The question that predicts customer loyalty

Wednesday, February 8th, 2012

Recently, I attended a talk by Fred Reich­held, a long time part­ner with con­sult­ing firm Bain & Com­pany (the same firm where U.S. Pres­i­den­tial can­di­date Mitt Rom­ney got his pri­vate sec­tor expe­ri­ence after grad­u­at­ing from Har­vard Busi­ness School.)

Reich­held is one of the pio­neers in the area of pro­mot­ing cus­tomer sat­is­fac­tion and loy­alty as a core strat­egy to drive busi­ness growth. In 1996, he pub­lished The Loy­alty Effect, one of the first attempts to rig­or­ously quan­tify the finan­cial pay­off of sat­is­fied customers.

In 2003, he pub­lished an arti­cle in the Har­vard Busi­ness Review titled, “One num­ber you need to grow.” In that arti­cle, he intro­duced a sim­ple 12 word ques­tion and a result­ing mea­sure called The Net Pro­moter Score that cor­re­late with cus­tomer loy­alty and can focus orga­ni­za­tions on cre­at­ing higher lev­els of cus­tomer satisfaction.

12 words to mea­sure loyalty:

The Net Pro­moter Score starts with one sim­ple 12 word ques­tion that cus­tomers are asked to answer on a scale from 0 to 10. That question:

How likely are you to rec­om­mend us to a friend or colleague:

Cus­tomers are then put into three categories:

• Pro­mot­ers: (score 9–10) are loyal enthu­si­asts who will keep buy­ing and refer oth­ers, fuel­ing growth.
• Pas­sives: (score 7–8) are sat­is­fied but unen­thu­si­as­tic cus­tomers who are vul­ner­a­ble to com­pet­i­tive offerings.
• Detrac­tors: (score 0–6) are unhappy cus­tomers who can dam­age your brand and impede growth through neg­a­tive word-of-mouth.

The net pro­moter score is cal­cu­lated by tak­ing pro­mot­ers and sub­tract­ing detrac­tors; what are left is your net pro­mot­ers. So, if you have 30% of clients scor­ing you a 9–10 (your pro­mot­ers), 50% a 7–8 (your pas­sives) and 20% a 0–6 (your detrac­tors), your net pro­moter score is 10.

In the US, net pro­moter scores north of 70% have been attained by USAA in bank­ing, by Costco and by Apple. Other firms using the net pro­moter score met­ric to track sat­is­fac­tion include Charles Schwab, Ama­zon, Intuit (maker of Quicken), Gen­eral Elec­tric and Proc­ter and Gamble.

In a pre­sen­ta­tion at a con­fer­ence, a senior exec­u­tive of TD Canada Trust explained how they used the Net Pro­moter Score in the U.S. and Canada to shift from satisfaction-focus to loyalty-focus. With high sat­is­fac­tion scores it was hard to iden­tify issues and moti­vate employ­ees to improve. By mov­ing to a Net Pro­moter approach using will­ing­ness to rec­om­mend as the mea­sur­ing stick, they were able to uncover new issues and iden­tify the best prac­tices of top per­form­ing branches. TD is now rolling out Net Pro­moter through­out the bank to include all func­tions that impact cus­tomer service.

The research behind the Net Pro­moter Score metric:

Below is an excerpt from the Net Pro­moter Score web­site that pro­vides ratio­nale for NPS.

“To deter­mine a use­ful met­ric for gaug­ing cus­tomer loy­alty, Fred Reich­held did some­thing rarely under­taken with tra­di­tional cus­tomer sur­veys: match sur­vey responses from indi­vid­ual cus­tomers to their actual behav­ior, repeat pur­chase and refer­ral pat­terns over time.

“Work­ing with Dr. Laura Brooks of Sat­metrix, a research team tested numer­ous dif­fer­ent ques­tions to see which one(s) would be the best gauge of future repur­chase and refer­ral behav­ior. The test was admin­is­tered to thou­sands of cus­tomers recruited from pub­lic lists in six indus­tries: finan­cial ser­vices, cable and tele­phony, per­sonal com­put­ers, e-commerce, auto insur­ance, and inter­net ser­vice providers. The team obtained a pur­chase his­tory for each per­son and asked them to name spe­cific instances in which they had referred some­one else to the com­pany in question.

“The results allowed the team to deter­mine which loy­alty ques­tions had the strongest sta­tis­ti­cal cor­re­la­tion with repeat pur­chases and refer­rals. The team hoped they would find at least one ques­tion for each indus­try. They found some­thing more; one ques­tion was best for most indus­tries. “How likely is it that you would rec­om­mend [Com­pany X] to a friend or colleague?”

“Next, the team looked at rel­a­tive growth rates for com­peti­tors in a given indus­try. In the first quar­ter of 2001, Sat­metrix began track­ing the “would rec­om­mend” scores of a new uni­verse of cus­tomers; many thou­sands of them from more than 400 com­pa­nies, in more than a dozen indus­tries. In each sub­se­quent quar­ter they then gath­ered 10,000 to 15,000 responses to a very brief e-mail sur­vey that asked respon­dents (drawn again from pub­lic sources) to rate one or two com­pa­nies with which they were familiar.

“Where the team could obtain com­pa­ra­ble and reli­able revenue-growth data for a range of com­peti­tors, and where there were suf­fi­cient con­sumer responses the team plot­ted each firm’s NPS against the company’s rev­enue growth rate.

“The results were strik­ing. In most indus­tries this one sim­ple sta­tis­tic explained much of the vari­a­tion in rel­a­tive growth rates; that is, com­pa­nies with a bet­ter ratio of Pro­mot­ers to Detrac­tors tend to grow more rapidly than competitors.”

Imple­ment­ing this in your business:

In the ques­tion and answer period after his talk, Reich­held was asked about cat­e­gories like invest­ing or air­lines where there are extra­ne­ous events (mar­ket down­turns and snow­storms) that depress sat­is­fac­tion in the short term. In those cases, should com­pa­nies look at NPS scores rel­a­tive to their indus­try to gauge how they’re doing, rather than absolute benchmarks?

His answer was that this is emi­nently rea­son­able in the short term. He went on to say, how­ever, that indus­tries that chron­i­cally have low sat­is­fac­tion scores can be vul­ner­a­ble to new entrants. Even if your cus­tomers are less dis­sat­is­fied than your competition’s cus­tomers (or as the old expres­sion goes, “In the land of the blind, the one-eyed man is king”), this cre­ates an oppor­tu­nity for dra­mat­i­cally new busi­ness mod­els to shift the com­pet­i­tive land­scape. If you look at the col­lapse of tra­di­tional busi­ness mod­els (the legacy air­lines, the Big Three US auto man­u­fac­tur­ers), dis­sat­is­fac­tion was masked by the lack of alter­na­tives right until bet­ter alter­na­tives pre­sented themselves.

Reich­held also pointed out that you need to make it easy for cus­tomers to answer the Net Pro­moter ques­tions hon­estly. Ask some­one directly and their scores are higher than their real sat­is­fac­tion lev­els. That’s why suc­cess­ful com­pa­nies col­lect scores either through writ­ten or online sur­veys that go to third par­ties or by hav­ing some­one else call cus­tomers to get their scores; in the U.S., Charles Schwab branch man­agers fol­low up with cus­tomers to get their scores, talk about their expe­ri­ence and deter­mine how the advi­sors serv­ing them can improve.

In fact, fol­low­ing up with cus­tomers is key; Reich­held said that ask­ing cus­tomers for their opin­ion ini­tially cre­ates a boost in atti­tudes. After all, the per­son they’re doing busi­ness with is show­ing they care. If there is no fol­low up or indi­ca­tion that their opin­ion is being taken seri­ously, how­ever, that ini­tial boost quickly evaporates.

One final note: If you are going to fol­low up with clients to talk about their rat­ing on the “How likely would you be to rec­om­mend us” ques­tion, it’s impor­tant that you make it clear that your moti­va­tion is to find ways to bet­ter serve them, rather than to get refer­rals to friends and fam­ily. Even if refer­rals aren’t your moti­va­tion, you need to clar­ify this to engage clients in an hon­est and frank conversation.

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Tags: Amazon, Amp Company, Charles Schwab, Core Strategy, Costco, Customer Loyalty, Customer Satisfaction And Loyalty, Financial Payoff, Fred Reichheld, Harvard Business Review, Harvard Business School, Loyalty Effect, Negative Word, Net Promoter Score, One Of The Pioneers, Private Sector Experience, Time Partner, Unhappy Customers, Usaa, Word Question
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