Since its introduction, in 2003, the Net Promoter System, which measures how consistently brands turn customers into advocates, has become the predominant customer success framework. But as its popularity grew, NPS started to be gamed and misused in ways that hurt its credibility. Unaudited, self-reported Net Promoter Scores undermined the usefulness of NPS. Over time its creator, Fred Reichheld, realized that the only way to correct this problem was to introduce a hard, complementary metric that drew on accounting results. In this article he and two colleagues from Bain introduce that metric: the earned growth rate, which captures the revenue growth generated by returning customers and their referrals. To calculate their earned growth rates, firms must have systems that gather data on the costs and revenues for each customer over time and must ask all new customers why they came on board. If the reason is a referral or recommendation, a customer is "earned"; if it's advertising, a promotional deal, or a persuasive salesperson, the customer is "bought." Earned growth rates reveal the real-world impact of customer loyalty. Because they're auditable, they can help firms validate investments in customer service and convince investors of their businesses's underlying strength.
Realizing that customer retention is more critical than ever, companies have ramped up their efforts to listen to customers. But many struggle to convert their findings into practical prescriptions for customer-facing employees. Some companies are addressing that challenge, say three Bain & Company consultants, by creating feedback loops that start at the front line. They forgo elaborate, centralized feedback mechanisms in favor of quickly polling customers with the question, How likely are you to recommend us? Firms use the responses to calculate their Net Promoter Score (NPS), a metric everyone in the organization can track. The greatest impact comes from relaying the results immediately to the employees who just served the customers - and empowering those employees to act on any issues raised. Allianz used this method to pinpoint make-or-break customer experiences. Claims representatives in a European insurance operation, for instance, learned that delays in reimbursement were a huge source of frustration for customers. Workers rapidly solved the problem by developing a new set of protocols, which spurred a sizable increase in NPS - and in policy renewals. Over time, NPS feedback can also be compiled into a baseline of customer experience, which firms can then draw upon to field-test ideas or make process and policy refinements. The household fixture maker Grohe did this by tracking the effect that the number of sales calls had on NPS in one of its markets. Grohe saw that scores spiked at three visits and then fell off. In response, it cut back on unproductive customer contact and freed up 25% more sales capacity.
This is an MIT Sloan Management Review article. Despite considerable research on customer retention and word-of-mouth referrals, it has always been difficult quantifying their contributions to the bottom line. Using a metric known as "net promoter score" (NPS), the author believes firms can measure the dollar value of customers based on satisfaction levels. A survey of thousands of customers in six industries reveals that customers tend to cluster into one of three categories: promoters, passives, and detractors. Promoters represent more than 80% of the positive referrals a company receives, whereas detractors represent more than 80% of the negative word-of-mouth. NPS is determined by subtracting the percentage of detractors from the percentage of promoters. Using this data, a firm can quantify the value of a customer by tracking five categories: retention rate, profit margins, spending, cost efficiencies, and word-of-mouth. The firm can then use NPS to make strategic decisions by targeting its efforts to leverage the most value for its customer service dollar.
Companies spend lots of time and money on complex tools to assess customer satisfaction. But they're measuring the wrong thing. The best predictor of top-line growth can usually be captured in a single survey question: Would you recommend this company to a friend? This finding is based on two years of research in which a variety of survey questions were tested by linking the responses with actual customer behavior--purchasing patterns and referrals--and ultimately with company growth. Surprisingly, the most effective question wasn't about customer satisfaction or even loyalty per se. In most of the industries studied, the percentage of customers enthusiastic enough about a company to refer it to a friend or colleague directly correlated with growth rates among competitors. Willingness to talk up a company or product to friends, family, and colleagues is one of the best indicators of loyalty because of the customer's sacrifice in making the recommendation. When customers act as references, they do more than indicate they've received good economic value from a company; they put their own reputations on the line. The findings point to a new, simpler approach to customer research, one directly linked to a company's results.
Customer relationship management is one of the hottest management tools today. But more than half of all CRM initiatives fail to produce the anticipated results. Why? And what can companies do to reverse that negative trend? The authors--three senior Bain consultants--have spent the past 10 years analyzing customer-loyalty initiatives, both successful and unsuccessful, at more than 200 companies in a wide range of industries. They've found that CRM backfires in part because executives don't understand what they are implementing, let alone how much it will cost or how long it will take. The authors' research unveiled four common pitfalls that managers stumble into when trying to implement CRM. Each pitfall is a consequence of a single flawed assumption--that CRM is software that will automatically manage customer relationships. It isn't. Rather, CRM is the creation of customer strategies and processes to build customer loyalty, which are then supported by the technology. This article looks at best practices in CRM at several companies, including the New York Times Co., Square D, GE Capital, Grand Expeditions, and BMC Software. It provides an intellectual framework for any company that wants to start a CRM program or turn around a failing one.
The greater the loyalty a company engenders among its customers, employees, suppliers, and shareholders, the greater the profits it reaps. Frederick Reichheld, a director emeritus of Bain & Co., offers advice on improving loyalty that is based on more than a decade of research. Primarily, he says, outstanding loyalty is the direct result of the decisions and practices of committed top executives with personal integrity. The "loyalty leader" companies--those with the most impressive loyalty credentials--are a diverse group, ranging from Vanguard and Northwestern Mutual to Chick-fil-A, Harley-Davidson, Intuit, and Enterprise Rent-A-Car. But beneath their surface variations lie six strikingly similar relationship strategies: 1. Preach what you practice. Executives must preach the importance of loyalty in clear, precise, powerful terms. 2. Play to win-win. It's not enough that your competitors lose; your partners must win. There's a clear connection, for instance, between a company's treatment of its employees and its attitude toward customers. 3. Be picky. A truly humble company knows it can satisfy only certain customers, and it goes all out to keep them happy. Careful selection of employees also plays an important role. 4. Keep it simple. Great leaders understand that they must simplify rules for decision making. 5. Reward the right results. Many companies reward employees who grab short-term profits and shortchange those who build long-term value and customer loyalty. 6. Listen hard, talk straight. Long-term relationships require honest, two-way communication and learning. Exemplary leaders believe that an organization thrives when its partners and customers do.
In the rush to build Internet businesses, many executives mistakenly concentrate all their attention on attracting customers rather than retaining them. But chief executives at the cutting edge of e-commerce--from eBay's Meg Whitman to Vanguard's Jack Brennan--know that customer loyalty is an economic necessity: acquiring customers on the Internet is very expensive, and unless customers stick around and make lots of repeat purchases, profits will remain elusive. For the past two years, the authors have studied e-loyalty. Contrary to the popular perception that on-line customers are fickle by nature, they found that most of today's on-line consumers exhibit a clear proclivity toward loyalty, and Web technologies, if used correctly, reinforce that inherent loyalty. In this article, the authors explain the enormous advantages of retaining on-line buyers. They also describe what Grainger, Dell, America Online, and other Internet leaders are doing to gain their customers' trust and earn their loyalty. By encouraging repeat purchases among a core of profitable customers, companies can initiate a spiral of economic advantages. This loyalty effect enables them to compensate their employees more generously, provide investors with superior cash flows, and reinvest more aggressively to further enhance the value delivered to customers.
U.S. corporations lose half their customers every five years. But most managers fail to address that fact head-on by striving to learn why those defectors left. They are making a mistake, because a climbing defection rate is a sign that a business is in trouble. By analyzing the causes of defection, managers can learn how to stem the decline and build a successful enterprise. The longer customers stay with a company, the more they are worth. The key to customer loyalty is value creation. The key to value creation is organizational learning. And the key to organizational learning, says the author, is grasping the value of failure.
Few companies have systematically revamped their operations with customer loyalty in mind. MBNA credit cards and State Farm Insurance are successful because they have designed their business around customer loyalty--a self-reinforcing system in which the company delivers superior value and reinvents cash flows to find and keep customers and employees. When a company consistently delivers superior value and wins customer loyalty, market share and revenues go up and the cost of acquiring new customers goes down. The company then can pay workers better. Increased pay boosts employee morale and commitment; as employees stay longer, their productivity goes up and training costs fall; employees' overall job satisfaction, combined with their experience, helps them serve customers better; and customers are then more inclined to stay loyal to the company. Finally, as the best customers and employees become part of the loyalty-based system, competitors are left to survive with less desirable customers and less talented employees.
Companies that aim for "zero defections" (keeping every customer they can profitably serve) can make profits rise. Defection rates are both a measure of service quality and a guide for achieving it. By listening to the reasons why customers defect, managers know exactly where the company is falling short and where to direct their resources.