July 2006
The following article was first published in the Eastern Daily Press' 'The Business' on 26 July 2006
Loyalty grows profits
Last month, I lamented the modern obsession with short-term deals and the fickle customer behaviour they encourage. People lured to a new supplier by a too-good-to-miss offer frequently depart as soon as the next even better deal is dangled in front of them by someone else. This ongoing loss of customers is intriguingly known as `churn' by sales and marketing types and is one of the measures by which they are sometimes judged (customer retention rate). Interestingly, not a lot of business people have their performance measured by customer longevity and lifetime value. Whilst both are part of the loyalty mix, they are metrics that take time and effort to acquire and aren't very good, therefore, for assisting in operational improvement.
I've always been a great believer that minimising customer acquisition costs and maximising the lifetime value of each customer was a basic tenet of good business. But it wasn't until I studied some of the ideas of Fred Reichheld, the world's leading customer loyalty expert, that I found real scientific evidence that supports that simple belief. I was introduced to Reichheld's work by my friend Martin Kentish, who runs The Customer Feedback Company in Norwich, and who has developed a simple but powerful tool that allows a business to understand how loyal its customers really are and provides timely feedback about what can be done to improve it.
The Feedback Company's Performance Toolbox is based on the concept of a net promoter score, developed by Reichheld and his fellow researchers at Bain & Company. This simple measure is based on the difference between customers who are very likely to recommend a business to their friends and colleagues and those who are not, or who are merely `passively satisfied' with the service they receive. By studying thousands of businesses in many different industries, he discovered that those with the highest net promoter scores consistently achieved the best profit growth - often by a factor of two to three times that of their lowest-scoring competitors.
One of the questions that Martin and I explored when first talking about net promoter scoring and its uses, and which Reichheld raises in his writings, is “If collecting and applying customer feedback is this simple, why don't more businesses already do it this way?” My guess is that, for one thing, people looking for solutions to what they believe are complex issues often want complex answers and this seems just a bit too simple. Also, most traditional customer surveys are commissioned or conducted by sales and marketing people and so they feel like they `own' the outcome and are responsible for any actions that ensue. Therefore, these will often revolve around product development, marketing activities like advertising or sales promotions.
A net promoter score, on the other hand, is a clear indication of a customer's willingness to recommend a business to a friend or colleague: a demonstration of true loyalty, not merely an indication of satisfaction. That, in turn, usually results from how well they are treated by frontline employees, not simply what they paid for the product or service. Thus, the underlying likelihood of a customer remaining with a business for a long time, and in aiding its profitable growth by word of mouth promotion is in the hands of everyone in the business, not just the sales and marketing team. If you're the boss, this is the one number you should focus on above all others. Simple? Yes, like all the best ideas.