How loyal are your customers?

Many companies recognize the power of loyalty and its impact on financial performance. Not only is the notion of loyalty intuitively appealing, but a growing body of empirical evidence suggests that companies that choose to ignore loyalty may find themselves on precarious footing as they attempt to ascend the ladder of financial success. Given the link between loyalty and financial benefits; increased market share, higher revenue, and lower costs, your company should be investing time and resources into developing loyalty programs that seek to measure, manage, and improve loyalty performance.

Despite the growing popularity of loyalty programs, the true value of such programs are not often realized due to ambiguous or ill defined measurement systems. NICE Satmetrix holistic Voice of the Customer (VOC) solution, powers enterprises to combine and analyze millions of customer interactions, solicited feedback, and operational data to uncover blind spots, increase customer satisfaction, and improve agent performance. To begin the path towards standardization, Satmetrix embarked on an independent research project. Their objective was to better understand the micro- and macro-economics of customer loyalty. At the micro-level, their research focused on finding a loyalty question that could consistently predict short-term purchase and referral behaviors. At the macro-level, they sought to validate this metric by linking it to long-term corporate financial indicators across industry-specific companies. The results of this investigation were compelling. Not only did they discover the most effective question for accurately measuring customer loyalty, but they also identified “Net Promoter” as a valuable tool for assessing long-term corporate growth.

The growing acceptance of Net Promoter is not limited to academics and researchers. Through vehicles such as netpromoter.com and conferences held in North America and Europe, Net Promoter is quickly gaining widespread industry adoption. During Forrester Research’s Marketing Forum, Forrester Chairman and CEO George F. Colony said “Net Promoter is becoming a driving force within organizations.”

A single loyalty question is in fact sufficient to gauge customer purchase and referral patterns across seemingly disparate industries. More explicitly, if customers reported that they were likely to recommend a particular company to a friend or colleague, then these same customers were also likely to repurchase from the company, as well as generate new business by referring the company via word-of mouth. Conversely, if customers reported that they were not likely to recommend a company, they were also less likely to engage in actual repurchase or referral behaviors.

Results of this analysis also led to the discovery of a customer classification system, whereby customers can be grouped according to their joint loyalty and behavioral profiles. Using these groupings, customers can be characterized in terms of their joint profile of ‘what they say’ and ‘what they will actually do’.

• Promoters – customers who were highly likely to recommend a company (i.e., ratings of 9 or 10) and exhibited the highest rates of purchase and referral behaviors
• Passive – customers who were somewhat likely to recommend a company (i.e., ratings of 7 or 8) and exhibited moderate rates of purchase and referral behaviors
• Detractors – customers who were less likely to recommend a company (i.e., ratings of 0 thru 6) and exhibited the lowest rates of purchase and referral behaviors 

To test whether the ‘recommend’ question would still link to financial indicators beyond the individual customer level, they aggregated company data from the benchmarking database to calculate two types of loyalty percentages:  

• % Promoter – the percentage of respondents indicating a ‘recommend’ rating of 9 or 10
• % Net Promoter – the percentage of respondents indicating a ‘recommend’ rating of 9 or 10, minus the percentage of respondents indicating a ‘recommend’ rating of 0 thru 6 (hereafter, Net Promoter®)

Using these percentages, they correlated %Promoter and %Net Promoter to each company’s growth rate for each targeted industry. They examined thirty-three correlation coefficients, in terms of absolute magnitude and level of significance, to determine whether either of the two types of loyalty percentages linked to corporate financial growth.

This comprehensive undertaking revealed unequivocal results: an individual’s propensity to recommend a company to friends and colleagues may be the most direct gauge of customer loyalty and, ultimately, financial success. Although this finding was born out by statistical tests, it also makes intuitive sense. When customers are truly loyal, their relationship with a particular company surpasses the basic model of economic exchange, where money is simply spent for products acquired or services rendered. Not only do these customers remain committed to the company, despite price increases and occasional errors, they also actively recruit new customers through positive word-of-mouth. These recommendations indicate true loyalty, since they reveal customers who are willing to risk their character, trustworthiness, and reputation with virtually no reward beyond the positive regard and thanks of others. Furthermore, it also makes sense that the Net Promoter metric demonstrates the strongest link to long-term corporate growth. Results from the macro-level portion of this study revealed that Net Promoter accurately measures the net effect of word-of mouth. In other words, the reason Net Promoter is such a powerful metric for gauging long-term growth is because it takes into account both the increased growth achieved through positive referrals, as well as the lost potential for growth caused by the effects of negative word-of-mouth.

While existing research positions Net Promoter as a straightforward metric that links customer loyalty to purchase behavior and long-term growth, there is always a need for ongoing validation. To this end, Satmetrix continues to analyze the links between Net Promoter and other indicators of long-term growth, as well as to expand these analyses into other industries, market segments and countries. For example, Satmetrix currently provides cross-cultural benchmark data to compare Net Promoter scores in different regions and countries. Although other factors can certainly influence a company’s growth potential, companies would be well advised to begin looking at loyalty through the eyes of customers who are ‘likely to recommend.’ By measuring and tracking this propensity, as well as the net effect of customers who ‘promote’ over customers who ‘detract,’ companies can confirm the appropriateness of the Net Promoter metric in their own specific circumstances. Over the course of time, and with repeated validation, Net Promoter is becoming the loyalty metric of choice for gauging both short term and long-term financial success.

Do you know your Net Promoter Score?

Next month, we will dive into the 10th driver of company value, Cash Flow. Until then, enjoy building value.

If you are curious as to how well your company is performing in the Value Drivers we have been discussing, get your FREE Value Builders Score today and find out.