Thursday, November 5, 2009

The Ultimate Question : Driving Good Profits and True Growth

Author: Fred Reichheld
Published: 2006
Publisher: Harvard Business Press

As per the author Fred Reichheld, customer satisfaction surveys conducted by organizations have several limitations.
Firstly the percentage of customers responding to these surveys is low.
Secondly when the survey results are analyzed , they do not translate into actionable items. Third limitation is that the linkage between the survey responses and the company financials is not obvious.

Reichheld , a well-known Loyalty experts pitches for a methodology aimed towards increasing the customer response rate and also proposes a single metric called Net Promoter Score (NPS) to measure the customer satisfaction. Based on the NPS score a company can take strategic actions to improve its profits and growth rate.

Reichheld says that one must restrict the number of survey questions to 3 or 4, in order to generate better response rates.
He proposes asking in the survey, the Ultimate Question -
In a scale of 0-10 how likely are you to recommend our company to your friends or colleagues ?
This can then be followed by two more questions :
Why you have given us the above rating ?
What do we need to do for you to rate us 9 or 10 ?

In Reichheld's opinion these three questions is all that is needed to capture the essence of what the customer feels about the company.
Based on the answers to the Ultimate Question, the customers are categorized as Promoters, Passives and Detractors. Promoters are the ones who give a rating of 9 or 10; Passives rate 7 or 8; and the Detractors rate between 0 to 6.
The Net Promoter Score (NPS) is calculated as
NPS = % of Promoters - % of Detractors

Having calculated the NPS the companies must take actions to improve it. The NPS as per Reichheld has a strong correlation to company profits and growth. Here Reichheld makes a distinction between a Good Profit and a Bad Profit. Good profits are the ones which are earned from the customers who are promoters i.e who have a strong loyalty. Bad profits come from the customers who are detractors, and who can switch to a competitor at the earliest opportunity.

Reichheld then asks us to take the following actions listed in the order of priority to generate good profits :
1. Investing in the Core - Continue keeping the highly profitable promoters happy.
2. Reducing the Bad Profits - Address the concerns and issues raised by those detractors who are also highly profitable customers.
3. Finding Additional Promoters - Focus on converting profitable passive customers to promoters.

The book elaborates on the above concepts in a highly readable manner supported by case studies, though it is slightly repetitive. The book also has a dedicated website . It is worth visiting since it contains most of the key information available in the book . In fact I was able to make an impressive presentation to the management on Ultimate Question and NPS even before I had read this book.

Companies like GE, American Express, Costco etc. are implementing this methodology.
However there are several detractors to this methodology too; mainly companies who conduct surveys on behalf of their clients feel threatened by such a simple methodology. But there are also some researchers who feel that this method is not statistically valid.

To me this method seems worth a try though one should not solely rely on it but supplement it with other information gathered about customer loyalty.
I was asked to implement NPS methodology in my company by the CEO and was looking forward to do so. Unfortunately things took a different turn ! But that's another story to be told elsewhere and to a different audience.

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