The ultimate question
Fred Reichheld - Bain & Company, Adele Beachley - Regional Director - Research In Motion
 
Fred Reichheld
Fred Reichheld
A CEO Forum classic interview: With so many organisations now using the Net Promoter Score (or variants thereof) to assess customer satisfaction, it seems timely to revisit a 2006 interview with Fred Reicheld, the developer and populariser of the influential measure.
 
Over the years, customer satisfaction measures have been, almost by default, the mainstay of most companies’ customer measurement systems. While their limitations have been acknowledged by many senior executives – the tenuous link to profits, lack of actionable data, and even the annoyance value to customers – lack of a credible alternative measurement framework has meant many companies have persisted with them in the face of these problems.

That lack of an alternative decisive measure is, as Fred Reichheld argues, no longer the case. As he describes in this interview and his most recent book (The Ulltimate Question Harvard Business School Press 2006) the Net Promoter Score (NPS) gets companies to systematically ask their customers one simple question : would you recommend us to others? More than any single customer measure, the NPS can highlight a company’s competitive position, identify profits at risk, and provide a clear focus for service improvements and customer relationship management.

Fred Reichheld is widely recognised as one of the world’s leading authorities on customer loyalty and customer economics. A Bain Fellow, and author of the best-selling loyalty trilogy The Loyalty Effect, Loyalty Rules, and The Ultimate Question, Fred is a frequent speaker at major business forums around the world and has consulted to some of the world’s largest and most successful companies. His work has appeared in leading business publications such as The Harvard Business Review, Wall Street Journal, New York Times, Financial Times, Fortune, Business Week and The Economist.

ceoforum.com.au: What is the Net Promoter Score (NPS) ?

Fred Reichheld: It’s a framework for rigorously measuring and managing the most important thing in your business – your customers. That is, how many of your customers are assets, or promoters, and how many are liabilities, or detractors. In essence, you ask your customer one simple question – How likely is it you would you recommend us to a friend or colleague – and ask them to indicate the likelihood of that on a 0-10scale. You can tally up the results for the company, and the % promoters minus % detractors gives you an NPS measure for the company.

"NPS represents a fundamental shift in how
a company approaches
its business..."

When we’ve applied the NPS to companies globally, we’ve found a strong correlation between the relative NPS of companies in a particular sector, and their relative growth rate. We’ve also found that it is quite unusual for companies to rate really highly on NPS – say above 50%. Most companies have around 5-10%, i.e. almost a balance of promoters and detractors. Interestingly, we’ve found many companies – and even entire industries – with negative NPS scores, which is one reason those companies or industries can’t deliver consistent, sustainable growth to their shareholders.

ceoforum.com.au: How do you need to modify the NPS framework for business-to-business selling, and/or where the buying decision is spread over a number of different people in a business?

FR: In a business-to-business scenario, the selling company needs to carefully consider which individuals in the customer organizations should be surveyed, and how frequently that should occur. Typically, a large company selling industrial products should focus first on the 2-3 key decision-makers in the purchase, then take in the influencers of that decision, and also talk to the ultimate users of the product.

ceoforum.com.au: What about cases where a company has an extremely strong market position, or almost a monopoly? In those situations, to put it bluntly, if customers don’t have too much choice in who they buy from, does it really matter what they think of the company concerned?

FR: Some people have argued that NPS is less relevant when applied to monopoly situations, but, in my experience, it’s even more important to measure it. No monopoly lasts forever, so while companies can boost profits in the short-term by disregarding customers, it can eventually come back to bite them. If they want to expand, for instance, into different markets where their position is not so dominant, the ill-will they have generated amongst potential customers will certainly hurt them. If you destroy your reputation with customers through abusive behaviour, there will be consequences.

In that situation, it’s even more important for the CEO to hold everyone in the organization accountable for how they treat customers, if they don’t want to undermine the longer-term future of the company. A good example of this is the airline industry in the US. There were a number of airlines that established almost monopoly control of certain key airports in the US, but, if you look at their current situation, most of them are now either in bankruptcy or fairly close to it. Over time, as they became more and more complacent about their customers, they simply had lost the ability to compete on their merits.

Another point here is that treating customers poorly often destroys the motivation of your employees. They stop being interested in innovating, and may even start to be ashamed of how shabbily customers are being treated, and ultimately, of the company they are working for. Once you have a thoroughly de-motivated and disengaged workforce, where do you go from there?

ceoforum.com.au: What are some of the most common mistakes companies make when hen implementing the NPS within their own organizations?

"Treating customers
poorly often destroys
the motivation of
your employees..."

FR: It’s very important to validate the NPS status of the customer with that customer’s real-world behaviour over time. If they don’t match – for example, you have a notional promoter who is buying less and less of your product and more and more of your competitors – you have a problem with how you are gathering the information. You may be asking the wrong question, asking the wrong people, or simply failing to sufficiently maintain your organisation’s ability to deliver the quality experiences your customers expect.

A lot of people underestimate the complexity involved in implementing NPS. Initially, of course, it sounds very simple – one question, that makes enormous intuitive sense, to ask our customers. Yet, implemented correctly, NPS represents a fundamental shift in how a company approaches its business. It means customer feedback measures are used to drive internal priorities just as much as traditional profit and accounting measures. That’s a major change: in information systems, in the culture and behaviours of the company, and in the skills and training front-line employees need. It also has some very strategic implications, for example in how you segment your customer base and how you invest in serving those segments. It changes the whole rhythm of your business.

ceoforum.com.au: Many companies give lip service to customer loyalty, but if you examine their price structure, for instance, they often offer more favourable terms to new customers than existing ones. What is your view of that type of behaviour?

FR: I guess it arises because companies are only focused on the short-term gain of getting new customers. Ultimately, this type of behaviour and the messages it sends to customers can wreck the economics of your business. Loyal customers get penalized, and you actually create the sense that customers would be better off being disloyal. You can’t grow your business in a sustainable way if you keep that up for too long.

One interesting example of a company that takes a more creative approach is the Vanguard Group, the leading mutual fund in the US. Vanguard’s pricing structure actually rewards loyal, long-term customers, instead of using them to subsidize the acquisition of new customers, as most other funds do. Unfortunately Vanguard’s example is very much the exception to the rule: you can find lots of examples in the US of the behaviour you describe.

ceoforum.com.au: This gets to your distinction between good and bad profits – good profits coming from your promoters, and bad profits coming from your detractors. Could you expand upon that?

FR: Accounting systems, of course, make no distinction between the two, but, for an operational business, it is absolutely critical to do so. Can you imagine a situation, for instance, where most of your profits were coming from customers who actually didn’t like your company, wouldn’t recommend you to friends, and – by implication – would take their business elsewhere at the first opportunity? Clearly that business is in a lot more tenuous situation than one whose profitable customers are also promoters of that business. That’s why it’s so important to correlate customer profitability to their responses to the NPS – it gives you a much better insight into the overall health of your business.

Ten problems with customer satisfaction measures

Many companies base their customer metrics around satisfaction measures, but, according to Reichheld, customer satisfaction measures are problematic at best, and misleading at worst. Evidence of the comparative irrelevance of customer satisfaction measures can be gained by seeing how infrequently the measure is referred to when CEOs of US public companies are discussing their company’s prospects with investors. Fred Reichheld: “There is a database which tracks the issues American public company CEOs raise with investors in their quarterly briefings. We did a search of that database and found that customer satisfaction measures – what they were, how they were trending, and so on - were only mentioned in only 3% of those discussions. That means that, in the overwhelming majority of cases, CEOs simply didn’t think the issue was important enough to mention.”

In The Ultimate Question, Reichheld outlines ten problems with customer satisfaction measures:

  1.  Gaming and manipulation undermine credibility. Employees come to see high satisfaction scores, particularly when linked to reward systems, as an end in themselves, and can be extremely creative in gaming the system – effort that would be far better spent on improving customer experiences.
  2. Satisfaction surveys dissatisfy customers. Many surveys are annoying and intrusive, and, even when customers to respond, many companies fail to adequately acknowledge them.
  3. Surveys confuse transactions with relationships. Is a survey designed to test satisfaction with a particular transaction the customer had with the company, or – much more complex - the quality of the overall relationship?
  4. There are no generally accepted standards. Questions asked, sample sizes, grading scales and so on can vary dramatically even within a single company’s different business lines and country operations, making it very hard to make sense of the ‘same’ measure.
  5. Generic solutions don’t work for unique companies. Simply relying on a ‘cookie-cutter’ market research tools hyped by market research firms is unlikely to deliver much value.
  6. Survey scores don’t link to economics. Between 60-80% of customers, for instance, pronounce themselves satisfied or very satisfied before they defect, and some companies have satisfaction levels approaching 90% without gaining economic advantage.
  7. Too many surveys are marketing campaigns in disguise. Surveys are all-too-often not used to fix problems, but as a promotional strategy, something that only magnifies customer irritation.
  8. Employees don’t know how to take corrective action. The specific implications for employees from complex satisfaction data is rarely clear.
  9. The wrong customers respond. What type of customers take the time to fill out long surveys or answer questions on the phone? Are they truly representative?
  10. Too many surveys, too many questions. As surveys get longer, costs go up, response rates drop, and the sample size shrinks.

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