| December 2007 | | | | from being uniformly loyal, some were far more |
| Fred Reichheld, an American loyalty guru, has | | | | prone to being tempted by competitor offers |
| argued that the days of customer satisfaction | | | | than others. The key difference was the |
| surveys are over (Reichheld, 2003). Instead we | | | | customer's level of involvement with cell phones. |
| should only be measuring customer loyalty. | | | | I found that amongst the Promoters who were |
| According to Reichheld all that is necessary is a | | | | psychologically involved with cell phones, |
| single question, which he labels 'The Ultimate | | | | competitors offering 20% discounts would create |
| Question'. | | | | a smaller increase in the switch rate than amongst |
| The Ultimate Question is simply "How likely are | | | | those Promoters who were not involved. |
| you to recommend company X to friends and | | | | Intriguingly those who were involved, although |
| colleagues?" Respondents are asked to rate the | | | | being an asset in that they were more resistant, |
| likelihood of recommending on a scale from 0, | | | | spent less on their cell phones every month than |
| meaning extremely unlikely, to 10 meaning very | | | | those who were involved. |
| likely. Promoters are those who give a rating of 9 | | | | In essence, 'Promoters' are not equally loyal. |
| or 10. Promoters are important not only because | | | | Relationship With Growth Not Clear |
| they are more likely to promote your brand to | | | | One of the foundational claims which undergirds |
| friends and family, they also tend to spend more | | | | the value of the Net Promoter Score, is the claim |
| than non-Promoters (Reichheld, 2003). | | | | that the Net Promoter Score relates to corporate |
| According to Reichheld you need to take it a step | | | | growth. However this is questionable. In a study |
| further if you want to relate the rating to future | | | | of 80 companies over a 7 year period, the |
| corporate growth, by calculating a Net Promoter | | | | researchers Morgan & Rego (2006) found |
| Score. The Net Promoter Score is simply the | | | | that the Net Promoter Score was not predictive |
| percentage of respondents who give your brand | | | | of company growth rates. In fact, customer |
| a 9 or 10 rating on a 0 to 10 recommendation | | | | satisfaction outperformed the Net Promoter |
| scale, minus the percentage who give you a rating | | | | Score as a predictor. |
| of 0 to 6 on the scale (Reichheld, 2003). | | | | Weighing-up the Positives and Negatives of the |
| Popularity | | | | Net Promoter Score |
| On the back of Reichheld's finding that the Net | | | | Reichheld has brought up some valid points about |
| Promoter Score correlates with future corporate | | | | satisfaction and loyalty measurement. Simplicity is |
| growth across a number of sectors (Satmetrix, | | | | not only appealing to high-level decision makers, it |
| 2004), the measure has gained broad support | | | | also appeals to customers who don't want to |
| from executives across a variety of industries. | | | | answer long questionnaires. The measure also |
| Some, such as GE's CEO Jef Immelt, have taken | | | | lends itself to standardization, to the point where |
| the unusual step of publicly praising the approach | | | | it may be a useful number to include on the |
| (General Electric, 2005). | | | | balance sheet. |
| Besides the claimed relationship with corporate | | | | That is one side of the story. The other is that |
| growth and customer behaviour, an additional | | | | the 'Ultimate Question' is far from being the most |
| attraction is simplicity, something very appealing | | | | accurate measure of loyalty, and so will more |
| to time pressured executives. | | | | often mislead than help. |
| Along the way Reichheld has popularized various | | | | It can also prove frustrating when it comes time |
| ideas in tandem with the loyalty measure - such | | | | to understand how to resolve a loyalty problem. |
| as his controversial claim that retaining 5% more | | | | Perhaps the highest-level decision makers are not |
| customers equals 100% more profits. Of | | | | overly concerned about tactical level problem |
| particular concern to those who have invested | | | | solving, however someone in the company will |
| heavily in customer satisfaction measurement, is | | | | have to be; and a single question won't give the |
| the claim that customer satisfaction measurement | | | | answers needed. |
| is redundant. | | | | Another issue is the delay before loyalty changes. |
| Reichheld pitches satisfaction measurement | | | | If executives wait until loyalty has been affected, |
| against loyalty measurement and proclaims the | | | | it is sometimes too late. Satisfaction with service |
| death of satisfaction measurement. He claims that | | | | quality will often drop long before it affects |
| customer satisfaction measures are overly | | | | loyalty. |
| complicated, a heresy to some in the boardroom, | | | | So Where to Now? |
| and that they also fail to explain corporate growth | | | | Reichheld has confused satisfaction with loyalty. |
| differences in a sector. | | | | Satisfaction and loyalty are two different issues. |
| He also laments the long windedness of the | | | | While you would naturally expect loyalty |
| questionnaires typically employed to measure | | | | measures to relate more closely to customer |
| customer satisfaction. | | | | behaviour and future growth than satisfaction and |
| The Ultimate Question? | | | | service quality perceptions, claiming that you |
| There is nothing terribly wrong with the Ultimate | | | | should drop these measures in favour of loyalty |
| Question - other than that it is far from being | | | | measurement makes no sense at all. |
| 'ultimate'. Reichheld claims that of the 20 different | | | | Customer satisfaction with the service quality |
| measures he tested, it was the best predictor of | | | | delivered, is only one amongst a number of |
| customer behavior and future corporate growth | | | | loyalty drivers, but that doesn't mean it should be |
| (Reichheld, 2003). | | | | ignored. |
| Not the Best Predictor of Customer Retention | | | | Measuring loyalty alone, may tell you how many |
| You don't need a degree in statistics to figure out | | | | loyal customers there are, but it doesn't tell you |
| that there is something intuitively wrong with the | | | | how to fix the problem if there is one. |
| claim, that whether a customer says he will | | | | It is still necessary to measure customer |
| recommend your company or not is the best | | | | satisfaction, along with service quality perceptions |
| predictor of whether he will stay with your | | | | in order to flag issues and tackle the root causes |
| company. | | | | of loyalty failures. Throwing out satisfaction in |
| Differences in the tendency to recommend don't | | | | favor of loyalty is like deciding that you only need |
| automatically mean there will be differences in | | | | to report net profits on an income statement and |
| loyalty behavior - whether retention or increased | | | | can dispense with all the rest of it. |
| spend. Results from an analysis I conducted using | | | | Lastly, looking beyond the hype, it is clear that |
| data collected by Ask Afrika, of a number of | | | | willingness to recommend is a sub-optimal loyalty |
| different markets ranging from short term | | | | measure. There are far more accurate loyalty |
| insurance to cars made this clear. Using an | | | | measures in existence which have benefited from |
| approach which has been established as a reliable | | | | years of development by professional marketing |
| predictor of the percentage of customers | | | | researchers. They offer better accuracy in |
| switching away from a company, I compared the | | | | predicting loyalty behaviors, and are typically |
| results to the Net Promoter Score (this approach | | | | coupled with diagnostics which aid in gaining an |
| is discussed in a related article "The One Number | | | | understanding of what creates loyalty. |
| You Need to Measure Loyalty"). | | | | Copyright reserved (2007). The author gives |
| Clearly the Net Promoter Score does not relate | | | | permission for the article to be re-published, |
| to the percentage of customers switching away | | | | however the article may not be altered or |
| from each institution. | | | | shortened and must be re-published in its entirety. |
| A survey of 8000 customers in the banking, retail | | | | References: |
| and ISP industries, conducted by Keiningham et al. | | | | General Electric, (2005), "GE annual outlook |
| (2007) lends support to this. Keiningham et al. | | | | meeting - final", Fair Disclosure Wire (Quarterly |
| (2007) asked customers the likelihood of | | | | Earnings Reports), Dec 13. |
| recommending question along with a rival set of | | | | Keiningham, T.L., Cooil, B., Aksoy, L., Andreassen, |
| questions, and then followed up with questions | | | | T.W., Weiner, J.W., (2007)"The value of different |
| about retention a year later. The results showed | | | | customer satisfaction and loyalty metrics in |
| that the Ultimate Question barely improves on a | | | | predicting customer retention, recommendation, |
| conventional satisfaction measure as predictor of | | | | and share-of-wallet", Managing Service Quality Vol. |
| retention, and was outperformed by a simple | | | | 17 No. 4, 2007 pp. 361-384. |
| repeat purchase intention question. | | | | Morgan, N. & Rego, L. (2006) "The value of |
| Doesn't Identify Those Who Are Truly Loyal | | | | different customer satisfaction and loyalty metrics |
| Reichheld (2003) states that some clients buy out | | | | in predicting business performance", Marketing |
| of habit, which means that retention | | | | Science, September/ October. |
| measurement (i.e. did they stay or did they go) is | | | | Reichheld, FF., (2003), The one number you need |
| not a good measure of true loyalty. He suggests | | | | to grow, Harvard Business Review, December, |
| that the Net Promoter approach is able to identify | | | | Vol. 81, Issue 12. |
| true loyalty. This suggests that Net Promoters | | | | Satmetrix, (2004), The power behind a single |
| should be more resistant to competing offers | | | | number: Growing your business with Net |
| than those who just buy out of 'habit'. | | | | Promoter, Satmetrix Systems. |
| However, using cell phone data collected by Ask | | | | *Note: Net Promoter is a registered trademark of |
| Afrika, I found hidden differences amongst | | | | Satmetrix Systems, Inc., Bain & Company |
| consumers who were identified as 'Promoters'. Far | | | | and Fred Reichheld. |