Posts Tagged ‘Private Sector Experience’
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.
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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