Magazine article Strategic Finance

A Question of Customer Loyalty

Magazine article Strategic Finance

A Question of Customer Loyalty

Article excerpt

Companies frequently use customer surveys as a way to assess customer satisfaction. But asking the right questions is crucial for capturing an accurate understanding. A measure called the Net Promoter Score (NPS) was developed to help companies get a clear picture of how customers view their performance. The foundation of the NPS system was described by head developer Fred Reichheld in his book The Ultimate Question. And now, with Answering the Ultimate Question, Richard Owen and Laura Brooks--contributors to the NPS--build on Reichhold's work to further help companies gauge customer loyalty.

When customers find your products and services to be "very satisfactory," are they actually saying they prefer yours over the competition? Reichheld believes that one question works best for most mature and competitive industries to predict customer behavior: "How likely is it that you would recommend our company to a friend or colleague?" This is the ultimate question that enables you to calculate your company's NPS. Those who answer that question with the highest rating are labeled "promoters"--and the more promoters your company has, the bigger its growth.

To calculate NPS, first ask customers to rate the likelihood that they will recommend a product or service to a friend or colleague on a scale of zero to 10, where 10 is extremely likely and zero isn't likely at all. Then take the percent age of respondents who selected a rating of zero to six (the detractors) and subtract that from the percentage of respondents who selected a rating of 9 or 10 (the promoters). The result is the NPS.

Owen and Brooks examined hundreds of companies that had implemented the NPS and found that an increase in the NPS led to revenue growth in most companies. They attribute this correlation to four behaviors of loyal customers: They buy more, stay longer, refer friends, and are more willing to provide feedback and ideas. …

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