Customer Service Reader

Ultimate notes

Notes on The Ultimate Question, by Fred Reichheld

• The average Net-Promoter Score (NPS) for U.S. companies is less than 10%
• Senior managers are delusional. 96% of senior managers said they were “focused” on the customer. 80% believed they delivered a “superior experience” to their customers. But when their customers were surveyed, only 8% of their companies were given a superior rating.
• Measurement is not enough. Pointless to set up an NPS measurement system if you don’t understand that delighting customers is the only path to true growth.
• If you do get it, three things you must do: (1) design value propositions that focus on the right customers, then create a complete customer experience capable of delighting each targeted segment, (2) deliver those propositions end-to-end, with all employees pulling in the same direction, (3) do all this over and over again.
• Good design is not enough. What counts is a company’s ability to deliver those propositions consistently.
• Delivery depends primarily on the spirit, enthusiasm, and cooperation of frontline employees - the people who actually produce the goods, or deliver the services and deal with the customers.
• And there's the problem. Bain surveyed North American employees who had worked ten years or more for the same company. Only 39% trust their leaders to communicate openly and honestly. Only 33% believe that employee loyalty at their company is valued and rewarded. Only 28% say that their company values people and relationships above short-term profits. Only 19% provide enthusiastic referrals for the company that employs them.
• To build an organization that creates promoters: (1) send the right messages to your people, (2) hire and fire to inspire, (3) pay well and invest in training, (4) keep teams small to enhance accountability and service, (5) link measures and rewards to company values.
• Don't tread on Fred. On Claes Fornell (principal author of the American Customer Satisfaction Index): "the Journal reported that Fornell had been buying or short-selling shares of companies surveyed by the ACSI prior to releasing the data for publication". On JD Power: "There are J.D. Power winners for flights over five hundred miles and flights under five hundred miles. Perhaps we'll soon see awards for the highest customer satisfaction among bankrupt airlines."

See also:
Excerpts from Chapter 1 (inc a link to a downloadable pdf version)
Reichheld on Loyalty, the war on customers, wrong yardsticks, keeping it simple
Fred Reichheld's net promoter slide show. A 3-minute presentation.
A Survey of Surveys
The Net Promoter Forum

War on customers

Excerpts from Stop The War on Customers
Fred Reichheld

Company leaders realize that profitable growth is impossible without loyalty — yet they have failed miserably in their efforts to earn loyalty from either their customers or their front-line employees. After pondering this paradox for several years I finally began to realize the answer.

The first step is to set aside all that rosy rhetoric about customer focus. Most companies today are waging a war they cannot win — the war against their customers. They cut corners on product and service quality. They impose hidden fees and charges. They force customers to endure aggressive sales tactics, endless airport lines, and virtual or voicemail hell. They don’t tell the truth in their advertising and marketing, nor do they own up to their mistakes.

Ironically, this is a war most of the generals do not want to fight. CEOs spend countless millions of dollars on customer-focus initiatives, improved service quality, and enhanced customer experiences. They extol customer loyalty as the ultimate strategic advantage. Satisfaction surveys rain down on homes and businesses with implicit messages of care, concern, and promises of a better future.

Yet this undeclared war is escalating. Cellular phone providers trap customers in long-term contracts, and then abuse them with outrageous overage charges. Car dealers mislead and manipulate consumers. Banks charge unconscionable nuisance fees. Electronics store clerks flog extended warranties more desperately than their flat-screen TVs. Printer manufacturers price-gouge on refill cartridges. Computer companies make sure that calling their customer help-line is more painful than a trip to the dentist.

Yes, what is really going on is an undeclared war that is destroying corporate reputations, alienating employees, and decimating economic prosperity. It is the reason that nearly 80% of the world’s major corporations failed to achieve a modest 5% real, sustainable rate of growth over the past decade. This war is the reason why society has concluded that business ethics and good profits are both oxymoronic.

The reason I wrote The Ultimate Question was to expose this war and its full range of guerrilla activities. I hoped that I could provide a manual of the tools and tactics required to stop this war for good—and clarify how corporate leaders are unwittingly motivating their troops to book bad profits that destroy loyalty and growth. My goal is to help leaders revitalize good profits and true growth by showing them a practical path for holding organization members accountable for building good relationships and for standards of behavior that are consistent with the Golden Rule and respectful of human dignity (of customers, employees, suppliers and investors alike). We must all blow the whistle on bad profits.

See also:
Reichheld on "The Ultimate Question"
Reichheld on Loyalty
A Survey of Surveys

The ultimate question

Excerpts from The Ultimate Question, Chapter 1
Fred Reichheld

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.

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

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.

Satisfaction vs Delight

Excerpts from Reassessing the Foundations of Customer Delight
Adam Finn, University of Alberta in Journal of Service Research

• There is strong evidence of positive effects of customer satisfaction on repeat purchase, retention, loyalty, and profitability.
• However, the 1990s saw some questioning of the value of treating satisfying customers as a business objective. One explanation is that the rating scales that researchers commonly use to measure satisfaction do not translate linearly into desired managerial outcomes, such as repurchase and loyalty.
• Only when satisfaction scores exceed the upper threshold of a customer’s zone of tolerance does a service experience have a lasting impact by creating customer delight.
• What is really important to intentions and future behavior is not satisfaction itself but the emotional response to the experience.
• Although meeting expectations can satisfy, it is the emotional response to a surprise—whether delight or outrage—that has a real impact on customer loyalty.
• Cross-sectional consumer behavior research found that the cluster of consumers reporting the highest levels of surprise and joy were more satisfied than others.
• Customer delight is conceptualized as an emotional response, which results from surprising and positive levels of performance. As such, it could provide an explanation for the observed variation in the intentions and subsequent loyalty of customers reporting the same level of satisfaction.

What is Loyalty?

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

• Loyalty is the willingness of someone--a customer, an employee, a friend--to make an investment or personal sacrifice in order to strengthen a relationship. For a customer, that can mean sticking with a supplier who treats him well and gives him good value in the long term even if the supplier does not offer the best price in a particular transaction.
• Customer loyalty is about much more than repeat purchases. Someone who buys again and again from the same company may not necessarily be loyal to that company but instead may be trapped by inertia, indifference, or exit barriers erected by the company or circumstance. On the other hand, a customer may be loyal even when she doesn't make frequent purchases. For example, she may have moved out of town but still recommends a store to her friends back home.
• True loyalty clearly affects profitability. While regular customers aren't always profitable, their choice to stick with a product or service typically reduces a company's customer acquisition costs. Loyalty also drives top-line growth.
• No company can grow if its customer bucket is leaky, and loyalty helps eliminate this outflow. Loyal customers can raise the water level in the bucket: Customers who are truly loyal tend to buy more over time, as their incomes grow or they devote a larger share of their wallets to a company they feel good about.
• Loyal customers talk up a company to their friends, family, and colleagues. Such a recommendation is one of the best indicators of loyalty. When customers act as references, they do more than indicate that they've received good economic value from a company; they put their own reputations on the line. And they will risk their reputations only if they feel intense loyalty.
• The tendency of loyal customers to bring in new customers--at no charge to the company--is particularly beneficial as a company grows, especially if it operates in a mature industry. In such a case, the tremendous marketing costs of acquiring each new customer through advertising and other promotions make it hard to grow profitably. In fact, the only path to profitable growth may lie in a company's ability to get its loyal customers to become, in effect, its marketing department.

See also:
Reichheld on the war on customers
Reichheld on "The Ultimate Question"
A Survey of Surveys