Astute Planning, Flawless Execution,
Delighted Customers

Issue #128

Tuesday, August 5, 2008

Net Promoter for the Rest of Us - Growing Your Business by Managing for Customer Loyalty
by Cedric Nash, QuestBack Boston

If you follow trends and research in Customer Loyalty, you have probably come across the term "Net Promoter" or "Net Promoter Score" (NPS). For those not familiar with the concept, this two-part article will provide a brief overview of the NPS approach to Customer Loyalty, and describe how even small and medium sized firms can adopt this powerful approach to growing revenue and profits by managing for customer loyalty.

What is NPS? The Net Promoter approach is a structured way of implementing a truly simple business philosophy that managing your business around the concept of creating highly satisfied and loyal customers will result in growing revenues and profits.

The Net Promoter approach involves two interrelated sets of activities as part of an on-going process: 1) Systematically measuring and tracking customer loyalty using the NPS metric, and 2) the steps management takes to "move the needle" and improve customer loyalty as reflected in NPS scores. These will both be discussed at more length, but first a little background.

NPS Background. The Net Promoter methodology was developed over a period in the 1990s and early 2000s by Fred Reichheld, then a practice leader in loyalty at Bain Consulting. Fred Reichheld has authored numerous books about loyalty and the Net Promoter approach, and has written several acclaimed articles which have appeared in the Harvard Business Review. He is considered both a "thought leader" and a leading practitioner in loyalty management consulting.

The NPS approach is based on a deceptively simple premise that systematically measuring customer loyalty, and managing a business to increase the loyalty scores, will result in superior growth and profitability performance of the business as compared to its peers. This concept seems at first to be both inherently logical (who doesn't want loyal customers?), and overly simplistic (is NPS really that good an indicator?). Yet it is backed up by research and empirical evidence. There is a documented and strong correlation between high NPS loyalty scores and high growth rates and profitability. Many large "loyalty-leader" firms have adopted the NPS approach and pay Bain and Reichheld big bucks to help them implement it. GE, Enterprise Car Rental, Intuit, Vanguard, State Farm, to name a few.

Measuring Customer Loyalty with NPS

Net Promoter (loyalty) Scores are derived by surveying the customer base on a regular basis and asking a specific but simple question, and then doing a little basic math. Here is how it works:

The question: "How likely is it that you would recommend (your firm) to a friend or colleague?"
The scale is 0 to 10, with 0 meaning "not likely at all" and 10 being "extremely likely".

Survey respondents are grouped as follows based on their numerical response:

  • 9-10 are "promoters"
  • 7-8 are "passively satisfied" (or "neutrals")
  • 0-6 are "detractors"

To calculate the NPS score, first you calculate the percentage of customers who responded with a 9 or 10 (promoters) and the percentage who responded with a 0 through 6 (detractors). Then subtract the percentage of detractors from the percentage of promoters to arrive at your "Net Promoter Score" (NPS). This process is typically performed on a regular basis (sometimes monthly to different sets of customers, more often semi-annually) for the purpose of tracking changes and understanding the impact of programs or measures designed to improve the scores.

Behind the Labels

Promoters Promoters are loyal not only in the sense that they remain customers, they tend to buy more of your products over time and best of all, they actively promote your firm to others. They generate positive "word-of-mouth" and referral business. Customers come to you because of them. The value of a promoter goes far beyond the value of the direct business from that specific customer. They are value multipliers!

Detractors Detractors are the opposite of promoters. These customers are not only likely to defect to competitors; they will "bad mouth" your firm to friends and colleagues. They drive potential customers away from you to your competitors. The value of a detractor customer is often thus negative!

Passively Satisfied Passively satisfied customers are, as the name suggests, neutral about your firm. They are neither promoters nor detractors. However, while these customers may not have an ax to grind with your firm (like detractors) they are still essentially at risk. They can be easily lured away by competitors for a variety of reasons since there is no loyalty bond of any strength.

Note: Keep in mind that these categories are not static. Today's promoter can become tomorrow's neutral or even detractor. Vice versa for detractors. Neutrals can go either way. This is why managing the business for loyalty is so important, and the topic of part two of this article stay tuned for the next CCI newsletter.

About QuestBack: QuestBack (www.questback.com) is an enterprise feedback management tool for gathering and analyzing feeback from critical constituencies via online suveys. With unique ASK&ACT TM follow-up capabilities, QuestBack transforms the data gathering process into a dialog that enhances customer relationships.The company is based in Europe and represented in the US by QuestBack Boston LLC.

 

Customer Data - Promoting Awareness of the Problem
by Craig Bailey


In our prior article in the series Customer Data Are You Neglecting a Key Corporate Asset, we covered the impact of neglecting customer data including:

  • Operational inefficiencies
  • Negative customer perception
  • Costs related to sending duplicate materials to the same entity and returned mail
  • Inability to get an accurate count of the customer base and perform analysis regarding customer acquisition, retention and risk without investing significant time to massage the data

Many organizations can attest to the fact that the above items are all too real for them. So, how do you remedy the situation? Make it painfully obvious to senior management that something must be done (NOW) or remain hamstrung in your ability to achieve corporate objectives.

How do you make it painfully obvious to senior management? Quantify the impact. Try the following steps:

  • Interview and/or observe your customer-facing personnel as they perform routine transactions (customer inquiries, order processing, etc.) and obtain their input on:
    • How much time they spend / difficulty they experience trying to identify the appropriate customer record.
    • Their level of frustration (even embarrassment) while they have the customer on the phone and they are trying to pull up the customer's correct and complete profile.
  • To get a more factual representation of the above, dump a list of your customer file into Excel, sort it by customer name with a count of occurrences of each customer name. This will be truly eye-opening as you quantify the number of duplicate, extraneous and/or erroneous customer records that exist.
  • Speak with your marketing and collections departments about the amount of returned mail they get from marketing programs, invoices and dunning letters.
  • Ask a few simple questions to your Marketing, Sales, Service and IS departments and see if you get "anywhere near" the same answer:
    • How many customers do we have?
    • How many new customers did we create last month?
    • How many customers stopped ordering last month, quarter or year (whatever is the appropriate frequency for your firm)?
    • Who are the top 10 revenue generating customers?

Once you've done the above, prepare a hard-hitting executive briefing package that includes your strategy to respond to the situation, and "let'em have it." Be sure to include numbers (hours wasted, pieces of mail returned and the cost, count of duplicates, exhibit the inaccuracies in customer counts, etc.).

Now, your next question might be "What IS my strategy to respond to the situation?" Well, to find that out; you'll want to stay tuned for our next newsletter article, or simply give us a call.

In future editions of this series we will cover the following topics:

  • Stopping the bleeding
  • Getting well
  • Prevention
  • Inspection

Remember this. You will want to consider pragmatic goals and realize that it is a continuous journey.

In closing, increasing the integrity of customer data will improve the customer experience, internal efficiencies and the ability to leverage this information to achieve business objectives. An easy ROI indeed!

Contents

+ Net Promoter for the Rest of Us

+ Customer Data - Promoting Awareness of the Problem


 


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Recommended Reading
For a related article about a simple approach to measuring customer loyalty and using the results to grow business, check out Harvard Business Review article The One Number You Need to Grow by Frederick F. Reichheld. Note that to see the full article, you will need to subscribe to HBR.

SPECIAL DEAL: Questback has purchased a limited number of authorized reprints of this HBR article and will send one to the first 10 people who contact Cedric Nash at c.nash@questback.com.

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