Happy customers - fuelling growth


Happy customers - fuelling growth

Wednesday, April 3, 2013


For decades, marketers have been measuring lifetime value of customers but they are not able to distinguish such value between a happy and an un-happy customer. Not anymore – with Netpromoter®, you are able to measure the lifetime value of a happy and an un-happy customer. Do check out my previous blog on The ABC of Netpromoter if you are new to Netpromoter. 

The difference between the two has a substantial value in the bottom line of a company. A study done by Bain with banks in North America in 2008 found that the difference was staggering! A promoter (happy customer) is worth roughly $9,500 more to a bank than a detractor (un-happy customer).

It explains why Netpromoter leaders tend to have higher growth than the laggards. In 2010, Philips who makes consumer electronics, medical devices and lightings embarked into finding out the difference of their Netpromoter leadership in some twenty seven business-units and its correlation to growth. Philips found they were growing a net  8% in the business-units where they led the Netpromoter score against other competitors. For the business-units where Philips were laggards compared to competitors, they were growing slower by a net 5% (-5%). 

When they probed further at local level, they found even stronger relationship between the Netpromoter, local growth and market-share. Some other companies have done similar analysis and found similar relationship between Netpromoter and growth.

Lets explore why these happy customers (the promoters in Netpromoter terminology) spur growth. Based on the book Ultimate Question 2.0 (by Fred Reichheld and Bob Markey) there are several factors that make a promoter more valuable in accelerating the growth of a company.

Retention rate:

Generally, promoters stay with you longer. The promoters want to stay longer because they like you and like doing business with you.  Customers will continue to do business when they feel they feel they are valued. It is not enough just saying that ‘You are valued’ on your advertisements. Customers have grown out of this. They are the jury and if they truly feel that they are valued, they will continue to stay. And it is not a one off initiative but companies will need to build into their system on continuously treating their customers in a way that the customers feel valued. 

The detractors aka un-happy customers, on the other hand would never want to do business with you from the onset. Many such customers continue to stay out of no choice or because they are trapped in a long-term contract. Hence measuring retention rate could be a little tricky as you need to find out if the customer continue buying from you because they like you or otherwise.

Pricing:

Detractors are usually bargain hunters. They will squeeze you to get the best only for themselves even if it means you will not survive. To them, your mere existence is to provide them for that moment and not for a longer relationship. You need to provide huge discounts and price concessions just to keep these detractors. 

Promoters are less price sensitive. In the beginning, they did not choose you because of price.  They chose you because you treat them well. They want you to make a profit (that is good profit and not bad profit) from their business with you. They want you to grow and prosper so that they can continue to rely on you in a meaningful long-term partnership. Promoters, because they feel valued in doing the business with you, they will help to grow your business. A survey done by RightNow in 2011 found that 86% of customers willing to pay more for better customer service.

Annual spend:

Your share of wallet with promoters increase more rapidly than with detractors. Customers usually want to consolidate their purchasing process for better efficiency. The risk they commonly face is in having to live with un-reliable partners or suppliers. Therefore they have more than one supplier to mitigate such risks. When a customer likes working with you, such risks become negligible that they expand their purchases with you. In fact promoters would have little reservations in trying new product introduced. They do so willingly because of the trust built from the relationship in making them feel valued.

Cost efficiencies:

While promoters help you by creating value to your business (likewise, they feel valued), the detractors diminish value out of you. Detractors make it difficult for you and your staff to deal with. They drain out valuable resources in time and money by making complains and unreasonable claims. They cause you sleepless nights by creating tangible and intangible cost to your business. They delay projects, demand for quick deliveries, charge you with liquidated damages, threaten you with legal suits and everything else to make you and your staff un-comfortable in working with them.

Promoters work with you to understand your constraints. They help you identify opportunities to reduce cost. Buying patterns of promoters are consistent and predictable that makes easy and accurate production planning. This improves your planning efficiency, reduces production inventory and reduces auxiliary administrative cost. Additionally, since they become your sales force, your advertisement and promotion cost could be reduced substantially. The promoters become your advertisement agents instead and at no cost. 

Word of mouth:

 I wrote this before. This is perhaps the greatest economic benefit in developing Netpromoter System for a company. The word of mouth could cause a spiraling effect on the growth of a business (as well as the demise of a business). A promoter could multiply and snowball to more promoters by the positive word of mouth. However, the effect on negative word of mouth is asymmetric. A negative word of mouth can travel like a wild fire and much faster than the positive word of mouth. 

Though more difficult, we could still quantify such effects in calculating the lifetime value of a promoter. This could be done by finding out how many positive word of mouth is required in order to neutralize a detractor or the negative word of mouth. This figure may vary based on the type of business. Bain & Co found to neutralize one negative word of mouth, you need three to ten positive word of mouth. A good example is to imagine the number of good positive word of mouth you would need to convince yourself for one negative word of mouth you hear about a dentist in your new neighbourhood.

While it is simple to conclude that to prosper, a business need to create more happy customers and lesser un-happy customers, there is a trade-off.  Businesses need to evaluate the cost and benefit of converting a detractor into a promoter. Such cost to convert a detractor to a promoter could sometimes be big. This could cloud companies’ vision from the enormous value they could reap from a promoter. Unless you are convinced from the benefit of a promoter discussed above, you will not take the next step to measure the lifetime value of a promoter versus a detractor.

Satya Narayanan