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Archive for June, 2008

A simple metric that is a great predictor of the future of your business

June 29th, 2008

Fred Reichheld is arguably the world’s leading authority on the impact customer loyalty has on business growth and profitability. His thesis is simple: if your business strategy and its execution results in a high proportion of loyal customers who are also strong advocates you are on a success trajectory.

For several decades Reichheld and his colleagues at the management consulting company, Bain & Company, researched this hypothesis. The data they assembled revealed that a 5% increase in customer loyalty could yield an increase in profits of between 25% to 100% and companies with the highest levels of loyalty grew revenue at a rate twice that of their competitors.

In his latest book, The Ultimate Question, Reichheld has gone one step further and has come up with a predictive success index he calls a Net Promoter Score (NPS).

Customers are asked to score their response to the following question on a scale of 0 to 10 where a score of zero indicates the respondent is not all likely to recommend the company while a score of ten indicates extremely likely:

How likely is it that you would recommend this company to a friend or colleague?

The idea behind the NPS concept is that a company’s customers can be divided into three groups:

People who are loyal enthusiasts who not only love dealing with the company but will urge their friends to do likewise are referred to as Promoters. They will indicate a score of 9 or 10 on the scale. Because these people are enthusiastic supporters of the business the profit generated from them is considered to be good profit as distinct to bad profit earned from detractors.

Then you have people who are satisfied but not overly enthusiastic who exhibit transient loyalty and are quite likely to switch to a competitor. These people, described as Passives, score a 7 or 8.

The final group are called Detractors. These are people who are unhappy and often feel trapped in the relationship with the company, they are all people who score on the 0 to 6 range. Even though you may be making a profit from these customers so from a short term economic point of view they may appear t be “good business”, Reichheld argues that this is bad profit.

The NPS is simply the difference between the percentage of people who score themselves as Promoters (9 and 10) and the percentage who score themselves as Detractors (6 and below.) Some companies (in fact many) find they have a negative score and Reichheld found there is a very strong correlation between those with a high score and superior levels of financial performance in their industry.

Reichheld’s research indicates that it is not good enough just to measure the percentage of promoters and to seek to increase that number alone. The companies that have achieved most success are those that have not only improved the percentage of their promoter cohort but have also reduced the size of the detractor cohort. In other words it is the “net” promoter score that is the critical metric to concentrate on.

The Ultimate Question contains a substantial body of corroborative evidence to support the efficacy of the NPS as a predictor of financial success but most of the examples relate to very large corporations e.g. GE, HomeBanc, Intuit, Enterprise Car Rental, Southwest Airlines etc. Interestingly, the concept is now starting to cascade down to much smaller businesses as more people see its potential as a management tool. For case studies and other insights about the value of the NPS metric, I strongly recommend a visit to the NPS web site and while you’re there take a special look at Reichheld’s Q & A page.

Reichheld makes the critically important point (page 118) “… measurement alone isn’t sufficient. Just as you plan how to raise your profits, you must also plan how to increase the number and percentage of promoters and reduce the number of detractors.” The beauty of the NPS is that it is a single, customer-centric, metric that everyone in the company can focus on and it is reasonably easy to collect and report in comparison with lengthy so-called customer satisfaction surveys.

By continually monitoring your NPS you can see if your businesses is getting better or worse in the minds of your customers and what impact your initiatives to improve the NPS are having. This involves three specific actions:

Decide what your customer value proposition is going to be for the customers you actually want to service. To help you with this you should review Principa’s business value proposition module.

You need to deliver that value proposition in everything you do with and for your chosen customers and every person in the business must understand what their role is in doing that. Principa’s Towards Awesome Service program is a tool that you can use to facilitate this process and the NPS is a perfect metric to monitor the impact of initiatives such as this to improve your customers’ experience.

Finally you need to systemize your processes so your business is able to consistently and reliably deliver enhanced value to its customers over and over again i.e. develop your customer experience capability and a culture built around it.

All your business clients should be doing everything they possibly can to DELIGHT (not just satisfy) their customers. This is what moves customers into the promoter category and out of the detractor category and it’s particularly important in these difficult economic times. In fact, it’s essential to make this the cornerstone of competitive strategy when everyone else is looking at ways to cut expenses and contract—refer to my blog post Recession is a time of great opportunity. Interestingly, one of Australia’s largest retail groups is very much aware of this and has recently invested in Principa’s Towards Awesome Service program. Right now over 22,000 of its employees are participating is TAS training.

Your growth just might come from an unlikely source

June 22nd, 2008

This note is about a Principa Alliance member who turned a practice disaster into an opportunity and picked up more than $100,000 in fees in a year from a most unlikely group of clients.

People come away from our Bootcamp excited by the opportunity they know they have to help their clients dramatically improve their business by applying the leverage points they’ve learnt.  They realize that creating a better and more valuable business does not involve rocket science.  All their clients really need is someone to give them direction, a workable action plan and a process for monitoring outcomes as a basis for holding them accountable for their actions (or lack thereof).

Inevitably, they have several of their “top” clients in mind when they leave the Bootcamp and they can’t wait to talk to them about how they can help.  Their top clients are people with whom they have a great relationship and for whom they are doing valuable work.  They pay their bills, are good referral sources and are a pleasure to deal with.  What better definition could you have for a “top” client.  Life would be great if all your clients were like that!

It sometimes happens, however, when you introduce “new” business development services to your top clients they’re reluctant to move forward with you in this style of business advisory or management coaching capacity.  Naturally this can be disheartening and there’s a risk you’ll conclude that your clients are not suited to this type of service.

I believe there’s a reason for this.  Those clients who show little or no interest in working with you in this capacity are telling you they’re very happy with what you are now doing for them.  That’s why they’re loyal advocates, are easy to work with and are very happy to pay for your services.  Many of them are not looking for more from you, at least not at this time.

On the other hand there are many other clients who you may not feel too close to and who you have probably dismissed as candidates for your business development services.  This group contains some phenomenal opportunities and here’s why.  We’ve done client advisory boards over the years in many countries and we are amazed at how many clients of accounting firms are not aware of the services the firm could provide them.  It does not matter how much promotion you think you do, the sad fact is many people don’t see it, don’t think it applies to them or summarily dismiss it it for some other reason.  If these people seem distant to you it’s usually because they feel that you could be doing more for them but they don’t know what that is and therefore can’t ask for it.  This is why so many studies of what clients think of their accountants come up with the finding that they want their accountant to proactively help them build a better business and would be very happy to pay for it—and who wouldn’t when the return on investment is so high.

People want you to notice them, they want you to talk to them and to show an interest in them personally.  They don’t want to be “sold” something they don’t need but they do want you to take enough interest in them to be willing to spend some time showing them what their full potential is and how they can accomplish that.  As long as they meet our 11 point client selection criteria they are great candidates for business development services.  Of the 11 criteria, three stand out, they are: does their business have development potential, do they have a pleasant personality and are they willing to listen?

And that brings me to Bob Bowley who I posted a blog about in October 2007.

Bob has a firm based in Nelson New Zealand called Bowley Consulting.  A small community of about 50,000 people with a typical mix of small businesses.  It is not a booming community but it’s not dying either.   A couple of years ago two of Bob’s senior people left his firm and within a few months he lost 30% of his best clients who together contributed 80% of his profit!

When you’re left with 70% of the work but only 20% of the profit the situation is scary to say the least.  Bob could easily have thrown in the towel but he decided to see what he could do with what he had to work with.  Noting that his previous employees had had considerable success with our Business Dashboard and the service protocol built around that product he approached several of the clients he had been left with and to his absolute amazement 11 of them took up his offer and have yielded more that $100,000 in fees in the past year.  Previously he had not considered them as prospects for this type of service and had not even approached them.

The results he has been able to achieve for these clients is as impressive as the results he has been able to achieve for his firm.  Bob kindly discussed his experience with the Dashboard at our Practice 2020 Conference in Brisbane this year.  We captured his session on camera so you can see for yourself how he has used the Dashboard and how you could do the same.

Lessons from Tiger Woods

June 3rd, 2008

Few people would question the proposition that Tiger Woods is by far the best golfer in the world and in time he will probably go down in history as the best ever.

Now you’d think that if someone is that good there wouldn’t be much pressure on him to work on getting better. From 1999 to 2002 Tiger absolutey dominated the field but towards the end of 2002 he was having a problem with stress on his left knee and realized that something had to change for him to stay at the top. From 2003 through 2004 he worked on developing a new swing adjustment to take pressure off his left knee and in this period his winning streak all but disappeared.

But the 2005 season saw a new Tiger. His swing was now working for him and he won the 2005 US Masters and the 2005 British Open as well as several other PGA events. But 2006 was not a great year, his father died in May and he took some time out to be with his family but by the time the 2006 Open came around at Royal Liverpool Golf Club he was again at the top of his game and won by 4 strokes.

There are several lessons for us mortals in this.

First, no matter how good you are, there’s always room for improvement

Second, what’s worked well for you in the past in not guaranteed to keep you at the top of your game

Third, even the best performers in their class will occassionally deal with adversity and they need to perservere to get back to their top form

Fourth, no matter how good you are there will be times when you lose your touch and that’s when you must take a close look at what you’re doing and have the guts to make changes if you want to return to your best.