Q&A with Fred Reichheld (Bain): Measuring Loyalty with One Number

 

 

Fred Reichheld is Director Emeritus at Bain & Company, the global business consulting firm, and the author of several key books and articles on the topic of measuring and managing customer loyalty.

MarketingNPV (MNPV): You've been studying customer loyalty for over 25 years now. What are the biggest mistakes you see companies make when they try to measure and manage loyalty?

Reichheld: They presume that loyalty is the result of a program or a marketing gimmick or a piece of software, when in fact loyalty has much more to do with the basic fundamentals of how people are treated by an organization as both customers and employees. Real loyalty happens when you have captured both their heads and their hearts. The head wants to know that you offer outstanding value, features, pricing — all the things an engineer or an economist can measure. The heart wants to feel things like, "This company knows me, understands me, cares about me, listens to me, and shares my ideals."

Managers also have a tendency to want to ask 30 questions in a satisfaction survey since we have the customer on the line anyhow. But I believe that in order to get reliable customer feedback, you can only have a few questions, maybe even only one. It's very hard to get candid, accurate feedback on a timely basis that is both auditable and trustworthy.

MNPV: How do you define loyalty in a way it can realistically be measured?

Reichheld: There is so much confusion about what loyalty means, confounded by an inclination to leap to metrics before managers really have a fundamental understanding of what it is they are after and why it makes sense for their organization. Historically, we looked at share of wallet, repurchase rates, and retention rates as useful metrics. But I've come to realize that they all have shortcomings. Even though retention rate is a wonderful metric that ties closely to the economics of an organization and is sort of black and white, it fails to reflect the possibility that customers can be trapped, inert, or maybe even taking advantage of you.

 

I've discovered the best way to measure loyalty is just to ask people one simple question, what I call the ultimate question: "Would you recommend us to a friend?" When customers recommend you enthusiastically to a friend or colleague, they are giving you the highest possible rating. They are, in effect, co-branding their own reputation with yours. We refer to them as "Promoters."

It's not just a vague concept — it's highly measurable. Take the percentage of customers (or employees) who would rate you a 9 or a 10 on this one question, subtract those who would score you at 6 or less (the Detractors), and you have a Net Promoter score. Managing to improve the Net Promoter score over time helps companies manage for better growth and profitability.

MNPV: So this is the controversial "one number" approach you've written about?

Reichheld: Correct. My upcoming book on the topic is called The Ultimate Question: Driving Good Profits and True Growth (Harvard Business School Press, March 2006). I think the ultimate objective in business is to build relationships that are worthy of loyalty because when you achieve it, you can grow profitably Īݠwhich I think is what all companies are aspiring toward.

MNPV: On the surface, one number seems just too simple. You must have run into some skepticism.

Reichheld: I can appreciate the initial reaction that loyalty is too complex to be explained by one single metric. But what we have discovered is that the more metrics a company uses to identify and measure the drivers of loyalty, the more difficult progress becomes. Each department favors the metric that makes them look best, and as a result, there is no accountability. My research has focused on establishing one simple and reliable metric for measuring loyalty. The goal of The Ultimate Question is to show executives how to generate profitable and sustainable growth by measuring loyalty just as carefully as profits.

MNPV: Do you see a causal link between satisfaction and loyalty?

Reichheld: No. I see a correlation. Satisfaction is a vague term. It's a nice idea, but I don't think satisfying customers is the true objective. It's far better to focus on turning customers into enthusiastic advocates. Satisfied customers may hang around, but might be very likely to switch the instant somebody offers them something marginally better. Our goal is to turn people into Promoters who not only come back for more, but bring their friends. Promoters make employees proud to work for the company and are the basis of the company's positive reputation. Promoters are the most important asset in most firms — they are the foundation of growth.

MNPV: So is this one number the only thing a company needs on its dashboard?

Reichheld: The one number is like looking out the windshield; it's where the brain is consolidating an accurate picture of where you are headed — and what changes are required. The elements on the dashboard are very valuable diagnostics, but the one number provides the final picture of your progress. The key to a business is to recognize the most important process driving its success, and I would argue it is getting more customers turned into profitable Promoters. Some might argue that it's maximizing shareholder value and others would say it maybe has something to do with employee happiness. Those are very, very valuable, but the fundamental objective from which those second-order effects emanate is the ability of a firm to turn its customers into profitable Promoters.

MNPV: So what are you working on now?

Reichheld: Trying to get people to recognize not just the radical character of the one-number approach, but the practicality. It's hard when most people see only how radical it is and are overwhelmed at the prospect of consolidating their 40 customer satisfaction measures into just one, one that can be elevated beyond a research statistic to become a core operating goal. If you take a slightly longer view of the question, you see that business has risen to become the predominant institution in Western civilization not because it knows how to squeeze profits out of people, but because it knows how to organize relationships in a mutually accountable, beneficial partnership. One number can help accelerate that evolution.