Last week I got a question via email from one of Forrester’s clients, who asked:

“How do you explain the success of companies that consistently provide a poor experience but perform well financially?”

I wish more people asked this question because it shows that they’re thinking about customer experience in the right context: as a path to profits. Here’s my answer: Creating a superior customer experience is the most important thing that companies need to do. But it will never be the only important thing they need to do.

My co-author and I describe the relationship between customer experience and other factors that lead to business success in Chapter 13 of our new book, Outside In:

“Is customer experience a silver bullet that will kill off all your company's problems and make your stock price soar? No. If there is such a bullet, we haven't seen it. The fact is, regardless of your customer experience, you can still get clobbered by a big, strategic threat like a new market entrant (Netflix if you're Blockbuster) or a substitute product (digital photography if you're Polaroid). That's especially true if the new market entrant or the provider of the substitute product offers an amazing customer experience (Amazon.com if you're Borders or Barnes & Noble).”

When you have a virtual monopoly, you can get away with providing a poor customer experience — right up until you can’t.

If you're a trapped customer — like many cable customers and health insurance customers — you can't switch your business to another firm. We’re fans of what Walker Information has to say about trapped customers, who look a lot like loyal customers until they get a viable choice in the marketplace, at which point they flee.

People at companies that are succeeding despite a bad customer experience have to ask themselves this question: What will happen when the inevitable occurs and a competitor enters my space? For the answer, look at what happens to a cable company when Verizon enters a market with its competing FiOS service. In the town where I live, Comcast now has to fight for every customer. One of its tactics is to re-brand itself as “Xfinity,” which helps distance the firm from its past reputation for providing a poor experience. But I’m pretty sure that Comcast would rather be entering this new, competitive environment with a reputation for providing a great customer experience — rather than digging itself out of a hole.

What about health insurance providers? As a result of “Obamacare,” a greater percentage of insurers' business will come directly from consumers starting in 2014. That means health insurers need to understand consumers as customers for the first time in order to attract and retain them — especially the healthiest ones who are most profitable. The result: The smartest companies are scrambling to improve the quality of the experience for their ultimate customers, consumers.

Weak customer experience players can get by when they’re in an industry of other weak customer experience players.

When we look at the data in our Customer Experience Index, we note that some industries are comprised of a bunch of low performers that tend to have similar scores. That means that none of them are either excelling at customer experience in an absolute sense or differentiating from their competitors in a relative sense. Take the wireless services industry, which came in No. 10 out of 13 industries. Sprint, Verizon, and AT&T are all within 5 points of each other on a 100-point scale. The top performer in that group, Sprint, has a score of 66 out of 100 points. That’s better than AT&T’s 61 points but not nearly enough to singlehandedly overcome other marketplace factors like price and network footprint.

To a casual observer, this makes customer experience look unimportant for this industry and others like it. The reality is that customer experience is potentially very important — but none of the players are good enough at it to capitalize on that fact. Whichever company makes a serious investment in transforming itself will be the one that pulls ahead in the marketplace and stays there for a while. Half measures will not create a sustainable competitive advantage — the winner will fully adopt the six essential disciplines of customer experience.

Consider how much money a flawed customer experience costs any company.

When Dan Hesse took over Sprint at the end of 2007, he focused the company on improving what was, at the time, the worst customer experience in the industry. Now the company saves $1.7 billion per year as a result of averted customer service calls.  Similarly, Deutsche Telekom implemented a systematic customer experience improvement process. Over the past two years, call center costs in Europe have gone down by 10% to 15% as a result of removing the root causes of dissatisfaction. That adds up to tens of millions of euros saved.

Even companies that start with a good customer experience can see significant incremental benefit. A single customer experience improvement at Fidelity cost less than $20,000 and saves the firm $4 million a year. It was just one of more than 160 projects that came through Fidelity‘s experience improvement system in 2011. Together those projects accounted for over $24 million in annual savings.

Here's the bottom line.

So is it possible to explain the business success of companies that deliver a flawed customer experience? Sure it is. Just don’t count on that success continuing as we get deeper into the age of the customer. 

If you're in Europe and you'd like to discuss the business implications of customer experience with me in person, I'll be speaking at Forrester's customer experience forum in London on November 6th and 7th. I will also be speaking at the Institute of Direct and Digital Marketing 2012 conference in London on November 8th as well as the IQPC Customer Experience Exchange Conference in Budapest on November 15th and 16th.