Sunday, February 26, 2006

Book Summary: The Ultimate Question

The Ultimate Question
by Fred Reichheld

I received this book as part of a BzzAgent campaign. Overall, I've found BzzAgent's books a mixed bag. Some, like Guy Kawasaki's "Art of the Start" rock hard and kick ass. Others, which shall remain nameless, well, suck.

The Ultimate Question falls into the former category. I think it's one of the most important business books of the year.

The Ultimate Question is about a simple, yet all-encompassing insight: The best way to build a successful business is to have loyal customers, and the best way to measure loyalty is by the proportion of customers who will recommend you to others.

The Ultimate Question is simple: "How likely is it that you would recommend this company to a friend or colleague?"

Based on the answer to that question, you can divide your customer base into three groups: Promoters (who act as evangelists for your company), Passives, and Detractors (who feel like they are trapped in a bad relationship).

The Net Promoter Score (NPS) is calculated by subtracting the % of Detractors from the % of Promoters.

The average company has an NPS of 5-10%. The best companies have an NPS of 50-80%. And then there are the bad companies who actually have negative NPS ratings.

Companies that engender loyalty enjoy higher growth and better profitability. They spend less on marketing and customer acquisition (thanks to their loyal customer who do that for them).

Answering the Ultimate Question is a beginning, rather than an end. Once you know your score, you still need to figure out ways to improve it. You still have to do the hard work of identifying ways to improve the customer experience. But the Ultimate Question provides the needed measuring stick to go about this systematically and more efficiently.

Companies like Enterprise Rent-a-Car use the NPS to seek continually improvement. With scores down to the level of individual offices, it gives Enterprise the ability to see where it needs to focus...and to make achieving a high NPS a part of the corporate culture.

The Ultimate Question can also be used to segment and manage customers. By grouping customers on a matrix that cross-references profitability and NPS scores, it is possible to apply different strategies to different situations.

1. INVEST in your profitable promoters.
2. REDUCE bad profits (profitable detractors) by identifying and solving their problems
3. Move unprofitable detractors UP or OUT by either finding a lower-cost way to serve them, or better yet, foisting them on the competition.
4. INCREASE the profitability of your unprofitable promoters by cross-selling more profitable services
5. INCREASE the happiness of your passives, but not at the expense of the above priorities

If you're building a company from scratch, design a business model around delighting profitable promoters. Do this, and you can prosper even in a cutthroat commodity business like HomeBanc, which focuses on mortgage loans to home purchasers with great service, no marketing, and competitive prices. It is able to do these things despite investing in its employees thanks to their high productivity.

Companies like Enterprise, Southwest Airlines, and many others succeed despite of their industry.

Some of the ways to build an organization that creates promoters are:

1. Send the right messages. If your focus is on delighting the customer, reward those who do, and punish those who don't, even if they deliver profits. Those profits are bad profits, bought at the expense of the customer relationship.
2. Hire (and fire) to inspire. Hire people with the right attitudes. Do not compromise and hire people who don't embody your core values just because they are skilled. And rely on employee referrals for hiring.
3. Pay well and invest in training--so employees invest in relationships. Make up for the cost with productivity.
4. Small teams enhance accountability and service. The military has found that the best building block for an organization are two five-man squads.
5. Link measures and rewards to company values.

Measure and reward what helps the customer experience, not just maximizing profits.
USAA uses these tactics. It spends double the industry average on training. Its people are empowered to use their judgment on all issues, including refunds, so that customers don't have to be transferred around. Call center operators work in small teams that collaborate. And NPS ratings are over 90%.

It's also important to make the customers part of the process. You develop a community of promoters by listening.

1. Hold direct conversations with customers. Senior managers need to stay in direct contact with real customers. CEOs man the customer service lines.
2. Create processes for systematic listening by frontline employees. SAS for example gathers all the suggestions and feedback and put them up on the Web site for users to vote on.
3. Let customers guide innovation. See what the customers want, rather than assuming you know.
4. Help customers delight one another. Connect them together and see what happens.

In the end, the Ultimate Question is the glue that ties together a number of themes, ranging from Seth Godin's "Free Prize Inside" to Ricardo Semler's "The 7-Day Weekend". In today's world of ultimate choice, the companies that delight their customers (and their employees) are the ones which will win in the marketplace and in their market cap. The Ultimate Question offers the best feedback mechanism to see how you're doing.

1 comment:

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