4/4/2006 | 7 MINUTE READ

Where Math Meets the Golden Rule

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Fred Reichheld has a rather revolutionary idea.


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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.

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

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.”

What’s more, there is an associated problem. The people who work for many companies are far from being satisfied with their employers. Another Bain study of employees who have worked for a company for more than 10 years—and who are consequently among the higher ranks—shows that:

  • 39% trust their superiors will communicate with them openly and honestly
  • 33% think loyalty is being appropriately awarded
  • 28% say the company puts people and relationships ahead of short-term profits
  • 19% are promoters.

Reichheld calculates that the NPS for these employees would be ?29%. Yes, minus 29%

Given that many companies in the auto industry depend on people like this, and given that many of those companies are in tenuous financial conditions, is there any possibility of things improving? Possibly. Reichheld says, “I have seen companies in the most desperate straits turn things around. But it does take a really serious group of leaders who are brutally honest and lay the facts on the table and involve people in figuring out the right solutions. People in their 50s and 60s who are jaded and frustrated have enormous potential, but they’ve got to believe that when they’re investing their time and energy and creativity that it is really going to pay off and they’re going to be part of the success and share in it. And I think that most people in those situations don’t believe that right now.”

Reichheld proffers a solution, one that can help companies assure that they have promoters both inside their company and outside, in the market. It, like the single question (“When you boil it down to one question, you don’t have to suffer with 10% response rates on research surveys—you can get 90% responses. It’s more like a vote.”), is rather simple. It’s the Golden Rule. Reichheld acknowledges the vital importance of Six Sigma, having high quality, reducing complexity, and the like as they relate to profitable growth. But, he says that it is only one half of the business equation. Driving future growth is key. “You want people to be investing in their relationships with you—both customers and employees. And when they’re enthusiastically recommending you to friends and relatives, you know you have turned them into real assets, real promoters for your business. That’s where your future comes from.

“Today you can measure profits. Future growth comes from people investing in relationships with your business, and that’s what’s been unmeasured heretofore.”

Reichheld observes, “If you’re really trying to build a loyal relationship, a relationship worth of loyalty, you have to accomplish two things. One is that you have to deliver value, real value, and the other is that you treat people in a way that is consistent with the Golden Rule. You can’t do one or the other. What I find most companies fall into is that they know how to measure value quite well, but they really don’t know how to measure this issue of ‘Did my front-line people listen to you, understand you, care about you, behave in an ethical, responsible way?’ They haven’t built the feedback mechanisms that are hard metrics.” They haven’t asked the Ultimate Question.

“Maybe the most important message in my book is a radical one,” Reichheld acknowledges. “Where most people today have given up on loyalty, they think the Golden Rule is a constraint on growth and profits, I’m saying, no, living up to the Golden Rule is the key to accelerating growth and profits. That’s a radically different world view. There’s a lot of pretty hard evidence in the book that I’m right.”