Build Your Business Around the Ultimate Loyalty Driver: An Interview With Fred Reichheld

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Do loyal customers make a difference? Fred Reichheld has spent three decades arguing that they do. He is new book, The Ultimate Question: Driving Good Profits and True Growth (Harvard Business School Press, 2006), goes even further, arguing that there is one question you can ask your customers that will help center and grow your business. CRMGuru.com founder Bob Thompson talks with Reichheld about that one question, his overriding philosophy and his methodology for good profitability.

This interview, conducted April 25, 2006, was edited for clarity.

Bob Thompson

I’d like to welcome Fred Reichheld to Inside Scoop With Bob Thompson. He’s the well-known loyalty expert and is a Bain & Co. fellow. He’s a best-selling author of a couple of the best books ever written on loyalty, The Loyalty Effect, [Harvard Business School Press, 1996] and Loyalty Rules, [Harvard Business School Press, 2001]. We’re going to be talking today about his most recent book, The Ultimate Question.

Fred, welcome to our program. I’m glad you could spend time with us today.

Fred Reichheld

Thank you. Pleased to be here.

Bob Thompson

Briefly describe your current position and the focus of your work.

Fred Reichheld

Well, some things never change, I suppose. I’ve been working at Bain & Co. for almost 30 years now. In the last decade or so, I’ve been in a half-time job as a Bain fellow, where the firm has let me focus on writing and research and teaching, the thing I really care most about, which is convincing people that loyalty is vital to a successful business and a successful community.

Bob Thompson

So why did you write this book? You’re elaborating on some topics that you started back many years ago. What was the purpose of that and whom are you writing it for?

Fred Reichheld

I guess it’d be fair to say I just wasn’t willing to live in a world where people believe loyalty to be irrelevant, if not dead. And that despite all my efforts to convince people otherwise over the last few decades, I think I’ve only had modest success because today most employees and most customers think loyalty is a pretty foolish idea. While senior executives, I think, have been convinced that they need customer loyalty to achieve profitable growth, they have not figured out how to build that kind of loyalty throughout their employees and earn it with their customers.

Bob Thompson

What is your definition of loyalty, Fred?

Fred Reichheld

It’s a very good question. A lot of people gloss over this, but I think the best definition of loyalty is someone’s willingness or enthusiasm to invest in a relationship because they believe it has potential to provide a wonderful future and make their lives better. And those investments are really the only way you can tell whether someone is loyal. You don’t ask somebody if they’re loyal. You watch if they’re investing their time, their energy, their money, their creativity.

And so, for customers, there are really four behaviors that I will look for in determining the level of loyalty. I look for:



  • Whether they come back for more; how long you keep a customer
  • Whether they come and buy more stuff. Some people call that “share of wallet”
  • Whether they give referrals, because they invest their own personal reputation and co-brand it with you if they’re loyal. So they bring new customers that way.
  • Whether they invest their most precious asset—their time—for free, to give you helpful suggestions and honest feedback.

So, those four things define loyalty. And interestingly, they also are the key drivers of growth in a business.

Bob Thompson

Let’s get at this ultimate question—the one question—I believe it was the third in your list: giving referrals. What is the one question that will help drive, and I quote here, “good profits and true growth”? And how did you determine that was the question?

One number

Fred Reichheld

We tried a number of metrics. I really prefer observable behaviors that you can measure. And the problem was that those observable behaviors like retention and buying more stuff, in most businesses, are just too hard to measure in a timely way. So you can’t use them for holding employees accountable. What we’ve discovered is that there is one question you can ask, though, that really is very closely related to those actual behaviors.

And we tested dozens of questions, all the classic ones that you see on a satisfaction survey, from intention to repurchase to whether you’re highly satisfied. The one question that best predicted customers’ loyalty behaviors was: How likely is it you’d recommend us to a friend? And that one question, what I would call the ultimate question, is the same question in most businesses that best predicts customer behaviors that drive growth.

Bob Thompson

And this was determined through a statistical analysis?

Fred Reichheld

With the help of Satmetrix Systems, I tested the classic survey questions with tens of thousands of customers and got the actual repurchase behaviors and referrals and so on of those same customers and then could see what question—which scores on which question—represented the best predictor.

Bob Thompson

So, you linked what these people said with what they actually did?

Fred Reichheld

When I went in this years ago, I figured someone would already have done this, but what I’ve discovered is all of this stuff you read about—oh, this predicts loyalty and this correlates with loyalty—no one I could find had actually gotten real customer behaviors and linked them up to the real scores that those customers had given on satisfaction-oriented questions. It’s astonishing to me. So we took a year and a half and did that.

Bob Thompson

I want to go back to the subtitle of your book, Driving Good Profits and True Growth. First of all, “good profits.” Is there any such thing as bad profits?

Fred Reichheld

I wish more people would ask that question. I think too many of our businesses and most of our society presumes that the only credible measure of success is accounting profits. And those generally accepted accounting principles are thoughtful; they’re rigorous. There’s an auditing procedure. People get fired if they fudge the numbers. They’re reliable numbers, and that’s the problem. The problem is that if you measure your success on accounting, accountants can’t tell you the difference between good profits and bad profits. I’ll give you an example of bad profits: any profits that are the result of things that would make customers recommend against you and say, “Don’t go there.” Those are bad profits.

Bob Thompson

You mean, you’re actually making money on the customer, but they’re locked or unhappy in the relationship and are actually badmouthing your company elsewhere.

Fred Reichheld

You’re making money at the expense of the customer. And the customer regrets their purchase and is certainly going to switch when they can. And they’re going to tell all their friends to stay away. That kind of bad profit is embodied in things like charging $6 a gallon for gas to fill up your rental car. It’s embodied in charging you $3 for directory assistance on your cellular telephone when it costs 30 cents. It’s embodied in—

Bob Thompson

A lot of those practices that companies use to pump up their bottom line. Think about the airlines, my favorite industry to complain about or whine about sometimes. Do you think that Southwest has such a loyal following in part because it does not—what’s the polite word?—it doesn’t stick it to its business travelers who book at the last minute, quite like some of its competitors?

Fred Reichheld

And they don’t abuse you with last-minute fees.

Bob Thompson

Right.

Fred Reichheld

Also if you have to change your flight, which happened to me a few years ago—I had a family vacation and screwed up my schedule— “OK, we’re not going to charge you $100, or you lose your money completely. We’re just going to say you can use that any time over the next year on Southwest.” Now, that’s a fair deal. And Jet Blue has a pretty fair deal. They charge you a $30 change fee. OK, I get that. They’re filling up their planes.

Bob Thompson

So there’s a concept of fairness in the customers’ mind that enters into whether the profit you get is good or not. If they feel like it’s reasonable and you’re making money on it, that’s a good profit. Otherwise, it may have some negative repercussions down the line.

Good profits

Fred Reichheld

The “golden rule” is the basis that distinguishes good profits from bad profits. Customers will recommend against you. They’ll resent the way they’re treated if you’ve broken a golden rule, if they feel that they have not been treated fairly. If they were in the other person’s shoes, would they feel that that was fair treatment?

And this notion of living up to the golden rule is so deeply misunderstood in business. Most people think, “Oh, that gets in the way of profits and growth”; whereas, the companies who earn high loyalty and are prospering, they think that the golden rule is actually the key. And the more closely you hew to it through an organization, the faster you grow and the more profitable you are.

Bob Thompson

I’d like to delve a little bit into your methodology, if I could: the Net Promoter Score. As I understand it, you have a zero-to-10 scale and—

Fred Reichheld

Yeah, the original caveman scale that I think all of us have in our DNA. Original digital system.

Bob Thompson

All right, but zero … The question is, “Would you recommend to a friend”—

Fred Reichheld

How likely would you recommend?

Bob Thompson

How likely? And zero would be—

Fred Reichheld

You don’t even need to define what zero means. It turns out that most people know what a zero is. And they know what a 10 is.

Bob Thompson

So it’s low to high, zero to 10. Now, zero to 6 is a detractor. Seven or 8 are passive. And 9 or 10 are promoters, correct?

Fred Reichheld

Yes. We find that people who score 9 or 10 on “would you recommend to a friend” account for 80 to 90 percent of all the positive word of mouth in the marketplace.

Bob Thompson

That part, I kind of understand, but I’m curious about the detractor. I mean, a 5 or a 6 is kind of at the midpoint, and a lot of satisfaction and retention scales would call that neutral. So it’s not negative. It may even be slightly positive, but you call them a detractor. Why do you call someone at that portion of the scale a detractor?

Fred Reichheld

I remember arguing with one of my teachers when I got a 5 on a quiz, it really should have been a C, because that’s average. It didn’t really fly. And since most of us have been to school and had similar conversations with our teachers over the years, I think most people get it that seven and eight, those are Bs and Cs. They’re OK, but they’re not going to get you into Harvard. People at a 6, they’re really giving you a negative message. They’re not angry. They’re not mean about it. But you failed. And when they give you a zero, they’re just livid. But, it’s the same thing: You really have failed to deliver the customer something that would make them a loyal promoter.

Bob Thompson

And you could see this in the statistical work that you’ve done that even fives and sixes are nothing to feel happy about.

Fred Reichheld

You can do all the statistics, which we have. There’s a very strong case to be made. But what I do instead of using statistics is, I just say, “OK, let’s identify some promoters and detractors and call them up. And you tell me if they’ve been characterized correctly. Call up some of those fives and sixes and see if they’re just fine. Happy. Everything’s copasetic.” No. You talk to them on the phone and you’ll get it.

Bob Thompson

Now, your methodology … You take the number of promoters minus the number of detractors, and you come up with a Net Promoter Score.

Fred Reichheld

Net percentages.

Bob Thompson

Percentages. So a company that’s really at the top of their game in this loyalty race, what kind of Net Promoter Scores would they get in their business?

Fred Reichheld

The highest score ever recorded on the face of the earth that I’m aware of is the 90 percent that USAA garners in their credit card business.

Bob Thompson

Wow!

Fred Reichheld

Remember, theoretical perfection means every customer is a promoter, and that’s a 100. And USAA, who has an 80 percent across all their business lines on average, is a 90 percent in their credit card business.



Bob Thompson

So, that means they only have 10 percent that are six or below.

Fred Reichheld

Oh no: 10 percent that are below nine.

Bob Thompson

That are below nine, excuse me. Yes, that’s amazing.

Fred Reichheld

Yeah. They only have 1 percent. What they really have is 91 percent promoters, 1 percent detractors. And that’s a Net Promoter Score of 90.

Bob Thompson

Wow! And aside from USAA, some other companies I think you’ve talked about in your book and elsewhere like Enterprise Rent-A-Car and Intuit, those are doing well, maybe not quite the level of USAA. What kind of scores did they get?

Fred Reichheld

Superstars achieve anywhere between a 50 and a 70. Well, let’s say 50 to 80 percent means you are probably in the stratosphere in terms of where you stack up vs. competitors.

Bob Thompson

I don’t know if this is indelicate to ask you, but are you willing to talk about some companies you think have fallen on some hard times relative to how you score them on NPS?

Fred Reichheld

Well, let’s see. We certainly do know who has the lower Net Promoter Score in all the industries. We’ve written about, so rather than hammering them by name, you can just go to the netpromoter.com web site and find some of that information.

Bob Thompson

OK.

Fred Reichheld

But there are a lot of industries. Let’s take the average Net Promoter Score in North America. It’s between zero and 10 percent. So the average company only has slightly more promoters than detractors.

Bob Thompson

Wow!

Fred Reichheld

Which is astonishingly bad and explains why they’re having such a hard time growing.

Link to growth

Bob Thompson

I want to talk a little bit about growth. Specifically, I think you’ve stated that NPS scores are linked with revenue growth, but what about the profit side of that? Is it really just growth and revenue or is it profitable revenue growth?

Fred Reichheld

It turns out that Net Promoter Score does link up with growth, especially over the long haul. In the short haul, it’s possible for companies to buy growth and pay real high commissions or put in marketing gimmicks and promotions that are unprofitable, but they generate revenue growth. The thing that Net Promoter Score does is tell you who’s generating profitable growth, because the only way to get profitable growth is to turn customers into promoters. So most of your acquisition expense is borne by your own customers, who are telling their friends and buying more stuff, themselves. If you look at the Net Promoter Score leader in 30 different industries that Bain has studied, we find that NPS leader is growing an average of 2.6 times the rate of their competitors.

Bob Thompson

Wow!

Bob Thompson

And these are all profitable, healthy companies beyond just the revenue growth, correct?

Fred Reichheld

Yeah, and it’s over a 10-year period, so you really can’t grow unprofitably for a long period.

Bob Thompson

It seems to me like this approach you’re advocating would appeal toward executives who are in it for the longer term, but that runs counter to some of the short-term Wall Street-type thinking on making your numbers each quarter. How do you reconcile those two things?

Fred Reichheld

I have found investors are at least as interested in Net Promoter Scores as senior executives are, because Wall Street doesn’t really love the notion of short-term. It’s just that the only credible reliable metrics that they have are short-term accounting numbers.

Bob Thompson

So you have another alternative you can give them.

Fred Reichheld

They want growth. Profitable growth is what drives stock prices. And investors are smart; they know that. So companies who start providing credible Net Promoter Scores are going to find investors are very interested. The private equity practice at Bain has been the most active of all the practice areas in rolling out Net Promoter technology, because the private equity clients who have their own money invested in these companies, they love the notion of getting a clear X-ray of the true asset of a business, which is its customer base.

And it doesn’t take rocket science. You just take a percentage of your customers who are promoters; those are your assets. Subtract the percent who are detractors; those are the liabilities. And that Net Promoter Score is an obvious gauge of what your future cash flows will be.

Bob Thompson

Now, you’ve spent an awful lot of time and done some wonderful work building the case for this one question. But other loyalty gurus in the industry are arguing that that’s not enough, that one question at the very least, doesn’t explain, if the number’s not right, why it’s not right. So is there a conflict in what they’re saying and what you’re saying or just a fundamental difference of opinion?

Fred Reichheld

Well, there’s certainly a conflict. I didn’t know there were other loyalty gurus. I thought no one else had actually focused on this. I really think of myself as an oddball for having done this for so long. But if there are other guys or women, that’s great. I do hear this argument about, “Oh, one question, that’s just too simple.” I sat with one of the senior executives from GE at a dinner last month, and they’ve been rolling out Net Promoter Scores across all their businesses globally. In fact, it was written up in GE’s annual report this year in the CEO’s letter to stakeholders.

And I asked him, “What’s the most important lesson you learned in implementing Net Promoter Scores or really the whole set of Net Promoter disciplines over the last year and a half?” He said:

Fred, you told us it really should be two questions: one question and a follow-up question. But, everybody had this argument that, “Well, you’ve got to diagnose what to do about it, ” so we’re up to 30 questions. And we ended up with a 20 percent response rate, and it was useless. So what we’ve done is scrapped it, and we went back to what you originally said. You really have to focus on one question.

Bob Thompson

But the argument goes that, “All right, you’ve got the indicator, and now you know there’s a problem. “But you don’t know why there’s a problem.” So what’s the follow-up if you find that your scores are not what you want them to be?

Fred Reichheld

It’s rarely sending out a survey. It’s really hard to find out why people are very happy or very unhappy. It usually takes a dialogue with somebody who understands the business and the context of the relationship, what’s really going on with competition. And that discussion could be by phone or email or in person. But you want to get the right people in your organization into those dialogues so that they really learn what’s happened and they come up with an economically rational solution.

Scott Cook at Intuit is one of the guys that taught me this. He said, “You know, when you hear these companies and the CEO says, ‘Oh, we’re going to get customer-focused,’ instantly, you see billions of surveys going out.” And he said, “That’s exactly the wrong thing. That means that the executives don’t want to go talk to customers. That means they’re dishing it down to a staff group to go do something that sort of looks like it’s customer-focused. Customer-focus is not wasting people’s time with lots of irrelevant questions.

Bob Thompson

That’s an interesting point of view: use the survey, keep it simple, get a high response rate, have an indicator that makes sense. But then, the follow-up should be more personalized, more of a dialogue, as opposed to just extracting more information.

Fred Reichheld

A lot of executives know this is true, but they gather so much more data from customers than they could ever act on, it’s scary. It just never sees the light of day.

Bob Thompson

You mentioned Intuit. I know you have a wealth of examples in your book, which I would encourage people to pick up. I recommend that students of CRM who are building a library include in it books from you. But I wonder if you could just mention briefly a company that has implemented this methodology. What do they get out of it?

Fred Reichheld

Well, I’ll give you a couple of quick examples. One is SAP. The enterprise software firm has been using the Net Promoter Score approach to identify the promoters in their business and then to build a reference program. So now that they know by name which individual clients—which individual employees and executives—are promoters, they can then keep track of them, communicate with them, get their input, use their references in an appropriate way. And it’s been a very practical way in which they have managed the customer reference process.

Then we’ll go all the way to the strategic. Intuit, in their TurboTax business, recruited thousands of customers who were willing to engage in an online community: their inner circle. They’ve got that group to help them innovate and focus priorities. They asked them to put in the most important thing or change in the product or service that would make it more valuable to them. Then each customer rated other people’s suggestions, and the software sifted this until you ended up with a community identifying and prioritizing the top three things. Then Intuit made that transparent and did it.

So they dropped their rebate process this year. They’ve completely changed their pricing, based on what their customers told them. And not just all customers. They keep it separate. It’s promoters, which are the future of your business. They really listen to them a lot, especially on the innovation ideas. With detractors, it’s problems that need to get fixed. By systematically responding to those priorities that their customers identify, they’ve been able to increase their Net Promoter Scores and turbo-charge their growth.

Bob Thompson

A somewhat related area to loyalty, I think, is customer experience management—

Fred Reichheld

Sure.

Bob Thompson

—where companies are attempting to get more of a focus back on the value proposition, as customers see it, the experiences that they receive. I wonder if you have a point of view, Fred, about how your work relates to this so-called customer experience management. It’s a pretty hot buzzword these days.

Customer experience

Fred Reichheld

Mapping out a customer experience and understanding all the touch-points is a very valuable thing to do. What Net Promoter Score does is make it even more valuable, as it helps you understand which of those touch-points are the most leveraged. “Which of them are really things that you can just do right and not screw up?” is a Six Sigma approach. And then, what subset of touch-points has the opportunity to really over-deliver and turn people into promoters? And those need to be managed separately. It makes it clear how much it’s worth to invest.

The last thing is Net Promoter really adds an entire dimension to customer experience management that I think everybody knows is there, but they miss it. And it’s this notion of trust and golden rule behavior and a group of people that share your ideals. You just don’t recommend a company unless there are people there that you trust that behave fairly. And that’s a hard one to get in customer experience management. You don’t just ask somebody if you trust them. On the other hand, you do ask them if they’d recommend them to a friend. And if the answer comes back nine or 10, you have built that kind of relationship. And so, it’s a more holistic approach, but it’s also quite practical at the touch-point level, as well.



Bob Thompson

We’re running a study on CRMGuru right now, and you’d be interested to know that when we asked customers to write in what was it about a company that caused them to select them as “consistently excellent” in the customer experiences they deliver, the things that tended to bubble to the top were well-trained and helpful employees; friendly and caring employees; personal attention; being responsive and flexible; things like that, along with high quality goods and services. People still want what they ordered correctly.

Fred Reichheld

Absolutely. That’d be abusive if you were buying a bad value. The golden rule is completely inconsistent with selling somebody a good value.

Bob Thompson

Now, just a quick question on implementation. Is this something that requires information technology to pull off, such as the solution offered by Satmetrix? Or can you just use any old survey system? What do you need to actually put this process into place in a company?

Fred Reichheld

Well, let me draw a distinction I think is important, and that’s the difference between NPS research and PS operations and process. You can do NPS research without software. You can just send out a survey monkey or whatever brand survey you want and get a sense of where you are, in terms of promoters vs. detractors and what the big issues are for your detractors and your promoters. That’s a one time thing. That helps a senior team sitting around a conference table understand the problem and focus. It’s the kind of thing that strategy consultants do. And it’s a good thing. You know, NPS makes the research process a little bit better than it was before and certainly much more practical and faster.

But the revolutionary side is where you’re talking about operating systems and process management in a business. That’s where you really can’t use surveys and just ad hoc kinds of approaches. You have to keep track of which person you talk to. You have to keep track of who they are and how they like to be communicated with. You follow up with an email or a phone call if there’s a problem.

And how do you hold people accountable in your organization? You can’t hold people accountable for some research survey that goes out every quarter or every year and it has some samplings. If you have a 10 percent response rate, how can you possibly pay people on that? Who are those 10 percent of the people? Are they those lonely, bored, compulsive people in your customer base? And what do they have to do with your profitable customers, who you should be listening to? I see way too many people confusing research with operating processes and messing up both as a result.

Bob Thompson

So for this operationalization and making it into an operating system, as you put it, you need some kind of a system for that.

Fred Reichheld

Absolutely. Because just like when you have software, you’ve got to define the process, you’ve got to have closed loops, got to be clear when a score comes in at a certain level: Who should know about that? When? What’s their accountability for doing something about it and then, reporting back? All those things that software forces you to do, that’s what you have to do to really create the discipline of NPS.

Bob Thompson

Well, Fred, as always, it’s been a pleasure chatting with you about customer loyalty. And congratulations on your new book, The Ultimate Question. CRMGuru readers, you can find it on Amazon.com or your local bookstore. Fred, again, thank you so much for being with us on Inside Scoop today.

Fred Reichheld

My pleasure.

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