 |
|
|
|
|
Bad Profits, Good Profits, and the Ultimate Question By Fred Reichheld  Too many companies these days can't tell the difference between good profits and bad. As a result, they are getting hooked on bad profits.
The consequences are disastrous. Bad profits choke off a company's best opportunities for true growth, the kind of growth that is both profitable and sustainable. They blacken its reputation. The pursuit of bad profits alienates customers and demoralizes employees. Bad profits also make a business vulnerable to competitors. Companies that are not addicted – yes, there are many – can and do zoom right past the bad-profits junkies. If you have ever wondered how Enterprise Rent-A-Car was able to overcome big, well-entrenched companies to become number one in its industry, how Southwest Airlines and JetBlue Airways so easily steal market share from the old-line carriers, or how Vanguard soared to the top of the mutual fund industry, that's your answer. These companies just said no to bad profits, and their revenues and reputations have flourished. Bad and good profits: how can companies tell the difference? Loyalty is the key to profitable growth. 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 true growth – turned out to be a long and arduous quest. Together with my colleagues at Bain & Company, I began investigating the connection between loyalty and growth almost 25 years ago. We first compiled data demonstrating that a five percent increase in customer retention could yield anywhere from a 25 percent to a 100 percent 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 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, Tyco, and Adelphia couldn't have cared less about treating customers right. But the vast majority of senior executives seemed to 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 I alluded to earlier: 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 profits 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. 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 building good relationships 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, trapped by the pseudoscience of satisfaction surveys. Companies lacked a practical, 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, we found one such metric. We discovered the one question you can ask your customers that links so closely to their behaviors that it is a practical surrogate for what they will do. By asking that question 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 simple, easy-to-collect metric can make your employees accountable for treating customers right. It's one number you need to grow. That's why we call the question that produces it the Ultimate Question: this question will determine the future of your business. Asking the ultimate question What is the question that can tell good profits from bad? Simplicity itself: How likely is it that you would recommend this company to a friend or colleague? The metric that is produces is the Net Promoter Score. Net Promoter Score (NPS) is based on the fundamental perspective that every company's customers can be divided into three categories. Promoters, as we have seen, are loyal enthusiasts who keep buying from a company and urge their friends to do the same. Passives are satisfied but unenthusiastic customers who can be easily wooed by the competition. And detractors are unhappy customers trapped in a bad relationship. Customers can be categorized according to their answer to the question. Those who answer nine or ten on a zero-to-ten scale, for instance, are promoters, and so on down the line. A "growth engine" running at perfect efficiency would convert 100 percent of a company's customers into promoters. The worst possible engine would convert 100 percent into detractors. The best way to gauge the efficiency of the growth engine is to take the percentage of customers who are promoters (P) and subtract the percentage who are detractors (D). This equation is how we calculate a company's NPS: P – D = NPS In concept, it's just that simple. All the complexity arises from learning how to ask the question in a manner that provides reliable, timely, and actionable data – and, of course, from learning how to improve your NPS. |
|
|
|
1-866-609-6146  |
