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Using Loyalty to Predict Growth

Having satisfied customers may be a worthy goal for most companies, but more satisfied customers doesn�t necessarily translate into future growth for the company, it turns out. Far more telling as a measure of growth potential is whether those happy customers are willing to tell their friends and colleagues about your company.

Researchers have been focusing on the �likelihood to recommend� measure ever since Frederick Reichheld reported, in a December 2003 article in the Harvard Business Review, on an experiment he conducted with 4,000 customers of companies in 14 different industries.

Reichheld used what he called the 20-question Loyalty Acid Test to test which question most often used in customer satisfaction surveys correlates with actual behavior that would ultimately lead to growth.�They found one measure that far and away better predicted behavior than any other in 11 of the 14 industries: �How likely is it that you would recommend [company X] to a friend or colleague?�

Reichheld and his colleagues then looked to use this measure to predict growth relative to other companies. In order to do this, they deployed this measure as part of surveys involving over 400 different companies in a variety of industries. They used a 10-point scale in the hopes that the larger scale would show more variability and allow them to circumvent �grade inflation� that tends to accompany customer satisfaction research.�Their model is as follows.

A customer giving a rating of 9 or 10 (very likely to recommend) was considered to be a �promoter� of the brand.�These are the people that have very positive experiences and are most likely to spread positive word of mouth.�Those that rated the company as a 7 or 8 were considered to have a relatively positive view of the brand, but not so much so as to be promoting it to friends and colleagues.�Anyone giving a rating of 6 or below was considered to be a detractor and had the potential to hurt the brand with negative word of mouth.

By subtracting the percentage of detractors from the percentage of promoters for any given company, the result is what Reichheld calls the �net promoter score.� In the majority of industries studied, they found this measure to be highly correlated with individual company growth rates over the three-year period studied from 1999 to 2002.

While this loyalty metric is insufficient as a management tool on its own, its proven relationship to actual behavior suggests it can be very useful as part of a larger research program.�The net promoter score has been successfully used by such companies as Enterprise Rent-A-Car as part of an ongoing customer satisfaction initiative.

The key is to identify the factors that separate the rest of your customers from your most loyal customers, so that your company can focus its attention on moving them into the most loyal category.

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