Wrong yardsticks

Excerpts from The One Number You Need to Grow
Frederick F Reichheld in Harvard Business Review

• Because loyalty is so important to profitable growth, measuring and managing it make good sense. Unfortunately, existing approaches haven't proved very effective. Not only does their complexity make them practically useless to line managers, but they also often yield flawed results.
• The best companies have tended to focus on customer retention rates, but that measurement is merely the best of a mediocre lot. Retention rates provide, in many industries, a valuable link to profitability, but their relationship to growth is tenuous. Furthermore, retention rates are a poor indication of customer loyalty in situations where customers are held hostage by high switching costs or other barriers, or where customers naturally outgrow a product because of their aging, increased income, or other factors.
• An even less reliable means of gauging loyalty is through conventional customer-satisfaction measures. Our research indicates that satisfaction lacks a consistently demonstrable connection to actual customer behavior and growth. This finding is borne out by the short shift that investors give to such reports as the American Consumer Satisfaction Index. The ACSI, published quarterly in the Wall Street Journal, reflects the customer satisfaction ratings of some 200 U.S. companies. In general, it is difficult to discern a strong correlation between high customer satisfaction scores and outstanding sales growth. Indeed, in some cases, there is an inverse relationship; at Kmart, for example, a significant increase in the company's ACSI rating was accompanied by a sharp decrease in sales as it slid into bankruptcy.
• Even the most sophisticated satisfaction measurement systems have serious flaws. I saw this first-hand at one of the Big Three car manufacturers. The marketing executive at the company wanted to understand why, after the firm had spent millions of dollars on customer satisfaction surveys, satisfaction ratings for individual dealers did not relate very closely to dealer profits or growth. When I interviewed dealers, they agreed that customer satisfaction seemed like a reasonable goal. But they also pointed out that other factors were far more important to their profits and growth, such as keeping pressure on salespeople to close a high percentage of leads, filling showrooms with prospects through aggressive advertising, and charging customers the highest possible price for a car.
• In most cases, dealers told me, the satisfaction survey is a charade that they play along with to remain in the good graces of the manufacturer and to ensure generous allocations of the hottest-selling models. The pressure they put on salespeople to boost scores often results in postsale pleading with customers to provide top ratings --even if they must offer something like free floor mats or oil changes in return. Dealers are usually complicit with salespeople in this process, a circumstance that further degrades the integrity or these scores. Indeed, some savvy customers negotiate a low price--and then offer to sell the dealer a set of top satisfaction survey ratings for another $500 off the price.

See also:
A Survey of Surveys
Ultimate notes
Reichheld on the war on customers, on Loyalty, and on "The Ultimate Question"
Fred Reichheld's net promoter slide show. A 3-minute presentation.