Where math meets the Golden Rule: while some companies proffer their customer satisfaction surveys as proof of how good they really are, Fred Reichheld thinks satisfaction may be nice but it is wholly insufficient for companies that would like to have sustained, profitable business. Which may explain why some of those same companies are also drowning in red ink

Automotive Design & Production, April, 2006 by Gary S. Vasilash

Fred Reichheld has a rather revolutionary idea. It's one that is exquisitely simple. It's one that is making some consultant and marketing people rather agitated. Although Reichheld is a fellow and director emeritus of Bain & Company (Boston; www.bain.com), which might lead one to believe that rather than simplicity he'd be promulgating an idea predicated on consultative complexity, that's not the case. It's all about one question, a question that ought to be top-of-mind for every manager and executive in any organization that offers products or services to customers.

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So what's this question? As he writes in The Ultimate Question: Driving Good Profits and True Growth (Harvard Business School Press): "How likely is it that you would recommend this company to a friend or colleague?" That's it.

OK. There is a little more complexity. Because Reichheld maintains that what companies need to do is to calculate a "Net Promoter Score" (NPS). This, too, is rather simple. He says that there are three categories of people. There are those who are the enthusiasts, the people who'd answer "yes," to the question, people he calls "promoters." There are people who are "passives." These people are customers, but could probably become non-customers in rather short order. Then there are "detractors," people who are unhappy with the company in question. To calculate the NPS, it is a simple matter of

P - D = NPS

The greater the number of promoters, the better.

As this seemed all too simple to us, we ask Reichheld about why this is important. And he answers, "CEOs who have focused on NPS have seen that it connects directly to organic growth. They know that their investors want organic growth, their organization wants organic growth. What they've lacked to date is a simple, practical tool to hold people accountable for that." He admits, "It's not rocket science." Be that as it may, he also believes that it is vital because there is another factor in all of this: good profits and bad profits. Not all profits are alike. He writes: "Whenever a customer feels misled, mistreated, ignored, or coerced, then profits from that customer are bad. Bad profits come from unfair or misleading pricing. Bad profits arise when companies save money by delivering a lousy customer experience. Bad profits are about extracting value from customers, not creating value." Bad profits lead to detractors. And about them, he writes, "Detractors don't show up on any organization's balance sheet, but they cost a company far more than most of the liabilities that traditional accounting methods so carefully tally. Customers who feel ignored or mistreated find ways to get even." And that costs companies plenty. When asked about that, Reichheld responds, "It is far more costly to have detractors than companies think." He admits, "Everyone knows that cutting the numbers of detractors in half would be a good thing, but until they know how good a thing, they won't put the right resources behind it."

But wait a minute. Don't companies pursue customer satisfaction, and don't many of them have trophies proving how good they are when it comes to satisfying customers? Well, Reichheld is a bit dubious (which doesn't make him particularly popular with some satisfaction organizations). "There is a lot of good in getting people to focus on satisfaction as a target. My criticism is because people have learned on satisfaction scores thinking those are the solution to getting rid of bad profits and getting people focused on the customer, and in that way they have failed miserably." He ticks off reasons why satisfaction scores aren't all they could be:

* They're measuring something after the fact. They don't help companies figure out how to get more promoters and fewer detractors.

* "I think the word 'satisfaction' is the wrong goal. It's not a practical business goal, it's a theory--sort of a 70% correct theory. You want promoters who come back and buy more and tell their friends and invest their time with you. That's a business goal because it has real profit implications. Making your customer more satisfied? I'm not sure what that's worth. Everyone thinks it is a good thing, but is it worth a billion dollars of investment or a hundred million or ten?"

* It's a soft metric. One that can be gamed. (Have you ever had your car serviced at a dealership and then been coached by the service manager about the need to fill out the survey that you'll be receiving in the mail and why it is critical to his livelihood to have 10s across the board?)

Here's something scary. Bain & Company conducted a survey across 362 companies and found that 96% of the senior executives felt they were "focused" on the customer and 80% said they were delivering a "superior experience" to their customers. In another survey, they asked customers about their experience, and found that only 8% of companies received a superior rating. Speaking to this apparent contradiction, Reichheld says, "These companies are hiring top-line vendors to go out and survey their customers and they're hearing that 80 to 90% of their customers are satisfied or very satisfied. So it's rational for them to presume that they're delivering a good experience. But they don't."