Reichheld’s New Metric: The Net Promoter Score
Fred Reichheld stunned marketers in 1996 when he argued in The Loyalty Effect that a 5% improvement in retention can boost profits by up to 100%. Now he is about to shock them again. In his new book, The Ultimate Question, he urges firms to rethink the way they measure customer loyalty. Does that mean developing a dashboard with 30 items on it? No. As Reichheld sees it, the calculation can be reduced to a single metric based on a single survey question. The metric? The Net Promoter Score. The question? Would you recommend us to a friend?
Reichheld deserves a hearing. “The Loyalty Effect,” influenced a generation of business leaders. and Reichheld had a best-seller on his hands. He followed it up with Loyalty Rules. All of his books are published by Harvard Business School Press.
A Harvard MBA, Reichheld was a Bain & Co. partner until roughly ten years ago. He then made the decision to give that up and become the first Bain Fellow. As such, he devotes himself to writing and lecturing. We sat down with Reichheld last week to ask him about the ultimate question.
MarketingROI: What is this hot new metric you’re talking about?
Reichheld: Net worth is one of the fundamental measures in a business. What we’ve done is create the equivalent for customers. We’ve identified the assets in the customer base, and subtracted the liabilities. And we’ve done that by asking one question and deriving one statistic: the Net Promoter Score. The ultimate question is: How likely would you be to recommend us to a friend? People who score nines and tens are promoters. They account for 80% to 90% of the positive word of mouth. They generate the growth in business and make employees proud to be there. Passives are those who give you a seven or an eight. They’re perfectly satisfied for the moment, but they’ll switch to a competitor if something better comes along. Then are those who score zero through six. Those are failing grades. Those customers are detractors. They complain and will eventually defect. If you take the percentage of your customer base who are promoters, subtract the percent who are detractors, you come up with the net promoter score, or the net worth of your customer base.
MarketingROI: Don’t many firms already do satisfaction surveys?
Reichheld: Yes, but they have been a terrible disappointment. With just a few exceptions. they’re not done very effectively, and they have very low credibility where it counts. One leading investment bank looked at two years of institutional investor reports in which mutual funds explained why they invested in specific stocks. Out of the 8,000 filings, only six mentioned anything about customer satisfaction. Wall Street likes the idea, but it hasn’t seen any reliable data.
MarketingROI: But aren’t there a host of other metrics that can tell you how well you’re doing?
Reichheld: Companies have built complex dashboards full of interesting measures, some of which are very good, like retention rates and share of wallet. But they aren’t gathered in a precise, timely, granular fashion. And they don’t influence frontline priorities the way that profits do. Profits are gathered according to a set of carefully established principles. They’re taken seriously. But there’s a big difference between good profits and bad profits, and accountants can’t tell us that difference. Customers can tell us, but we just haven’t built the kinds of feedback tools that are strong enough to stand up to profitability.
MarketingROI: What are bad profits?
Reichheld: Bad profits are those you earn from any customer who gives you a zero-through-six when asked if they would recommend you to a friend. And they destroy a business.
MarketingROI: How so?
Reichheld: They create more detractors, and those detractors do several very specific things that destroy growth. They buy less stuff. They eventually defect. They give terrible word of mouth. And they make your employees embarrassed to work there. Companies can fake it for awhile. They can buy growth with more advertising, but they lose their ability to grow profitably. And there’s more to it than that. Business is the predominant institution in western society, but most citizens have a negative view of it. They think that they can’t trust it, and the reason is that bad profits have become so prevalent. You have the airlines hitting you with these fees, and rental car firms charging you a crazy amount for gas. Most companies are addicted to bad profits, and it’s not just hurting them, it’s hurting society by leading to calls for more regulation.
MarketingROI: What does the net promoter score tell you beyond the fact that some customers like you?
Reichheld: It’s the best predictor of organic growth that we have seen to date. In over 24 industries that Bain has analyzed, the net promoter score leader is growing at more than 2.5 times the rate of its competitors.
MarketingROI: But isn’t it a tough sell when you’ve got CEOs demanding a quick return on investment?
Reichheld: No. Executives have been deeply frustrated that they haven’t had a way to hold people accountable for generating the right kind of profits, so it’s an easy sell. The difficult part is recognizing that it takes work and that you can’t just add the 40th question to your 39-question survey. You have to ask the ultimate question carefully and frequently, and have closed-loop processes so that when a customer says they’re neutral or worse, someone’s responsible for following up and trying to fix that.
MarketingROI: Who’s doing it right?
Reichheld: General Electric tested the Promoter’s Scores for six to nine months in its healthcare division, and has since rolled it out across all 500-plus businesses. Twenty percent of all its executive bonuses are driven by Net Promoter Scores.
MarketingROI: Anyone else?
b>Reichheld: Intuit is one of the first firms to adopt the net promoter score. In their TurboTax business, they manage to grow net promoter scores by 15 points and have for the first time in over a decade gained substantial share and grown that business the right way.
MarketingROI: What changes did they have to make internally?
Reichheld: Number one, they had to find a way to measure Net Promoter Scores that was credible, not just internally but to their investors. You just can’t sort of take your satisfaction surveys and do them twice as often and offer that up and expect Wall Street to accept it. They also found appropriate ways to link it peoples’ bonuses. And they found that you really have to allocate a certain amount of time at each executive meeting, and to make sure everyone’s trained in it. You have to make it one of the top priorities at your firm. It can’t be No. 7 or 8.
MarketingROI: Are most companies patient enough to stick with this process?
Reichheld: Wise leaders recognize that it’s never simple to do anything important. How do you get your customers to give you the time to give you candid, thoughtful feedback after years of wasting their time with irrelevant surveys,? That’s a tough challenge. How do you make sure that your front line employees aren’t out there pleading for higher scores and bribing customers? That’s a tough challenge.
MarketingROI: A number of the firms cited in your book, like Amazon and Enterprise, are fairly young, entrepreneurial companies driven by a very strong personality at the top. What about firms that are more mature and not being run by their founder?
Reichheld: Most of the superstars in my book didn’t initially get there by measuring net promoter scores. What they did was get more promoters and fewer detractors without the benefit of a hard metric. Enterprise is one of the few who really did have a hard metric for seven or eight years now, and that really did play a very important role in their progress. Overall, the net promoter score is of the greatest value to large public firms that owe a responsibility to shareholders that this is financially rational.
MarketingROI: Now that you have asked the ultimate question, what’s next?
Reichheld: Some pundits have said, that my next book will obviously be “The Ultimate Answer.” One thing I’m interested in is taking this to the employee side of the organization. That same question is really the core issue for employees as well: To what degree would you recommend this as a great place to work? Too many firms forget that you can’t earn customer loyalty unless you’ve first earned the loyalty of your front-line employees.
MarketingROI: Will this help chief marketing officers extend their job tenure?
Reichheld: Chief marketing officers have drifted the same way as satisfaction surveys: towards irrelevance. Marketing should be the center of a business organization, but it’s not for most. The CFO and the financial side have become dominant. What the Net Promoter Score offers to marketers is a rigorous, reliable metric that can put them back to front and center in terms of driving the corporate agenda. If they do that, the CMO job is going to be a lot more rewarding.
