Valuable experience
How customer experience can unlock value in private equity
Logic prevails in private equity but is it time to inject more emotion? Robust analysis and cold hard numbers are the foundation for solid investments. Yet in the wider world, 95 per cent of consumer purchasing decisions happen entirely subconsciously,1 and B2B buyers also demonstrate a strong emotional connection to their vendors.2 Entering the decision-making mind of customers requires organisations to connect on this deeper level and through the customer experience (CX) they deliver.
Market conditions have lengthened Private Equity (PE) investment periods and forced a shift in value creation priorities towards top line growth. More than half of PE leaders (52 per cent) say that company revenue growth was the number one component of the value creation case of PE acquisitions made in the last three years.3 Not surprisingly, savvy PE investors are taking an interest in how an exceptional customer experience can go beyond revenue protection to drive real and sustained growth. So how can portfolio companies grasp this opportunity?
CX for growth and competitive edge
CX is a significant influence on revenue and 87 per cent of business leaders say it’s their top growth driver.4 It’s the sum of your interactions with customers – the advertising viewed, the receipts and invoices received, the ease of transaction, the performance of your website, your social presence, customer service and product performance – all shape how your customers feel about your brand.
Whilst price and the product or service bring competitive edge, for most organisations, the biggest battle being fought is in the delivery of brand defining customer experiences. In fact, more than two-thirds of marketers say their companies compete mostly on the basis of CX and there are some key shifts driving this.5
Across many industries, barriers to entry are lowering, resulting in more choice for customers. Meanwhile, better access to data and tech advances provide the ability to deliver personalised experiences at scale, constantly raising the bar on customer expectations. Customers are demanding more and no longer separate their CX expectations – B2B customers expect the same quality of online experience when choosing a vendor for their organisation as when buying a holiday for their family.
The customer experience is usually the responsibility of the sales team or the Chief Marketing Officer (CMO). However, getting it right requires an organisational set up where the CMO is empowered to influence all customer touchpoints and to align this across all customer-facing functions including marketing, sales and customer services as well as non-customer-facing functions such as IT, finance, supply chain, product development and HR. Even the best CMOs struggle to improve CX when faced with entrenched functional silos.
In many situations CX is only partially measured due to the fact that it takes place at multiple touchpoints and through several systems and functions. Whilst this can lead to CX feeling somewhat intangible, it is possible to cut through this and identify interventions that can deliver immediate, organic value growth, often with little effort.
The CX payback
Investing in CX can boost revenue reliability and profitability. For PE, this is likely to bring greater buyer interest and deliver higher multiples on exit. Analysis of the total shareholder returns of S&P 500 companies tells a compelling story and shows that companies with above average customer satisfaction scores achieve 4x the growth in value of those with below average scores over a ten-year period.6 Whilst there are no specific studies which focus on PE backed businesses, it naturally follows that a better experience increases brand equity. Brands with higher brand equity deliver superior shareholder returns over time, an 88 per cent return vs the S&P 500 and a 251 per cent increase vs the broader MSCO World Index.7
There’s convincing evidence of the commercial returns. Delivering customers what they want enables customer-obsessed organisations to report 41 per cent faster revenue growth, with more predictability.8 There’s a profit boost too: customer focussed organisations deliver 49 per cent faster profit growth, benefiting from a lower cost-to-serve, and a five per cent increase in customer retention boosts profits by 25 per cent to 95 per cent.9
Better returns are underpinned by known operational benefits including increased customer advocacy and spend. Customers who enjoy positive experiences are likely to spend 140 per cent more and are likely to remain customers for five years longer than those with negative experiences.10 In fact, customer-obsessed companies have 51 per cent better customer retention11 and there are efficiencies in delivering positive customer experiences – it can reduce the ‘cost to serve’ customers by a third (33 per cent).12 All of these operational benefits fuel value creation and revenue growth in a PE backed environment.
Identifying CX value multipliers
As consumers we’re aware that our customer experience can be measured. Every day we’re part of that process – in the marketing emails we leave unread, the time we spend in store, the five-star ratings, the abandoned online shopping trolleys. We leave numerous measurable signals indicating how effective our customer experience has been in influencing our decision to purchase – our digital and physical footprint. The same is true of B2B buyers – the signals may be found in different places and involve several individuals, over a longer time periods but can be, and are, tracked.
By understanding the full universe of CX levers, applying metrics across these, and then benchmarking these against a competitive set, the wider industry and best practice, it’s possible to calculate the revenue, profit and valuation opportunity that could be realised by meeting those benchmarks.
Each metric has a different role to play across the end-to-end customer journey, acting as an early warning system. It enables management to isolate the commercial contribution of each metric and to see where value can be created (and protected). Initiatives can then be prioritised based on value, time, effort and cost, to build a CX value creation roadmap.
The value that can be found is pretty tantalising. Interrogating seven CX areas through 30 metrics, has identified the opportunity to realise a 1x multiple of revenue and over 3x of profit for one retailer, spread across the seven areas. If realised, this would unlock at least a further 2x on the enterprise valuation. Within this, there are quick wins where value could be unlocked in a matter of weeks, for example, increasing the volume and relevancy of key words to reduce ad spend and increase visibility in search engines, or increasing page speed to enable customers to complete their checkout. Other opportunities like improving brand awareness or increasing engagement rates on social platforms would need investment over time before realising returns.
Value creation opportunities exist in many areas and the relative importance of these will vary between industry sectors. For illustration, here is a small sample of the kinds of questions that can be used to uncover opportunities:
- How effective is the brand’s advertising in engaging the right audience? This includes evaluation of ad quality and reach, consistency, execution effectiveness and distinctiveness. For example, ad personalisation is frequently overlooked yet can have a measurable impact on sales.
- What is the overall health and perception of the brand? This often requires looking at employee engagement, brand awareness and brand sentiment across multiple channels.
- Is the organisation driving full CX value from its marketing technology stack and how do its martech capabilities compare to those used by industry leaders? Metrics can be used to track the effectiveness of many aspects such as customer data analytics, marketing automation and campaign and ad execution. Unlocking value here doesn’t necessarily require investing in new tech. Gartner reports that 58 per cent of marketing technology available to marketers goes unused and the number one reason for this, according to marketers, is down to duplication of technology solutions (30 per cent).13 So doing more with what is already there can be a big win. Creating COEs (Centres of Excellence) for specific capabilities can significantly increase solution adoption and enable a much more impactful, intelligence-driven customer experience for example, to drive better personalisation.
- How effectively do marketing and sales teams work across the full customer lifecycle from awareness generation to deal closure and renewal? Such as marketing equipping sales teams with information on a prospect’s interaction with the organisation for example, what website pages they’ve browsed, what events they’ve attended and what social posts they’ve interacted with. Or ensuring marketing is still involved to help convert a lead once it’s being managed by the sales team – for example, to surface relevant content on the website or to target them with relevant content.
- How effectively does the brand connect with its audience on social media? This involves looking at follower growth, engagement rates, sentiment analysis. Often, changes to social media influencer strategy and the adoption of more nuanced, platform specific content and engagement tactics can significantly improve customer engagement and brand sentiment.
- How easily can potential customers find the brand online? Measuring how it appears on search engines, the volume and relevance of keywords on the website, the proportion of visitors from organic vs paid search, how readable your site is to search engines.
- How do users perceive and interact with the brand online? This includes measuring ease of use, flexibility and efficiency of use, aesthetic and design, user control and freedom, responsive design, accessibility and ecommerce features.
There’s scope, throughout CX, to unlock efficiencies by automating low-value, high frequency tasks and using GenAI to support content production or customer service delivery. Improvements in ways of working such as improving hand-offs between teams can bring big wins as can a change in culture and organisational design. Reorientating teams structurally, towards a category, customer type or mission can re-energise them and enhance collaboration.
One organisation introduced overarching KPIs to align previously siloed teams around common goals, which all ladder up into a single Net Promoter Score (NPS). This ensured everyone was pulling in the same direction with a focus on measurable impact. Another effective approach is to introduce agile ROI models to analyse actual and forecast performance to pivot investment faster.
Adapting to the challenge
Most PE investors (76 per cent) agree that more focus on organic revenue growth is needed to deliver returns to Limited Partners on current and future assets.14 CX has a big role to play in that growth but to unlock the full CX value creation opportunity, investors and their portfolio company CMOs will need to be on the same page.
PE portfolio company marketing leaders should expect more scrutiny and challenge than before and with a focus on CX as a key revenue lever. Those companies without a CMO may see this challenge directed at the sales function and should consider whether the time is right to appoint a leader to own the customer experience. Either way, being able to talk the language of private equity will be important. It means decoding the customer experience and quantify how CX changes and investments can impact the top and bottom line and drive sustainable value for current and future investors.
PE investors should consider CX benchmarking and value-identification across the lifecycle: prior to acquisition, to bake it into their investment thesis; following the acquisition, to identify value-creation opportunities; and then prior to exit, to demonstrate value to a future owner. However, realising the full CX opportunity may require PE to evolve its operating support. The kinds of operating partner networks that are currently in place to transform the financial practices of portfolio companies and enable them with technology, don’t yet exist for front-of-house functions. Given the organic growth ambition, this may be a capability gap.
There is a place for emotion in private equity. A focus on how customers feel about your brands and putting the customer experience at the heart of value creation plans, backed by the right blend of metrics, will pay dividends.
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References
2. From Promotion to Emotion: Connecting, B2B Customers with Brands, Google & CEB, 2013
3. M&A Revenue Growth Survey 2024, Deloitte
4. M&A Revenue Growth Survey 2024, Deloitte
5. Customer Experience Survey, Gartner
6. How customer satisfaction correlates to total return to shareholders, Medallia
7. Kantar BrandZ Most Valuable Global Brands Report 2024
8. Forrester’s 2024 US Customer Experience Index
9. Loyalty Rules, Harvard Business School Press
10. The Value of Customer Experience, Quantified, Harvard Business Review, 2014
11. Forrester’s 2024 US Customer Experience Index
12. The Value of Customer Experience, Quantified, Harvard Business Review, 2014
13. Disruptions Derail Progress in Martech Utilization: 2022 Marketing Technology Insights, Gartner.
