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Private equity (PE) has become a driving force in the business world, fueling growth and innovation across various industries. One crucial aspect of this investment strategy is due diligence, the comprehensive assessment of a target company before an acquisition. While financial metrics and operational efficiencies are often prioritized during due diligence, an equally important aspect that is gaining prominence is the evaluation of customer experience (CX). In an age where customers hold immense power, PE firms are recognizing that a strong customer experience can directly impact a company’s success.
The Evolution of Due Diligence
Traditionally, due diligence focused heavily on financial analysis, legal compliance, and operational efficiency. However, as the business landscape evolved, so did the understanding of what constitutes a valuable and sustainable investment. The emergence of the experience economy, where customer interactions and perceptions hold immense sway, shifted the spotlight to the customer experience. Today, savvy investors understand that a company’s financial health is intrinsically linked to its ability to deliver an exceptional customer experience.
Understanding Customer Experience in Due Diligence
Customer experience encompasses all interactions a customer has with a brand, from the first point of contact through to post-purchase support. A positive customer experience results in brand loyalty, repeat business, and positive word-of-mouth recommendations. And a negative experience can have an equally and often more consequential negative financial impact. Dissatisfied customers buy less, spread negative word of mouth and stop buying altogether – the ultimate financial consequence.
A Better Way
Financial due diligence involves a comprehensive examination of a target company’s financial health, performance, and risks. And it typically includes a review of financial statements, analysis of quality of earnings, and working capital assessment to name a few. When it comes to due diligence on the off-balance sheet assets, such as customer experience, the metrics are limited.
The common process for many PE firms is to understand a company’s Net Promoter Score(NPS). The thinking here is that if a company has a high NPS score, then the company has strong customer equity. But there is a growing body of evidence that NPS has a limited relationship to financial performance. According to a quote cited in NPS’ early days by the MIT Sloan Management Review, “ The Net Promoter Score metric does not measure customer loyalty as effectively as other metrics and is a poor predictor of growth relative to other measures of customer satisfaction.” So, is NPS enough? Even when supplemented with customer interviews, the amount of CX due diligence done by PE firms is shockingly limited. How can a PE firm truly understand the extent of risk related to sub-par customer experiences which may be pervasive but unknown through traditional NPS survey results?
Verde Group has found that when measured correctly, there can be a strong positive correlation between key customer metrics and YOY revenue growth. Understanding 3 key elements of a customer’s experience is critical:
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