Sunday, February 26, 2006

The Ultimate Question

Last week I started reading this fabulous book from Fred Reichheld, a customer-loyalty guru in Boston, called The Ultimate Question: Driving Good Profits and True Growth. It is officially being published next month. While this book is aimed at corporate executives, it underlines the importance of having a strong customer focus.

Reichheld says too many companies are dependent on “bad profits” – revenue from tactics that alienate customers, such as charging service charges and monopoly premiums or cutting back on service. He says that companies grow much faster and more sustainably when they focus on “good profits” – revenues that accrue from customer-pleasing strategies, such as offering lower prices (e.g. Southwest Airlines) or creating better customer experiences (think Amazon.com) or building community (think eBay).

He and his colleagues at Bain & Co. did a multi-year customer loyalty study that found that companies that increase customer retention by 5% can yield a 25% to 100% increase in profits. The problem is, most employees are measured and compensated not on retention or customer satisfaction, but on sales and profits – metrics that do not distinguish between what’s “good” or “bad” for customers. Thus, many executives take the easy way out and compromise the customer experience in order to make their numbers.

Here’s how you make this work for you.

1. Ask customers this simple question:
How likely is it that you would recommend this company to a friend or colleague?

2. Based on the responses to this question, calculate your Net Promoter Score. (Subtract the number of customers who are Promoters of the company from the number who are Detractors.) Reichheld’s research has found that companies with the highest percentage of promoters enjoy strong profits and healthy growth.

3. Continually monitor your NPS and include those results in all calculations of executive compensation or bonuses. That which is measured (and rewarded) gets done.

Run (don’t walk) to your bookstore. This is an easy to read book with a powerful message.

Or, download Chapter 1 for free by clicking here. (Ain't the Internet grand?)

1 comment:

John Ross said...

I think you've hit the mark. I've worked for a number of companies that have been overly focused on short-term revenue at the expense of longer term sustainability.
I think you should show your post to the Editors at PROFIT. I like their "Top 100" lists of the highest growth companies, but I wonder how many companies are growing too fast? I'd love to see their NPS value - or some other metric that they're in controlled growth.