The Customer Score: The Key to Calculating Customer Loyalty

As promised, let’s discuss another driver of value to your business. This is the “CUSTOMER SCORE”.  The value of your business is determined by the future stream of profitability. But how do we predict this?  Let’s talk about the Net Promoter Score. Using the NPS, there is one question you can ask your customers that not only is an indicator of your customer’s satisfaction, but also is a prediction of your future string of profitability – and acquirers love it!

Net Promoter Score is a powerful metric for measuring customer loyalty. It can help you understand your customers better, build value in your business, and make smart decisions to create competitive advantage.

This article will explain how NPS works, why its important for owners of dry cleaning and laundry businesses, and the benefits of using this metric.

I apologize in advance for the technical aspect of this information, but if was not important, I would not include it.

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, such as increased market share, higher revenue, and lower costs, companies have been wisely investing time and resources into developing loyalty programs that seek to measure, manage and improve loyalty performance. The kings of loyalty programs have been the airlines. If you travel like I do, you have your top 2 carriers and avoid all the rest.  Points are points.

Despite the popularity of loyalty programs, the true value of such programs is not often realized due to ambiguous or ill-defined measurement. Moreover, it became quite obvious that measuring customer satisfaction was simply not enough (Reichheld, 2003). And yet, researchers and practitioners alike were still trying to identify a customer metric that consistently linked to a company’s bottom line. To begin the path towards standardization, Satmetrix, in close consultation with Frederick Reichheld, founder of the Loyalty practice at Bain & Company, embarked on an independent research project in 2003. The 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. Since then, ongoing research has continued to strengthen the efficacy of Net Promoter. For example, Reichheld’s book The Ultimate Question (2006) presents many cases documenting the power behind Net Promoter. The growing acceptance of Net Promoter is not limited to academics and researchers. Even in our industry, operators are using this program.

To evaluate the relationships between loyalty questions and customer behavior, they designed survey questions and response options. Response options for the loyalty questions were based on a 0- to-10-point rating scale, with ‘0’ representing extremely negative and ‘10’ representing extremely positive.

The result was that a single loyalty question is in fact sufficient to gauge customer purchase and referral patterns across seemingly disparate industries. Specifically, of the correlations studied across the different industries, the ‘likelihood to recommend” question proved to be the first or second correlate to actual customer behavior 80% of the time. 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 actually 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 scheme, 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 33 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 macro-level analysis revealed significant correlations (0.70 or higher) for a majority of the targeted industries. These high correlations led to the interpretation that the ‘recommend’ question, when expressed in terms of %Promoter or Net Promoter, does indeed suffice as an aggregate loyalty metric for companies to track long-term corporate growth. These results also indicated that the Net Promoter expression of the ‘recommend’ question, rather than simply the %Promoter metric, more strongly links to revenue growth rate for most industries. In other words, companies that maintain higher Net Promoter scores also demonstrate higher growth rates, whereas companies that maintain lower Net Promoter scores demonstrate lower growth rates.

The correlation coefficient of 0.89 indicates that firms with higher Net Promoter scores enjoy higher long-term growth rates (e.g., Southwest), whereas firms with lower Net Promoter scores have lower long-term growth rates.

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 borne 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-ofmouth. In other words, the reason why 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. So how do you improve your scores?  Focus on the “why” reason your clients responded to the first question. Fix these and keep surveying.

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 has become the loyalty metric of choice for gauging both shortterm and long-term financial success. Over time, you can benchmark yourself and segment your different customer groups. You may discover differences between store customer and route clients.

Next month, we will dive into the 4th driver of company value, and I promise it will not be as technical as this one was.  Until then, enjoy building value.

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How Business Coaching Can Help

Service companies, trades, restoration companies, dry cleaning businesses, laundry businesses come to me for assistance in:
  • Developing systems to create smoother operation, improving processes and removing bottlenecks
  • Implementing team management practices including meetings, delegation and working with challenging communication issues
  • Interpreting financial statements and using the information to make better decisions and become more profitable
  • Sales and marketing help to get better clients and bigger projects
If coaching with me sounds like something you’d like to explore, I invite you to book a confidential 15-minute call so we can each assess whether or not it will be a fit.

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