Fred Reichheld dramatically reshaped marketing in 2006 when he unveiled what he called the ultimate question. Now, he’s back with an added step to help you understand and improve your marketing efforts.
Bain & Co.’s loyalty expert was initially concerned that companies couldn’t tell the difference between good profits and bad profits. Bad profits are gained at a future cost because they shortchange or irritate the customer. A prime example is a phone centre that companies set up with tight cost controls and limits on time talking to customers. Good profits come when the customer is so well-treated they tell everyone about your service.
On the profit and loss statement, both look the same. So he offered an alternative scorecard, asking customers, on a 10-point scale, “How likely is it that you would recommend this company to a friend or colleague?” People who rate the company at nine or 10 are considered promoters – the customers you want. Customers who value your company at seven or eight are considered passive, while anyone who gives a score below that is considered a detractor – somebody probably hurting your company by saying negative things about it. Subtract the detractors from the promoters and you get your “net promoter score.”
But it’s meant as more than a score. It should be a system, in which companies dig into the numbers, and their practices, building on two supplemental questions to achieve greater customer loyalty. Although two-thirds of Fortune 1,000 companies now use the net promoter score and many report their scores publicly, he is disappointed so few have turned it into a system intended to enrich the lives of their customers. Indeed, in his new book Winning on Purpose, written with Bain partners Darci Darnell and Maureen Burns, he presents a manifesto for what he considers to be an era of customer capitalism.
“The primary mission of every organization striving for greatness should be to build a community whose primary purpose is to sustainably enrich the lives of customers and where all members are treated in accordance with (and held accountable to) the Golden Rule,” he declares.
That’s flowery and, indeed, he warns against customer centricity that is “the puffery of public relations platitudes.” His scoring system offers some scientific rigour, although he acknowledges it can be undermined, as when the auto sales representative urges you to give them a 10 rating or companies don’t seek the feedback of clients whose claims are denied.
That’s why he has developed a complementary metric that draws on accounting results, not on surveys, which he calls “earned growth rate.” It measures the revenue growth generated by returning customers and their referrals. When compared to total revenue growth, you have the “earned growth ratio.”
First Republic Bank, whose analysis of its customers enlightened him to the concept, had its deposit balances expand by 50 per cent from customers coming back for more and 32 per cent by bringing their friends – an 82-per-cent deposit growth rate from offering great experiences to customers. For loans it was even higher, 88 per cent.
To calculate earned growth, most companies will have to upgrade their accounting. But, he argues, that’s long overdue. Until then, managers are flying blind, trying to gauge progress on financial metrics that have no regard for customer love.
But not all customers who love you necessarily help you. Some can be very costly to serve. That means you must prioritize your customers by profitability, MIT senior lecturer Jonathan Byrnes and consultant John Wass urge in Choose Your Customer.
An example they cite is the 18 per cent of customers for a furniture company who produced over half of revenue and accounted for more than 130 per cent of profit – in other words, if they were the only customers, profitability would have been much higher. Unfortunately, about 30 per cent of customers were not in that “profit peak” category but in the “profit drain” group, generating about one-third of revenue, which looks positive but not when analysis reveals they had drained off about 50 per cent of the profit by being costly to deal with. About half of the company’s customers were labelled “profit desert,” since they accounted for about 20 per cent of revenue and produced less than 10 per cent of profit.
Loyalty enters into this equation. When the furniture company dug deeper, it learned the profit peak folks were very loyal, loving to shop at the store and having a trusted sales rep. The profit drainers were classic price shoppers, comparing with other outlets and then demanding the best price they found be matched.
Profit peak customers are typically underserviced. “If your profit peak customers are providing 120 to 200 per cent of your reported profits, they should get a comparable amount of your attention. In most companies, however, the profit drain customers, who are typically bargainers, shoppers and complainers, get much more attention. So do the profit desert customers who are many times more numerous and are often inexperienced,” they write.
As well as being very loyal, profit peak customers tend to be service sensitive rather than price sensitive. They are usually willing to accept a price increase if it is packaged with an extension of your value footprint, be it a new ordering process, better packaging, or the chance to co-design products with you. They also tend to be early adopters of new products and services.
Increasing your business with the profit peak customers – this ties in to the earned growth concept of Mr. Reichheld – can be your fastest and most lucrative way to improve your profit. Together, the two approaches remind you that it’s important to understand and serve your customers better, particularly the loyalists.
Cannonballs
- Most corporate strategy focuses on markets to pursue and competitive advantages to wield but consultant Scott Edinger suggests conspicuously absent is how to train your salespeople in consultative approaches to be more effective. Too often, companies still hire folks who fit the stereotype of used car salesmen, focus on pitching and closing techniques, and never build solution-selling skills.
- Being right can be wrong. Blogger Ian McKenzie shares four questions to ask if you always need to triumph in interpersonal situations: Do I want to be right or do I want to be happy? What’s more important to me: making someone wrong for the moment or having a great long-term relationship? What would happen if I let go of the urge to correct and concentrate instead on the rewards of connecting? Can I let someone else be right for just a minute before I say what I think?
- Women view negative smiley emojis as more negative than men, research found. Both genders interpret positive smiley emojis equally.
Harvey Schachter is a Kingston-based writer specializing in management issues. He, along with Sheelagh Whittaker, former CEO of both EDS Canada and Cancom, are the authors of When Harvey Didn’t Meet Sheelagh: Emails on Leadership.
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Harvey Schachter