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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.

  1. September 30th, 2008 at 18:54 | #1

    Ric-

    I’m trying to implement these attitudes in my clients. As a CPA consulting with businesses, I know they appreciate our transparency, and we appreciate their feedback.

    Good post.

    Thanks, Jason M. Blumer

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