Together with my colleagues at Bain & Company, I began investigating the connection between loyalty and growth almost twenty-five years ago. We first compiled data demonstrating that a 5 percent increase in customer retention could yield anywhere from a 25 percent to a 100 percent improvement in profits. Later, we showed that companies with the highest customer loyalty (we labeled them loyalty leaders) typically grew revenues at more than twice the rate of their competitors.
What we needed was a foolproof test — a practical metric for relationship loyalty that would illuminate the difference between good profits and bad. We had to find a metric that would permit individual accountability. We knew that the fleeting attitudes expressed in satisfaction surveys couldn’t define loyalty; only actual behaviors can gauge loyalty and can fuel growth. So we concluded that behaviors must be the real building blocks. We needed a metric based on what customers would actually do. After considerable research and experimentation, we found one such metric.
We discovered the one question you can ask your customers that links so closely to their behaviors that it is a practical surrogate for what they will do. By asking that question systematically, and by linking results to employee rewards, you can tell the difference between good profits and bad. You can manage for customer loyalty and the growth it produces just as rigorously as you now manage for profits.
Customer responses to this question yield a simple, straightforward measurement. This simple, easy-to-collect metric can make your employees accountable for treating customers right. It’s one number you need to grow. That’s why we call the question that produces it the Ultimate Question: this question will determine the future of your business.
Asking the Ultimate Question
What is the question that can tell good profits from bad? Simplicity itself:
How likely is it that you would recommend this company to a friend or colleague?
The metric that it produces is the Net Promoter ® Score. Net Promoter Score (NPS) is based on the fundamental perspective that every company’s customers can be divided into three categories. Promoters, as we have seen, are loyal enthusiasts who keep buying from a company and urge their friends to do the same. Passives are satisfied but unenthusiastic customers who can be easily wooed by the competition. And detractors are unhappy customers trapped in a bad relationship. Customers can be categorized according to their answer to the question. Those who answer nine or ten on a zero-to-ten scale, for instance, are promoters, and so on down the line.
A “growth engine” running at perfect efficiency would convert 100 percent of a company’s customers into promoters. The worst possible engine would convert 100 percent into detractors. The best way to gauge the efficiency of the growth engine is to take the percentage of customers who are promoters (P) and subtract the percentage who are detractors (D). This equation is how we calculate a company’s NPS:
P – D = NPS
In concept, it’s just that simple. All the complexity arises from learning how to ask the question in a manner that provides reliable, timely, and actionable data—and, of course, from learning how to improve your NPS.
Our research over a ten-year period confirms that, in most industries, companies with the highest ratio of promoters to detractors in their industry sector typically enjoy both strong profits and healthy growth. This might seem counterintuitive. After all, the high-loyalty firms tend to spend much less on marketing and new-customer acquisition than do their competitors. They also focus intensely on serving existing customers and are highly selective in pursuing new customers, which you might suspect would limit these firms’ growth. But the data doesn’t lie: the faster growth of the loyalty leaders is driven by the superior efficiency of their growth engines. Earning growth rather than buying it sustains top-line momentum while generating richer profits.