The ultimate question twitching on loyalty guru reichheld’s lips

Turning his back on his erstwhile efforts, Reichheld has discovered a simple, practical, easy-to-collect, foolproof test for loyalty: ‘Would you recommend X?’

Whatever happened to loyalty? It’s a sign of our times that books with titles like “Loyalty Myths: Hyped Strategies That Will Put You Out of Business” are being published. In this particular volume, a team of loyalty gurus from Ipsos present a list of 53 loyalty myths that, they warn, can subvert company goals, contaminate company management practices and alienate customers and employees.

“Loyal” customers, we now know, are not necessarily higher spending, less costly to serve, more open to cross-selling and up-selling, or more likely to recommend the brand via word of mouth. In fact, in many cases, they are the opposite. So treat customer loyalty as a 100 per cent good thing at your own risk. Notwithstanding this growing backlash, the ultimate loyalty guru Fred Reichheld has moved on to a new Big Idea.

First, the admission. Having persuaded countless companies to introduce a battery of new measures – retention rates, repurchase rates, share of wallet indices and so on – Reichheld now admits it was a wild goose chase. “We had to face reality,” he says. “The data was difficult and expensive to collect, and even more difficult to use”. Top of Reichheld’s new hate list: customer satisfaction surveys which, he now believes, are nothing more than “pseudo science” and a waste of time and money delivering precious few actionable insights.

So Reichheld and his Bain colleagues had to go back to the research drawing board: is there a measure that does give us an insight into the strength of customer relationships and therefore, into likely future performance?

Enter a new, super-improved alternative: the “Ultimate Question” – “Would you recommend X to a friend or colleague?”. Satisfaction squared, in other words. This question, Reichheld now declares in his new book “The Ultimate Question” is “a foolproof test” and that nirvana of all measurement systems: “a practical, simple, easy-to-collect metric” that “can make your employees accountable for treating customers right”. It produces a single number – a “net promoter score” (proportion of promoters minus proportion of detractors) – which, it turns out, is an “incredibly powerful” predictor of corporate growth. And this number can be applied at any level of the company: branches, regions, nations, and so on.

“Remarkably,” he writes, “this one simple statistic seems to explain companies’ relative growth rates across the entire industry”. On average, a 12-point increase in net promoter scores leads to a doubling in the company’s rate of growth. So the bad news is that many companies only have around five to ten per cent net promoters, while some entire industries have negative net promoter scores: on balance, their customers would say “don’t do business with them”. The good news is that, with the right numbers under their belt, these companies and industries can do something about it.

Sceptical? I am. Before jumping on this bandwagon – and Reichheld clearly intends it to be a new bandwagon – have a look at the research base: 14 companies in six industries (financial services, cable and telecoms, personal computers, e-commerce, auto insurance and ISPs).

Then read the results carefully: Reichheld’s ultimate question turned out to be the first- or second-best predictor of future customer behaviour in 11 of the 14 results. Alright, that’s pretty good. But remember, it was similarly narrow research into customer retention rates, cost to serve and so on that launched the last loyalty bandwagon – the results of which were subsequently proved to be far less universal than claimed, and from which Reichheld is now distancing himself.

Reichheld admits: “Though the ‘would recommend’ question is far and away the best predictor of customer behaviour across a range of industries, it’s not the very best for every industry.” But adds: “Companies need to do their homework. They need to validate the link between survey answers and behaviour for their own business and their own customers.” That caveat should be underlined in bold capital letters.

A second concern is that “willingness to recommend” is just another accident statistic: it tells you that something has happened but it doesn’t tell you why, or how to improve on the situation. The real “ultimate question” is not whether you have a single, simple number but whether the organisation has the culture to answer those “why” and “how to improve” questions. This, it seems, is Reichheld’s real interest and here it gets interesting.

The good, the bad and the worse profits

A core part of Reichheld’s argument rests on a distinction between what he calls “good” profits and “bad” profits. Good profits are where companies create value for customers; serving them, delighting them, and so on. Bad profits are where companies extract value from customers. They are “profits earned at the expense of customer relationships”. Whenever a customer feels misled, mistreated, ignored or coerced; whenever the company profits from unfair or misleading pricing; or whenever cost cutting leads to a lousy customer experience, the company is making bad profits which alienate customers and demoralise employees, Reichheld suggests.

There are three particularly worrying things about bad profits. First, they are often easier to make than good profits. Second, once this happens companies get addicted to them: moving from bad profits to good often involves taking a hit. Reichheld cites the example of “one of the world’s leading mobile phone operators” which calculated that moving all its customers to the best tariff rate for their particular usage behaviour would cut its profits by two-thirds. Banks now make about one-third of their money from “parking fines” which they levy on customers for not keeping to the small print of their contracts. Bad profits are like a drug – they’re nice and easy, and you always want more.

The third really frightening thing about bad profits is that they are invisible to accounting systems. Revenues created by exceeding customers’ service expectations and by bamboozling them with deliberately confusing tariff structures appear as one and the same thing to the finance director, chief executive and shareholder. They are simply revenues. Companies that judge their performance simply by looking at accounting numbers therefore become blind and indifferent to the difference between good and bad profits. And that makes addiction to bad profits all the easier.

Open to discretionary investment

Reichheld really has a point here. Every transaction has two aspects to it: a substance and a shadow – the shadow of the future. The substance is easily measured by accounting systems because it’s where money changes hands. The shadow is not, because it takes place in the customer’s heart and mind and revolves around a question for future behaviour: “Given this experience, do I really want to invest more time, money, effort, emotion (etc) in this relationship?”.

This investment may take the form of repeat or increased sales. But it may well manifest itself via other forms of additional, discretionary investment: increased willingness to forgive mistakes, to pay more attention to communications, to disclose information (personal data, suggestions, complaints), to recommend the company to other people, and so on.

What’s more, these additional discretionary investments don’t apply to company/customer relationships – they apply, potentially, across all important relationships: employees, supply chain partners and so on. And they can take the form of “ill-will” as easily as they can take the form of “goodwill”.

A shadow more substantial than transactions

Such additional discretionary investments have three intriguing characteristics. They cannot be measured by traditional accounting or other performance measures. They have little to do with loyalty (as commonly defined). And they probably explain whether or not the organisation’s performance is on an upward or downward trajectory: whether it is buzzing with positive energy or paralysed by backbiting and background resentment.

In other words, it may be that when it comes to business momentum, the “shadow” can be more substantial than the transactional substance and is the essence of real marketing effectiveness. Now, this shadow of the future probably ranges much wider than simple willingness to recommend. But Reichheld is right to say we have to calibrate it. Without it, corporate addiction to bad profits will continue unabated and good marketing will struggle.