The Ultimate Question
By Fred Reichheld
Harvard Business School Press, 211 pages, $33.95
Too many companies these days can't tell the difference between bad profits and good profits, and as a result, have become hooked on bad profits, contends loyalty expert Fred Reichheld of Bain & Company.
Bad profits are earned at the expense of customer relationships. You don't have to look much further for examples than most customer service phone centres, or, alternatively, the exorbitant costs for using a hotel room telephone. They lower short-term costs for a company or raise short-term revenue at the expense of long-term profitability.
But companies can't spot the impact, today, on the financial statements. "Accountants can't tell the difference between good and bad profits. They all look the same on an income statement," Mr. Reichheld writes in The Ultimate Questions: Driving Good Profits and True Growth.
Managers and investors therefore need another benchmark that illuminates the impact of corporate decisions on those all-important, long-term customer relationships. And Mr. Reichheld thinks he has found it: one question on customer surveys that differentiates between good and bad profits, and when monitored by companies, has been leading to success.
The key are detractors -- customers who feel badly treated by the company, and cut down on their purchases, switch to the competition if they can, and warn others to stay away from the company they feel has wronged them.
Detractors don't show up on the balance sheet, but Mr. Reichheld says they cost companies far more than most of the liabilities that traditional accounting methods so carefully tally: "Bad profits work much of their damage through the detractors they create."
After trying out a battery of questions over the years to find the link between customer satisfaction and profits, he found to his surprise only one needs to be asked: How likely is it that you would recommend this company to a friend or colleague? Respondents are asked to give a score to this ultimate question, on a scale from a low of zero to a high of 10.
People who rate the company at 9 or 10 are considered promoters. Those are the customers you want: People who tell others they should be doing business with you. Customers who value your company at 7 or 8 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.
"Some of these customers may appear profitable from an accounting standpoint," he warns of the detractors, "but their criticisms and attitudes diminish a company's reputation, discourage new customers, and demotivate employees. They suck the life out of a firm."
To rate your company's effectiveness, subtract the percentage of customers who are detractors from those who are promoters. So if 60 per cent of your customers are promoters and 40 per cent detractors (with none passive), your company gets a score of 20 per cent.
His studies found the average firm sputters along at a net promoter score of only 5 per cent to 10 per cent. That means its promoters are only marginally greater in number than its detractors, an ominous situation. In fact, for the average firm, more than two-thirds of customers are passives, bored with the company, or detractors who are actively angry.
But some customer-centric companies gain ratings of between 50 to 80 per cent. USAA, the remarkable U.S. insurance company catering to the military, tops his charts at 82 per cent. Harley-Davidson Inc.'s net promoter score is 81 per cent, Costco Wholesale Corp. is at 79 per cent, Amazon.com Inc. at 73 per cent, eBay Inc. at 71 per cent, and Apple Computer Inc. at 66 per cent.
"Our research over a ten-year period confirms that, in most industries, companies with the highest ratio of promoters to detractors in their sector typically enjoy both strong profits and healthy growth," he says.
That means companies can ask the question on customer surveys -- just this one question; no need for any more -- and by following up on the answers employ it to eliminate bad profit activities and institute good profit ideas.
The book explains the details of introducing the metric at your company, and using it as an active management tool, offering examples from trailblazers. It's an eye-opening and alluring account, told in a clear, reasoned manner.
In Addition: Marshall Cohen, chief industry analyst market research firm the NDP Group, deals in Why Customers Do What They Do (McGraw-Hill, 184 pages $33.95) with how lifestyles have become more important than age in determining how to market to customers: The middle in most markets is thinning as people prefer either premium or low-priced purchases. He brings a lot of knowledge and some insight to the book, but it is mostly scattered and prosaic.
Harvey Schachter