How do your customers love you? Let us count the ways. Actually, if you are counting, and working on improving the reasons your customers love you, you’re nurturing one of the strongest engines available to power your way to growth. But first, let’s start with a little background.
In December 2003 Harvard Business Review published customer loyalty expert Fred Reichheld’s, The One Number You Need To Grow. In it, Reichheld, Director Emeritus and Bain Fellow, championed a different, simpler way to measure loyalty and drive growth: the Net Promoter Score (NPS).
Simply, he said to measure your greatest champions, those loyal customers who rate themselves as extremely likely to put their reputation on the line to recommend you to others. Then subtract those who are not likely to recommend you. The net score, of those who do promote you less those active or passive detractors, represents the net impact of free marketing by your supporters and the true measure of your retention and growth engines.
Does the NPS Really Work?
It certainly does! After three years of Satmetrix testing thousands of responses across multiple industries, the correlation in almost every industry was clear. In the airline industry, for example, the Net Promoter Score (NPS) relationship was so strong that it appeared to explain the relative growth rates across the entire industry.
In a few industries, the question changes a bit to reflect a small market (e.g., highly specialized software) or little consumer choice (e.g., monopolies). Generally, a higher NPS translates into higher growth and higher market share, with a 12 point increase in the score typically translating into a doubling of a company’s growth rate. This is what GE discovered when it tested the NPS in its healthcare business, and what inspired its CEO Jeffrey Immelt to incorporate it as a key element in its Execute for Growth process that aims to generate growth two to three times greater than that of global GDP.
An Enterprising Invention Drove Rental Car Success
Enterprise’s efforts striving to be the number one rental car company resulted in their success and a high Net Promoter Score (NPS). They needed a way to determine how well they were satisfying customer needs and gaining market share by discovering what they needed to work on most.
This need for a consistent, easy-to-collect customer and market metric drove them to the NPS question, with two limited follow-up questions for customers not extremely likely to recommend them to others. They refused to allow gaming of the system, and they focused relentlessly on finding ways to fix the problems customers reported. Enterprise became number one.
Two Reasons Why The NPS Works
Across a myriad of industries, increasing your Net Promoter Score depends on doing two things: increasing your promoters and decreasing your detractors. The score provides a framework for determining how well you’re serving your customers’ needs.
The 10% That Makes 90% of the Difference
NPS creates a singular focus on customers, something companies often profess but far less commonly deliver. Of over 350 companies surveyed by Bain and Co., 80% said they delivered a superior customer experience. Yet those same customers said only 8% of those companies were delivering a superior customer experience. That’s a 10-to-1 distortion.
Most companies have an NPS in the 5% to 10% range, mirroring that 8%. But companies that grow explosively typically have much higher scores: those for Ebay and Amazon were 75% to 80% during their explosive growth periods. That focus on delivering what customers want is a powerful motivator for continued success.
KISS (Keep It Simple. Score.)
The Net Promoter Score is also very simple: keep it to just one question. Even with one or two follow-up questions, it is short enough to generate a high response rate and to be compiled for reporting fast enough to provide real feedback that can generate change. Additionally, because of the nature of the question, the NPS changes with the business for continual improvement.
American Express Enhances Service to Charge Ahead of Competitors
During the 1980s, American Express began shifting profits from its core card business into investments in a broad array of other financial businesses. By the early 1990s, it began to notice some defections in its card business, and embarked on a relatively stingy rewards program designed to staunch defections to Visa and MasterCard. Unfortunately, American Express customers were savvy enough to realize the change in emphasis and defected anyhow. The company was losing its most valuable customers.
This realization helped American Express set course to hold onto its most profitable customers. It created a special benefit program with its own customer service telephone number. The company had been under-satisfying its customers for so long, however, that it completely underestimated what was required to serve its customers right. Many “special” customers actually felt their service was even worse and defections increased.
Eventually American Express woke up. It began focusing on designing and delivering benefits that succeeded in delighting customers rather than making them angry, in making their customers feel valued, and in rewarding them for actions that increased the company’s profit.
Next, they leveraged the increase in their customers’ demand by expanding the number of merchants accepting their card. This refocus on what their customers wanted ultimately became a catalyst for American Express clientele charging four times more on their cards than Visa and MasterCard customers, which translated into record profits and a high price-earnings ratio embedded in the company’s value.
Profits: The Good, The Bad and The Hidden
The Net Promoter Score also forces companies to address good profits versus bad profits. What’s the difference? In The Ultimate Question, Fred Reichheld asks if the additional profit you’re reporting is due to new hidden surcharges or because you’re cutting customer defection rates? If it’s from new hidden surcharges, you may still have your customers, but chances are they’re not happy campers.
If you ask those customers if they’re content, up to 90% of them will typically tell you they’re satisfied or extremely satisfied. They’ll also happily leave you at their first chance for a competitor offering a slightly better deal. Being satisfied is simply too low a threshold. And if your profits from those customers are bad profits, from new hidden surcharges or similar revenue sources, the moment those customers have a chance to bolt, they’ll leave so fast, you’ll see skid marks.
I like to think of it this way: if your customer lacks the intellectual or observational capacity to notice that you’re taking advantage of them, their chances of having the resources to be a profitable long-term customer for you are very low. And if your customer does notice you taking advantage of them, your chances for long-term profitability from that customer are even lower.
Either way, finding a way to profit from serving your customers, inspiring their loyalty and receiving their referrals, is your best option for long-term success.