In today's competitive business landscape, private equity firms face the challenge of achieving sustainable, profitable growth for their portfolio companies (portcos). In fact, with increasing competition and disruption from digital-native firms, traditional carve-outs need to not only achieve growth but must significantly accelerate the time to value realisation. They need to adopt innovative, quick-to-value strategies to differentiate themselves to better attract and retain customers.
In fact, in a recent Alvarez & Marsal survey, 63% of PE professionals are actively exploring alternative strategies for value creation. One such strategy that has proven successful as a growth accelerator is focusing on customer experience (CX) to drive value creation.
In this article, I aim to explore the importance of CX in private equity, the benefits of experience-led growth, and strategies for unlocking CX value creation opportunities.
The Power of Customer Experience in Private Equity
Private equity firms often prioritise cost optimisation, technical debt reduction, and business process optimisation to drive EBITDA gains. However, they often overlook their most valuable asset—their existing customer base. They often take their eye off the ‘customer ball’ and experience unexpected increases in customer churn. According to McKinsey, 80% of value creation for successful growth companies comes from their core business, primarily by unlocking new revenues from existing customers.
To leverage this competitive advantage, forward-thinking private equity firms are adopting experience-led growth strategies for their portcos. These strategies focus on providing a distinctive and consistent customer experience that entices existing customers to choose their brand, resulting in behaviour changes that can be measured through financial growth metrics such as share of wallet, repeat purchases, or net revenue retention (NRR).
The Benefits of Experience-Led Growth
Companies that successfully implement experience-led growth strategies outperform their peers in terms of total shareholder returns (TRS) and value creation. These strategies allow companies to earn greater value at a greater rate from their current customer base, resulting in successful commercial outcomes. Research by McKinsey shows a strong correlation between companies' CX ratings and their revenue growth. CX leaders in the United States achieved more than double the revenue growth of "CX laggards" between 2016 and 2021. Moreover, CX leaders were able to rebound from the COVID-19 pandemic more quickly than other companies, showcasing the resilience and competitive advantage gained through a customer-centric approach
Growth outperformers differentiate themselves by knowing their valuable customers intimately, identifying and quantifying value creation opportunities at key stages of the customer journey, and using predictive analytics to deliver personalised messages that address these opportunities. Instead of focusing solely on short-term acquisition measures, they cultivate growth from existing customers by making it simple (and even enjoyable) for them to buy and use more of the company's products and services over time.
Three Pillars of Experience-Led Growth
Experience-led growth strategies rest on three essential pillars: setting a clear growth aspiration and linking it to value, committing to business transformation through redesigned customer journeys, products, and services, and enabling the transformation through new mindsets, capabilities, technologies, governance, and effective CX measurement.
1. Setting a Clear Growth Aspiration
Leading companies executing experience-led growth strategies start by defining a clear growth aspiration, typically across immediate quick-win, short-term, and next-term timelines. They prioritise the customer experiences that will deliver the desired financial outcomes, such as enhanced conversion, improved customer retention or increased share of wallet. These companies identify metrics to measure success and ensure a strong link between CX improvements and value creation.
For example, a major logistics company set a bold aspiration to become the logistics player of choice for both business customers and their end customers. This vision drove the transformation of customer journeys and a focus on building personal relationships between end customers and local drivers. By prioritising CX as a path to distinguish themselves from competitors, the company aimed to build long-term, value-generating relationships with customers.
2. Committing to Business Transformation
To achieve experience-led growth, companies must be willing to transform their business models, corporate culture, and operating models. They need to rethink customer journeys, products, services, and business processes to align with the desired customer experience. This transformation often requires innovation, technology adoption, and building new CX measurement and analytics capabilities. It also needs a change to a digital mindset, adopting more agile, product management approaches to test and learn how to drive rapid growth.
Digital transformation (or as I prefer, digital evolution) plays a critical role in enabling experience-led growth. Companies recognise the importance of digital thinking, processes, and technologies and start considering them early in the value creation program. AI and automation have increasingly become areas of focus, with companies identifying areas where technology can help automate business operations.
3. Enabling the Transformation
Enabling the transformation requires a shift in mindsets, the development of new capabilities, the adoption of relevant technologies, the establishment of effective governance structures, and the implementation of robust CX measurement practices. Companies need to cultivate a customer-centric culture that prioritises problem-solving and customer experience.
Successful experience-led growth strategies often involve collaboration between private equity firms, portcos, and external partners. This collaboration allows for the exchange of expertise, resources, and best practices to accelerate the transformation process.
Conclusion
Private equity firms are recognising the importance of customer experience in driving value creation for their portfolio companies. By adopting an experience-led growth strategy, firms can leverage their existing customer base, differentiate themselves from competitors, and achieve sustainable, profitable growth. Setting clear growth aspirations, committing to business transformation, and enabling the transformation through new mindsets, capabilities, and technologies are key to unlocking CX value creation opportunities.
According to respondents in AlixPartners’ Eighth Annual Private Equity Leadership Survey, the task of value creation falls squarely on leading the business effectively and designing and operating it efficiently, with an eye toward revenue and margin growth and cost control. However the survey showed that only a bare majority of private equity leaders (54% PE firms/53% portcos) believe portfolio companies (portcos) have the right leaders in place to deal with the multiple disruptions their enterprise's face,
In today's digital age, where customer expectations are constantly evolving, leaders of private equity firms must embrace CX as a strategic priority. By investing in CX and focusing on customer-centric strategies, private equity firms can position their portcos for success in a competitive marketplace.
Remember, CX is not just a buzzword; it's a powerful tool for value creation. By understanding the importance of CX and implementing experience-led growth strategies, private equity firms can drive customer loyalty, increase revenues, and outperform their peers. Embrace the power of CX and unlock the full potential of your portfolio companies.
About CX Strategy
To unlock customer experience value creation opportunities, organisations can partner with CX Strategy. CX Strategy goes beyond analysis and identification. We craft rapid change blueprints that integrate data and AI to improve both CX and business performance. By harnessing the power of data and AI, organizations can bridge the gap between their capabilities and customer expectations, resulting in improved customer loyalty and increased profitability.
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