All companies know that consumer loyalty is important for growth. But most can’t define or measure it. Without a systematic feedback mechanism, companies never know whether the profit they are making is good or bad. With only financial metrics to gauge success, managers focus on profits regardless of whether those profits represent the rewards from building relationships or the spoils from abusing them. But there is one metric that can tell the difference between good profits and bad, and that is the ultimate question that companies should ask their customers, says this extract from the book The Ultimate Question 2.0.
Loyalty is the key to profitable growth,” said Andy Taylor of Enterprise. That makes sense as far as it goes. But it raises as many questions as it answers. Most companies can’t even define loyalty, let alone measure and manage it. Are customers sticking around out of loyalty, or just out of ignorance and inertia? Are they trapped in long-term contracts they would love to get out of ? Anyway, how can managers really know how many of their customers love the company and how many hate it? What practical gauge can distinguish good profits from bad?
Without a systematic feedback mechanism, after all, the Golden Rule is self-referential and simplistic, unreliable for decision making. I might think I’m treating you the way I would like to be treated, but you may strongly disagree. Where companies are concerned, satisfaction surveys often delude executives into thinking that their performance merits an A, while their customers are thinking C — or F. Business leaders need a hard, no-nonsense metric — an honest grading system — that tells them how they are really doing.
The search for that metric — the missing link between the Golden Rule, loyalty, and sustainable growth — turned out to be a long and arduous quest.
At Bain & Company, we began investigating the connection between loyalty and growth almost thirty years ago.We first compiled data demonstrating that a 5 per cent increase in customer retention could yield anywhere from a 25 per cent to a 100 per cent improvement in profits. Later, we showed that companies with the highest customer loyalty (we labeled them loyalty leaders) typically grew revenues at more than twice the rate of their competitors.
Of course, not everybody was eager to learn about the mysterious loyalty effect, which explained how building relationships worthy of loyalty translated into superior profits and growth. The corporate generals at places like Enron and WorldCom couldn’t have cared less about treating customers right. Some Wall Street firms in recent years seem to have been ignoring customers in favor of racking up big profits through proprietary trading. But the vast majority of senior executives generally buy into the concept. After all, it doesn’t take a rocket scientist to see that a company can’t grow if it is churning customers out the back door faster than the sales force can drag them in the front.
Still, there’s a puzzle lurking here. Survey after survey demonstrates that customer loyalty is among most CEOs’ top priorities — yet the colonels, captains, and corporals in their organizations continue to treat customers in ways that ensure these customers won’t be coming back anytime soon. If the CEOs are as powerful as they are said to be, why can’t they make their employees care about customer relationships?
The reason, of course, is just what we alluded to earlier in this chapter: employees are held accountable for increasing profits. Financial results are what companies measure. Financial results determine how managers fare in their performance reviews. Trouble is, accounting procedures can’t distinguish a dollar of good profits from a dollar of bad. Did that $10 million in incremental profit come from new hidden surcharges, or did it come from loyal customers’ repeat purchases? Did that $5 million in cost reduction come from shaving service levels, or from cutting customer defection rates? Who knows the answer to any such question? And if nobody knows, who cares? Managers trying to run a department or division can’t be faulted for paying attention to the metrics by which they will be judged.
Whatever the CEO might think, in short, companies that measure success primarily through the lens of financial accounting tend to conclude that loyalty is dead, relationships are irrelevant, and the treatment of customers should be governed by what seems profitable rather than by what seems right. With only financial metrics to gauge success, managers focus on profits regardless of whether those profits represent the rewards from building relationships or the spoils from abusing them. Ironically, customer loyalty provides companies with a powerful financial advantage — a battalion of credible sales and marketing and PR troops who require no salary or commissions. Yet the importance of these customer promoters is overlooked because they don’t show up on anybody’s income statement or balance sheet.
Finally, at a European conference on loyalty, a Bain colleague provided a crucial insight into this conundrum. Watching the executives file out of the room after a presentation, seemingly pumped up about loyalty as never before, he shook his head. “You know, it’s sad,” he said. “Right now, they all understand that their businesses can’t prosper without improving customer loyalty. But they’ll get back to their offices and soon recognise that there is no one in their organisation to whom they can delegate the task. There is no system to help them measure loyalty in a way that makes individuals accountable for results.”
Bingo. Accountability is one of those magic words in business.
Any experienced manager will tell you that where there is individual accountability, things get done. Measure is another magic word: what gets measured creates accountability. With no standard, reliable metric for customer relationships, employees can’t be held accountable for them and so overlook their importance. In contrast, the precise, rigorous, daily measures of profit and its components ensure that those same employees — at least the ones who wish to stay employed — feel personally accountable for costs, revenues, or both. So the pursuit of profit dominates corporate and individual agendas, while accountability for treating people right, for enriching lives, for building good relationships, all gets lost in the shadows.
Several years ago, we thought we had solved this measurement challenge. We had helped companies develop a whole set of key measures, such as retention rate, repurchase rate, and “share of wallet.” But then we had to face reality. Most organizations found it difficult to collect accurate and timely data on these loyalty metrics. The companies were simply unable to rebalance their priorities and establish accountability for building good relationships with customers. Though the science of measuring profits had progressed steadily since the advent of double-entry bookkeeping in the fifteenth century, measuring the quality of relationships remained stuck in the dark ages. Companies lacked a practical, reliable operational system for gauging the percentage of their customer relationships that were growing stronger and the percentage that were growing weaker — and for getting the right employees to take appropriate actions based on this data.
So we went back to the drawing board. What we needed was a foolproof test — a practical metric for relationship loyalty that would illuminate the difference between good profits and bad. We had to find a metric that would permit individual accountability.
We knew that the fleeting attitudes expressed in satisfaction surveys couldn’t define loyalty; only actual behaviors can gauge loyalty and can fuel growth. So we concluded that behaviors must be the real building blocks. We needed a metric based on what customers would actually do.
After considerable research and experimentation, some of which you’ll read about in the following chapters, we found one such metric. We discovered the one question you can ask your customers that usually links so closely to their behaviors that it is a practical surrogate for what they will do. By asking that question thoughtfully and systematically, and by linking results to employee rewards, you can tell the difference between good profits and bad. You can manage for customer loyalty and the growth it produces just as rigorously as you now manage for profits.
Customer responses to this question yield a simple, straightforward measurement. This easy-to-collect metric can make your employees accountable for treating customers right. It’s one number that lets you determine how much progress you are making in your quest to become customer-centric. We called this question the ultimate question because it helps you see whether you have succeeded in your mission to enrich the lives you touch. Upon reflection, though, perhaps we should have called it the penultimate question since it always needs to be followed up by one additional question: why?
Reprinted with permission from Harvard Business Review Press. Excerpted from The Ultimate Question 2.0: How Net Promoter Companies Thrive in a Customer-Driven World. Copyright 2011. Fred Reichheld and Rob Markey. All rights reserved. Rs 995.
THE ULTIMATE QUESTION 2.0
AUTHORS: FRED REICHHELD AND ROB MARKEY
PUBLISHER: HARVARD BUSINESS REVIEW PRESS
PRICE: Rs 995
ISBN: 9781422173350
