Customer Engagement: A Driving Force of Business Growth€¦ · with the services and have an emotional connection with the brand. Customer Engagement: A Driving Force of Business

AN EXL WHITE PAPER

Customer Engagement: A Driving Force of Business Growth

A Conceptual Framework and Empirical Study

Nupur VermaDecision Analytics, EXL

Rahul LathDecision Analytics, EXL

Swati Jain, Ph.DDecision Analytics, [email protected]

Developing a reliable metric of customer

engagement is as important as having

a loyal base of customers because

effective marketing intervention can be

made only when the organization knows

how engaged the customers are with

its brand. Development of this metric

has always been a challenge because it

involves combining various behaviors of

the customer into one scale. This paper

discusses the importance of engaging

customers, strategies to increase

customer engagement and the use of

factor analysis to measure customer

engagement. Hence, this paper is not

just a conceptual discussion but also an

empirical study of customer engagement.

The developed measure of customer

engagement has been empirically

tested for an online retailer and has

been implemented to design marketing

strategies.

IntroductionIn today’s competitive world, revenue and

margins are not the only way to study

the impact of marketing interventions.

Sustained growth of the organization calls

for investments in developing a robust

customer relationship which is nurtured

through an intelligent marketing program.

The benefits of these marketing efforts

may not be reaped in the short term

but definitely have a powerful impact

in the long term, which is reflected in

a customer’s lifetime value. Customer

engagement becomes a strong measure

of the effectiveness of a marketing

program. Engaged customers are loyal

customers who promote the brand image

of the business. They trust the quality of

products offered and spread the good

message around. These customers are

less sensitive to price changes because

the relationship which they have with the

business is based on satisfaction over a

period of time. Organizations with a loyal

Abstract: With unlimited information available, customers today are highly sensitive to price. An

organization can counter this situation of high price sensitivity if it has a large base of highly engaged

and loyal customers. Such customers are associated with the organization because they are happy

with the services and have an emotional connection with the brand.

Customer Engagement: A Driving Force of Business Growth A Conceptual Framework and Empirical Study

EXLservice.com | 2

base of customers are less worried about

customer retention and are able to focus on

improving their services. Their resources are

less diverted to resolving customer issues

and more towards innovative solutions to

customer requirements. According to a

2014 study by Rosetta Consulting, engaged

customers spend three times more each

year than other customers and are five

times more likely to prefer the brand over

others.

Given that the cost of acquiring a new

customer is ever increasing and is higher

than reactivating an existing customer, it

becomes imperative for organizations to

ensure that existing customers are satisfied

and remain associated with the brand.

The recent digital disruption has given

enormous opportunity for customers

to communicate with organizations and

also communicate with each other. A bad

customer experience is not just limited

to one person, but is spread to all their

contacts through social media. Due to

this multi-dimensional interaction, an

organization must become customer

centric. The digital marketplace sees a large

number of new entrants every year, which

makes it difficult to create a differentiated

product. Competition of these types can

be checked though an ongoing customer

engagement program. Engaged customers

are less likely to be swayed away by these

competitive threats.

Literature Review:Dr. Pankaj Gupta in ‘Enhancing

Organizational Effectiveness Through

Customer Engagement’, January 2012

highlights effective methods which online

and offline companies are using to reinforce

customer engagement. ‘A Generalized

Multidimensional Scale for Measuring

Customer Engagement’, December 2014

by Shiri D. Vivek, Sharon E. Beatty, Vivek

Dalela & Robert M. Morgan, explains

the usage of factor analysis to measure

engagement. ‘Measuring and Influencing

Consumer Engagement, February 2010

uses a combination of Cronbach’s Alpha,

Guttman Split-Half Coefficient, Intraclass

correlation and factor analysis to develop

an engagement scale in healthcare

domain. Justina Malciute, August 2012

discusses partial least squares method

to estimate engagement in ‘Customer

Brand Engagement on Online Social Media

Platforms’.


EXLservice.com | 3

Strategies to Increase Online Customer Engagement:Engaging customers does not mean a

heavy investment on advertisements to

create an all-pervasive presence through all

communication channels. It needs a well-

defined approach to achieve this objective,

as discussed below:

i. Long-term engagement of the customer

can be boosted by using the principle

of the Four I’s: Interaction, Involvement,

Influence and Intimacy. Regular

interactions with a customer lead them

to get him involved with the brand. This

will influence them in making a purchase.

If the services are delivered well, this

goes a long way in establishing a sound

relationship with the brand.

ii. It is very important to integrate various

channels of communication to maximize

the gains of each contact with the

customer. It ensures that the customer is

contacted at the right time with relevant

content. A communication which is not of

interest to the consumer is of no value to

the website.

iii. The visit to the website should be a

memorable experience to the consumer.

The navigation path to reach the

desired products should be seamless

and hassle free. According to Kate

Leggett of Forrester Research, 92% of

companies view customer experience

as one of their top priorities; 60% use

customer experiences as a competitive

differentiator.

iv. Communications to the customer should

be linked to the customer’s lifecycle,

their lifecycle with the business and their

lifecycle of product repurchase. This

strategy has tremendous opportunity

in establishing a robust brand

association and relationship. Product

recommendations for a customer who is

a senior citizen who has been associated

with the business for five years and

buys a specific product after every

three months should be different than

those for a 25 year old who became a

customer six months back and has made

a purchase just a week ago.

v. Social media should be used as means

to improvise the products and not just

a platform to build a brand image.


EXLservice.com | 4

Data on social media can be utilized to

understand latest trends in customer

preferences and requirements. This can

be leveraged to anticipate the demand

and offer it to the customer before the

competition does.

Measuring Customer Engagement:The importance of having a strong base

of loyal customers cannot be negated,

and hence it becomes important to have a

holistic measure of the same. A challenge

faced by all organizations is to define the

metrics on which customers’ engagement

with its product can be measured. Several

parameters can be used to define and

measure engagement like activity onsite,

frequency of visits and customers referring

the website to a friend or colleague. A rule-

based approach can be used to define if a

customer is engaged or not. For example,

if the customer has made a purchase in

last four weeks or has browsed on the

website more than ten times in last six

weeks then they are engaged, or else the

customer is not engaged. Rule-based

methods are simple to implement but given

their nature they cannot be used to rank

order the customers. A set of engaged/

disengaged customers may vary in their

degree of engagement/disengagement, so

marketing interventions must be designed

according to the degree of engagement/

disengagement. Statistical methods provide

a meaningful solution to this problem. This

paper discusses the use of factor analysis

to define the engagement score. The

score was developed using weekly data

for an online retail company wherein the

population size was 0.5 million. The results

were validated on a predefined hypothesis

using a profiling exercise.

Methodology:Factor analysis was used to measure

engagement because it enables combining

different dimensions of customer behavior

to get a measurable scale of engagement.

Factor analysis identifies latent factors

summarizing the characteristics of the

observed variables. Factors or the latent

variables are a linear combination of

correlated variables. Different factors are

independent of each other. It is important to

use only the variables impacting customer

engagement because factor analysis gives

junk results if junk variables are inputted.

The steps outlined below explain the

methodology used to define engagement

score.


EXLservice.com | 5

1. All possible variables which reflect

customer engagement were identified.

Some of these variables were frequency

of visit, depth of visit, email open rate,

clicks rate, etc. The hypothesis was set

on the direction of relationship of the

variable with customer engagement.

2. Factor analysis typically groups similar

variables into one factor. However,

when factor analysis was done on the

exhaustive set of variables it showed

that dissimilar variables had higher factor

loading in the first factor. Since factor

analysis was not able to create the

factors in desired manner, the exhaustive

list of the variables were grouped into

different variable categories to manually

create factors of different categories of

variables as below:

i. Browse Behavior: Gallery page

views, product views, etc.

ii. Purchase Behavior: Credit/cash

purchase, average value of order

placed, etc.

iii. Device Mix: Interaction with

the website through laptop,

smartphone, tablet, etc.

iv. Channel Mix: Responsiveness

through different channels of

communication

3. Within each variable category, the

objective was to select the most

important variable. Hence, factor

analysis was done for each factor

separately with number of factor=1

because a variable category captures a

particular characteristic of the customer.

Within a category, a variable was

selected on the basis of the conditions

below:

i. Variables with higher absolute

factor loading than other variables

were selected because such

variables capture high variability

within that variable group

ii. Variables with VIF<5

iii. Variable which made very good

intuitive sense were retained

even if the variable had low factor

loading or high VIF

4. Factor analysis was done on all the

selected variables. Variables were

selected on the same logic as in the

above step. The intent was to have

diversity in the selected variables so

that the engagement score captures all

facets of customer engagement.

5. On the above set of selected variables,

a final factor analysis was done to get

the factor loading of variables, a linear

combination of which explains customer

engagement.


EXLservice.com | 6

6. Factor loading of the variable is the

weight for the variable. A sum-product

of the factor loading and the value of

the variable is the engagement score.

Result:The engagement score derived using

the linear combination of the shortlisted

variables was tested against hypothesis

for the variable. This was done through a

profiling exercise to check for the direction

of relationship of the variable with the

engagement score. The validation results

of some hypotheses are presented below.

Validation 1: Hypothesis: More engaged customers

drive up the sales. The chart below

shows that as engagement score

increases, the amount of sales also

increases.

Validation 2:Hypothesis: Customers who have placed

an order in last 3 months are more engaged

than customers who have not placed

an order. The table below validates this

hypothesis.

Customer’s Action

% PopulationAverage

Engagement Score

Did not place an order

75% -0.56

Placed an order 25% 3.01

Engagement Score for orderers vs non-orderers

Engagement Score

Ave

rag

e S

ale

s

900

800

700

600

500

400

300

200

100

0-0.8 -0.7 -0.2 -0.1 -0.2 2.0 2.6 2.9 3.3 4.2


EXLservice.com | 7

Validation 3: Hypothesis: Customers who have placed

an order in last 3 months and have not

returned the order are more engaged than

others. This is validated in the table below.

Validation 4: Hypothesis: Customers who have

opened the email are more engaged

than customers who did not open the

email.

Conclusion:The study shows that factor analysis is able

to create a measurable score of customers’

engagement with the online retailer and

can give expected results if it is tweaked

as per business requirement. This scale

can be used to design loyalty programs,

reactivation programs and offer optimization

strategy.

Organizations can be tempted to make

heavy investments in engaging customers,

but it is equally important to track this

metric against a financial metric which has

direct impact on bottom line. The discussed

metric of engagement is positively

related to sales, which show that higher

Customer’s Action

% PopulationAverage

Engagement Score

Did not open the email sent

62% -0.29

Opened the email sent

38% 1.89

Engagement Score for customers who opened the email communication vs those who did not open the email

Engagement Score for customers who ordered but did not return their order vs others

Customer’s Action

% PopulationAverage

Engagement Score

Did not order or returned

85% 0.13

Ordered but not returned

15% 2.91


EXLservice.com | 8

engagement improves the performance of

the business.

The engagement scale discussed here

was developed using behavioral data of

the customer which was available in-house.

A further enhancement to this scale can

be done by using data available through

social media and survey data on degree

capturing connect of the customer with the

business. This will help to build a 360° view

of customer engagement.

Acknowledgement:We would like to thank Divya Chowdhary,

Chhavi Gupta, Anshul Goyal and the

entire team at EXL whose feedback and

support helped in making this paper more

informative.

References:1 Rosetta Consulting, ‘How Technology Marketers

Can Better Engage Customers’

2 Magento.com, ‘The Rules (and Tools) for Successful Customer Engagement’

3 https://www.teamsupport.com/blog/customer-loyalty-benefits

4 http://www.forbes.com/sites/forbesinsights/2015/01/29/6-strategies-to-drive-customer-engagement-in-2015/#283917a82f09


EXLservice.com | 9

GLOBAL HEADQUARTERS280 Park Avenue, 38th Floor, New York, NY 10017

T: +1.212.277.7100 • F: +1.212.277.7111

United States • United Kingdom • Czech Republic • Romania • Bulgaria • India • Philippines • Colombia • South Africa

Email us: [email protected] On the web: EXLservice.com

© 2017 ExlService Holdings, Inc. All Rights Reserved.

For more information, see www.exlservice.com/legal-disclaimer

EXL (NASDAQ: EXLS) is a leading operations management and analytics company that designs and enables

agile, customer-centric operating models to help clients improve their revenue growth and profitability. Our

delivery model provides market-leading business outcomes using EXL’s proprietary Business EXLerator

Framework®, cutting-edge analytics, digital transformation and domain expertise. At EXL, we look deeper to

help companies improve global operations, enhance data-driven insights, increase customer satisfaction,

and manage risk and compliance. EXL serves the insurance, healthcare, banking and financial services,

utilities, travel, transportation and logistics industries. Headquartered in New York, New York, EXL has

more than 26,000 professionals in locations throughout the United States, Europe, Asia (primarily India and

Philippines), South America, Australia and South Africa.

Documents

Customer Engagement: A Driving Force of Business Growth€¦ · with the services and have an emotional connection with the brand. Customer Engagement: A Driving Force of Business