LOYALTY: You may have LESS than you think

We all want it. We all need it. We all track it. CUSTOMER LOYALTY! The problem is customer satisfaction is NOT a good predictor of customer loyalty.

Customer satisfaction surveys actually show that up to 80% of customers that defect had indicated they were "satisfied" or "completely satisfied" just before they left! YIKES!

So what's the right measure of loyalty?? A recent BusinessWeek article discusses the expanding use of a measure that CM Solutions has helped clients use effectively for years; NPS, or "Net Promoter Score". It's so effective it's been called, "The only number you need to know!"

More than 20 years of research led to the discovery that by simply asking customers, "How likely is it that you would recommend this company/product to a friend or colleague?" on a 10 point scale, you can calculate loyalty more accurately than any other method.

Numerous studies have tried to find a link between customer satisfaction and business performance to no avail.  Yet, most companies continue to rely on a traditional 5-point satisfaction scale for evaluating their performance with their customers.  I've certainly been in numerous Board rooms when the latest customer satisfaction numbers come in and the CEO proudly announces, "For the 9th straight quarter we are at a 85% satisfaction level.  Hurrah!" [As market share continues to decline....D'oh!]  

But at some level, we all know it's a lie.  The first problem is that the 85% is probably made up of 60% that said, "somewhat satisfied" with the remaining 25% actually saying, "very satisfied".  The second problem is that this seemingly delightful achievement ignores the 15% that are clearly "very unsatisfied".  Shouldn't we be a bit concerned about the folks that are most likely to speak POORLY of us?  It's truly like sending a survey to everyone you know and finding out that one in seven of them thinks you're a jerk.  I'm not so sure any of us would feel good about that. 

The first way that Net Promoter Score fixes these failings is by putting the respondent's reputation on the line.  Remember, the magic NPS question is, "How likely is it that you would recommend this product to a friend or colleague?"  Now, the response isn't just theoretical.  It's been demonstrated that people actually stop and think about their peers and whether they'd actually go out on a limb and give a real endorsement.  Let's face it, no one wants a friend or colleague to come back and say, "Boy that company you recommended really stunk! Thanks a lot jerkball."  So, needless to say, answers to this question are much better at reflecting one's actual attitudes to a brand or company. 

Secondly, NPS is superior because it uses a scale that has been adjusted for human nature.  We live in a world of 1 to 10 and are used to rating things that way.  Don't believe it?  Just ask any group any question on a five point scale and I guarantee you'll get a few that say, "3.5".  Hello! If you use half-points you're back to a 10 point scale.  It's the same with letter grades (there are five you know).  We all know a B+ is a lot better than just a B.  Those fine gradations are important and that's why a 10 point scale is usually superior. 

More importantly (in my humble opinion) is rebalancing the scale.  NPS breaks respondents into 'detractors' and 'promoters', but, this isn't done at the midpoint of five.  Let's digress to another example for a moment.  If your child (pretend you have one if you don't) brings home a "C" in math you certainly don't say, "Great! You're right in the middle of the class!" No, you know there's only one kid getting an "F" and maybe two getting "D's", so your kid better get it together and get at least a "B", right? We all know "B" is average (and a B+ would be a lot better). 

So, back to the point.  The same phenomena exists on a ten point scale.  Research indicates that "7" is what people most often select for "average" then only "9" or "10" can truly represent superior or in this case your "promoters". [Some say 8-10 counts, but I'm a stickler.  I've seen too many mediocre movies and given them an 8.]  So does that mean "1" and "2" answers represent our detractors? Obviously; but let's face it, knowing that "7" is the new midpoint we have to recognize that everyone below that (0-6) are our true detractors. [You can gasp, "Ouch" now.] This readjustment of the evaluation scale provides a much more accurate assessment of people's attitudes and sets us up for the next level of NPS insight. 

The next way that NPS more accurately reflects loyalty and the health of a business is by using simple math.  It's great to increase the percentage of my customers that are promoters, but it can mask an increase in my detractors.  If I am converting my 8's into 9's, that's obviously great.  But what if more of my 7's are turning into 1's.  That means I have created more people saying nasty things about my product or company. Bummer.

Hence, we have the NET Promoter Score, which is simply the percentage of promoters, less the detractors. Here's an example:

 50% Promoters
(9 or 10's: the people that drive your business)

MINUS

20% Detractors
(0-6's: the people that destroy your value)

EQUALS

Net Promoter Score of 30%
(For the math sticklers in the audience, the remaining 30% are the customers who picked 7 or 8 and are often called "passively satisfied")

That may not sound so great, but because it is a net number, Net Promoter Scores are not as rosy as traditional "satisfied" scores.  But, from a business management perspective, I think that's a good thing.  In my experience, the closer people find themselves to 100% the less meaningful small changes become (for example, a 1% increase in satisfaction score from 90% doesn't seem like much, but actually represents a 10% reduction in dissatisfied customers, a notable achievement). 

The Conclusion:

So, you're convinced.  From now on you'll only ask the NPS question and delight in the glorious consumer insight it provides. Sounds easy enough right?  Well, as BusinessWeek puts it:

"Like any good metric, NPS presents challenges. Companies must spend a significant amount of resources gathering and reporting reliable data. They must track variations in NPS, and they must understand how and why customers react as they do to their products and services. They must also understand the causes of variations in NPS, using surveys, field observations, and analysis of customer comments to identify problems and opportunities. And they need to address those problems and opportunities fast, holding management teams accountable for improving their NPS."

I couldn't agree more.  Tracking NPS isn't enough, you must incorporate it into the company's processes and measurement systems.  That's where CM Solutions can help.  We can review your current measures and processes and help you implement a system to make it a transparent driver of your culture.  And most importantly, we can help you form short and long term strategies to address the underlying opportunities that are driving your Net Promoter Score.   

The moral of the story: satisfaction is not loyalty.  Getting an accurate measure of your customers' attitudes can be the most powerful tool in your company, particularly if you understand the motivation of your detractors and promoters.  Now if I could just get those movie review sites to use Net Promoter Score I might find something decent to watch.  

Related Links:

BusinessWeek - NPS: The Next Six Sigma?

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