value x Purchase Frequency) x Customer Lifespan

Example:

1. Determine the time period you want to calculate CLV for. Let’s say we want to calculate CLV for the last 5 years (2017-2021).
2. Calculate the average revenue per customer per time period. Over the last 5 years, the average revenue per customer was $1,000.
3. Calculate the gross profit margin for each customer per time period: The gross profit margin for each customer was 60%.
4. Determine the retention rate for customers during the time period. Out of the 1,000 customers we had in 2017, 700 stayed with us in 2018, 500 in 2019, 400 in 2020, and 300 in 2021. The retention rate for each year is as follows:
   1. 2017 to 2018: 700/1,000 = 70%
   2. 2018 to 2019: 500/700 = 71.43%
   3. 2019 to 2020: 400/500 = 80%
   4. 2020 to 2021: 300/400 = 75%
5. Calculate the discount rate: The discount rate is 10%.
6. Use the formula to calculate CLV: CLV = ($1,000 x 1) x [(0.70 x 0.60) / (1 + 0.10 – 0.70)]

• ($1,000 x 2) x [(0.71 x 0.60) / (1 + 0.10 – 0.71)]
• ($1,000 x 3) x [(0.80 x 0.60) / (1 + 0.10 – 0.80)]
• ($1,000 x 4) x [(0.75 x 0.60) / (1 + 0.10 – 0.75)] = $533.33

This means that the estimated CLV of each customer over the last 5 years is $533.33. By understanding the CLV, businesses can make informed decisions on customer acquisition and retention strategies.

By calculating CLV, businesses can understand the long-term value of each customer and allocate their resources to improve customer experience, retain existing customers, and acquire new customers.

Customer Churn Rate

The churn rate calculates the proportion of customers who discontinue their business association with a company during a specific period. A high churn rate can indicate customer experience, product quality, or pricing issues. Advantages of churn rate include

• Provides insight into customer retention and loyalty.
• Helps in identifying areas for improvement.

It has limitations in not providing insight into the reasons for customer churn. So, it may not apply to certain industries.

How to Calculate It?

• Determine the time period for which you want to calculate churn rate (e.g., month, quarter, year).
• Calculate the total number of customers you had at the beginning of the time period (C1).
• Calculate the total number of customers you had at the end of the time period (C2).
• Determine the number of customers who churned (i.e., cancelled or did not renew their subscription) during the time period (N).
• Calculate the churn rate by dividing the number of customers who churned (N) by the total number of customers you had at the beginning of the time period (C1) and multiplying the result by 100%: Churn rate = (N / C1) x 100%
• Analyze the results and identify areas for improvement based on the feedback.

Example 

A subscription-based streaming service wants to calculate its monthly churn rate for January 2023.

• Time period: January 1-31, 2023
• Total number of customers at the beginning of the time period (C1): 10,000
• Total number of customers at the end of the time period (C2): 9,500
• Number of customers who churned during the time period (N): 500
• Churn rate: (500 / 10,000) x 100% = 5%
• Analysis: The churn rate of 5% for January 2023 indicates that 5% of the company’s customer base churned during that month. The company can analyze the feedback from these customers to identify the reasons for churn and work on improving those areas to reduce churn in the future.

Customer Retention Rate

The retention rate quantifies the proportion of customers who maintain their business relationship with a company during a defined period. And only a high retention rate indicates customer loyalty and satisfaction.

And some of the advantages of retention rate include 

• More profitable repeat customers
• Lower marketing costs
• Positive word-of-mouth marketing
• Insights for improvement
• Competitive advantage

But, it has limitations in not providing insight into customer satisfaction levels. And also not accounting for new customers.

How to Calculate It?

• Determine the time period for which you want to calculate the retention rate (e.g., month, quarter, year).
• Then calculate the total number of customers you had at the beginning of the time period (C1).
• Determine the number of customers still active at the end of the period (C2).
• Calculate the number of customers who churned (i.e., cancelled or did not renew their subscription) during the time period (N) by subtracting C2 from C1.
• Calculate the retention rate by dividing the number of customers who were still active at the end of the time period (C2) by the total number of customers you had at the beginning of the time period (C1), and multiplying the result by 100%: Retention rate = (C2 / C1) x 100%
• Analyze the results and identify areas for improvement based on the feedback.

Example:

• Time period: Quarter 2 (April 1 – June 30), 2022
• Total number of customers at the beginning of the period (C1): 1000
• Number of customers still active at the end of the period (C2): 800
• Number of customers who churned during the period (N): 1000 – 800 = 200
• Retention rate: (800 / 1000) x 100% = 80%
• Analysis of results: The retention rate of 80% indicates that the company was able to retain 80% of its customers during the period. The feedback can be used to identify areas for improvement and devise strategies to retain more customers in the future.

Conclusion

Measuring customer experience is essential for any business to achieve success. So, by understanding what customer experience is, why it’s important, and how to measure it, businesses can identify areas for improvement, increase customer loyalty, and differentiate from competitors. Choosing the appropriate metrics based on the company’s goals and industry is essential to achieve the best results.

Contributed by Aman Raj