Saturday, 24 March 2012

Net Promoter Score

I have recently read a very interesting article about the ‘Net Promoter Score’ and basically the idea is that by concentrating solely on those most enthusiastic about their experience, the company could focus on a key driver of profitable growth: customers who not only return again but also recommend the company to their friends.

Frederick Reichheld was arguing about the usefulness of long surveys and we he found that the ‘Would recommend’ question generally proved to be the most effective in determining loyalty and predicting growth.

What is loyalty?
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. Customer loyalty is about much more than repeat purchases. Indeed, even 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.

That is actually a true story. I decided to test the theory on myself and I prove that the theory is practical. I am not loyal to Ryanair, but I constantly use it to fly – because I am a student and it is cheap. Where else could I buy a ticket for 13 pounds to exact places I need to go? But I would not recommend flying with this company to anyone. Yes, the price is cheap – but you get the same experience and service for this cheap price. Although, I wrote a report about Ryanair and about its customer experience and etc. but just the final point about it that I would like to make – right now they are trying to change their customer’s perception. A got an email recently from them, saying ‘Please be advised that there has been a five minute time change to your Ryanair booking’ and attached a link to accept this change. That was unexpected, but actually nice.

Loyal customer may not make frequent repeat purchases because of a reduced need for a product or service.  Customers who are truly loyal tend to buy more over time, as their incomes grow or they devote a largest share of their wallets to a company they feel good about.

In case of Ryanair, if the price is not a concern – I will switch to another airline. Therefore, it again proves that I am not loyal to Ryanair, but I constantly use its services. In comparison, when I get more money I can spend more on IKEA furniture, because when I see it – I want to buy more and more.

And loyal customers talk up a company to their friends, family and colleagues. When customers act as references, they do more than indicate that they’ve received good economic value from a company.

It is also very much linked to a research I am doing for a company for 6 months already. We [my group] found out that in that industry people tend not to be loyal to the companies they are buying services from. On some of the interviews we conducted and backed up with the online questionnaire, we found that some teachers say ‘Yes, I am using the services, but I actually cannot remember the name of the company’. That’s not loyalty, and when they have a chance – they will probably switch to a competitor who offered a greater deal.

Retention rates are also 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.

The good positive example is McDonalds. Why? Well at least when I was a child I remember that I thought that McDonalds is a place for kids. They had ‘Happy Meal’ and you could organise a Birthday Party over there as well. That was a smart move! Now I still purchase its products and prefer it much more to others like Burger King or KFC. Smart strategy – grab customers when they are young, keep them and they will grow together with your product.

Customer satisfaction scores –or the pressure they put on salespeople to boost score often results in post-sale pleading with customer to provide top ratings – even if they offer free incentives in return. Customers can answer the survey, that they are satisfied, just because they feel the need to do so [feel that someone else wants them to leave the positive feedback, so they want to satisfy they people], they feel it to be’ right’ to lie or just because they know someone else personally, so they think it would affect that someone else. 

However, there is a strong correlation between a company’s growth rate and the percentage of its customer who are ‘promoters’ – that is, those who say they are extremely likely to recommend the company to a friend or colleague. Measuring those is a good measure of customer loyalty.

Countering a damaged reputation requires a company to create tremendously appealing incentives that will persuade sceptical customers to give a product or service to try, and the incentive drive up already significant customer acquisition costs. When a customer reported a neutral or negative experience, marking him a potential detractor, the interviewers need to request a permission to immediately forward this information to the brand manager, who is trained how to apologise and identify the root cause of the problem and resolve it.

Therefore, the author suggests focusing on ‘promoting’ customers- those, who are likely to recommend your product/company and influence impact the success and growth of business – increasing the number of customers.

Whereas, it is also important to know what was wrong and apologise – but instead of trying to focus only on the wrong part – it is costly and time consuming, it is better to just try to increase brand loyalty by constantly checking your net promoter score, knowing your loyal customers, knowing why they are loyal.

Even though, that is a B2B industry, I would be curious to find out how it would fit with BP.

If you want to read more, and find out how to calculate the net promoter score read the initial article by Reichheld F.F. (2003) ‘The one number you need to grow’ Harvard Business Review, December 2003

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