Download “The purpose of business is to create and keep a customer”

A new perspective on customer experience improvement
“The purpose
of business
is to create
and keep a
customer”
Peter F. Drucker,
writer and management
consultant
Abstract
Studies into customer satisfaction have
been conducted over the last few decades.
Managers have grown skeptical about
its role in delivering genuine business
benefits. It continues to be complicated
to link a rather “soft” measure like
customer satisfaction to “hard” measures
such as financial results and shareholder
value. Despite significant investments in
customer satisfaction, satisfied customers
do not necessarily remain loyal. Recent
research shows us the importance of
the emotional experience of customers
compared with functional features of
products or services. Correlations between
emotions, customer satisfaction and
business performance have been found.
An important metric – known as the Net
Promoter Score® (NPS) – has gained a
lot of attention over the last year. It helps
to improve insights into your customers’
experiences. Another application of NPS
is that it can be used as a KPI to stimulate
a customer-oriented culture within your
company. Multinationals like General
Electric and Philips have successfully
implemented NPS as a single key metric
of customer experience. This article
describes various elements of NPS, which
have been deployed by Ernst & Young
across a wide range of companies.
Introduction
Today, one of the big questions faced by
companies is deciding which customers
have a positive customer lifetime value9
and are thus most worthy of investment.
Furthermore, a lot of research has
focused on how to make marketing
investments more accountable.
However, in today’s environment one has
to face the fact that no holy grail exists to
influence financial results and shareholder
value. In the end, many direct and indirect
factors influence business performance.
Especially in turbulent times a loyal, stable
and profitable customer base which adds
current and future value is priceless.
Focusing on keeping customers satisfied
and loyal clearly contributes significantly
to the future health of the business.
Researchers have stated that customers
are the primary source of future cash flows
(Anderson et al. 2004). As customers
are powerful growth-generating assets,
it becomes even more important to turn
them into true loyal fans. This highlights
the important role of marketing to satisfy
and even delight customers and not merely
acquire them. Customer satisfaction
has been found to be positively related
to shareholder value, market value
and ROI (Anderson et al. 2004; Ittner
& Larcker 1998). Moreover, several
researchers have carried out analyses
that reveal that the cost of acquiring a
new customer is five times the cost of
9
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Performance
Customer lifetime value is the present value of
the future cash flows attributed to the customer
relationship. This metric places more emphasis
on long-term customer satisfaction than on the
maximization of short-term sales.
retaining a customer (Reichheld and
Sasser 1990). Evidence has been found
to show that customer satisfaction results
in customer retention, cross-buying,
future revenues, reduced costs of future
transactions and more efficient future
advertising due to positive word-of-mouth.
One relationship often examined in
literature is the interplay between
customer satisfaction, customer loyalty
and profitability. Customer satisfaction
has been argued as a necessary but not
sufficient condition for loyalty (Jones and
Sasser 1995). It was found that loyalty, as
measured by retention, is most likely when
customers are completely satisfied and
give a satisfaction rating of 5 on a 5-point
scale. Therefore, complete satisfaction
is more likely to result in future profits.
Several studies have focused on how to
retain satisfied customers. These studies
acknowledge that satisfaction contains
emotional as well as cognitive elements.
The importance of customers’
emotional experience
Recent research shows the importance
of customers’ emotional experience
compared with functional features
of products or services. Correlations
have been found between emotions
and customer satisfaction and loyalty.
Satisfaction based on emotions is a
better indicator of future behavior than
satisfaction based on cognitive experience.
Moreover, in low-contact services,
technical quality (what is delivered)
is needed to obtain satisfaction, but
functional quality (how it is delivered)
is required to drive beyond satisfaction,
What is NPS?
NPS was developed by loyalty expert
Frederick Reicheld (Reichheld 2003).
The metric is based on recommendation
intention and makes the vague concept
of customer loyalty more tangible which
helps to drive company growth. NPS is
calculated from a single loyalty question:
“How likely are you to recommend
company or product X to your family,
to loyalty (Mittal and Lassar 1998).
This finding emphasizes the importance
of taking the appropriate action during
the “moments of truth” in customer
interaction. Fortunately, there is a
better way to measure customer
loyalty, which takes into account the
more emotional aspect of the customer
relationship. It’s called NPS.
Figure 1: What is Net Promoter Score®?
“Would you recommend us to a friend?”
Probes both dimensions of loyalty
Scale
Head
10
• Best features
9
• Best service
8
• Best price
7
• Best quality
6
Heart
5
• They know me
• They value me
• They listen to me
• They share my values
4
3
2
1
0
Performance
Promoters – customers who are loyal
enthusiasts and are likely to recommend a
company (i.e. ratings of 9 and 10). They
demonstrate the highest rates of purchase
and referral behaviors.
Passives – customers who are satisfied
and somewhat likely to recommend a
company (i.e. ratings of 7 and 8).
They demonstrate moderate rates of
purchase and referral behaviours. They
can be wooed by the competition.
Detractors – customers who are
unhappy and less likely to recommend a
company (i.e. ratings of 0 to 6).
They demonstrate the lowest rates of
purchase and referral behaviors.
% Promoters - % Detractors
=
Net Promoter Score (NPS)
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It is advisable to include two or three
questions in your survey in order to detect
underlying reasons for the promotership
or detractorship of a customer.
Loyalty contains both behavioral (heart)
and attitudinal (head) elements. When
only measuring behavioral components
of loyalty (repeat purchases, crossselling, upgrading etc.), one falls short of
acknowledging the effects of the dynamic
customer relationship. Behavioral loyalty
can be caused by perceived switching
barriers, while attitudinal loyalty reflects
a conscious choice. Furthermore, a
customer experiencing both behavioral and
attitudinal loyalty (true loyalty) is more
likely to become an active ambassador.
The customers who are truly loyal
engage in recommendation behavior and
therefore add value beyond their own
value and contribute to business growth
and performance(Reinartz and Kumar
2002; Reinartz and Kumar 2000). The
NPS makes loyalty tangible and gives more
information about attitudinal loyalty as an
intention to recommend indicates that a
customer is willing to put its own reputation
at risk by recommending the company or
product. As true loyal customers have to
show attitudinal loyalty as well, created by
positive emotions towards the company
or product, it is valuable to manage the
customer experience. The customer
experience, created when interacting with
a company during many points of contact
or moments of truth, is vital to the business
results. The difference of NPS compared
with the traditional measures of customer
satisfaction is illustrated in Figure 2.
NPS enables the quick identification of
detractors within your customer base
who could leave you or spread negative
word-of-mouth. From that perspective,
companies are able to take action swiftly in
order to maintain their retention ratio. On
the contrary, given the enormous influence
that word-of-mouth messaging has on
brand evaluation and purchase decisions,
the promoters of a company represent a
significant —and often untapped — asset.
Figure 2: Difference between average overall satisfaction (CSAT) and NPS
Use of NPS to measure customer loyalty
Customer satisfaction trends July 2005 to June 2006
Average overall
satisfaction (CSAT) = 7.46
“Promoters”
50%
47.9%
40%
Net Promoter Score
(38.8%)
(i.e. “top box” rate less
“bottom box” rate)
30%
“Detractors”
20%
9.1%
Bottom box (9.1%)
customer dissatisfaction
(CSAT 0 to 6)
10%
0
2
4
6
8
Customer satisfaction score
Source: Company A KPI reports (Nov 2005 and June 2006)
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Top box (47.9%)
advocacy and loyalty
(CSAT 9 to 10)
60%
Percentage of customers
friends and colleagues?” The answer, on
a scale from 0 to 10, enables you to look
at 3 distinct groups of clients (promoters
and detractors of your firm, and those that
are passive) and to take targeted action
to improve the client experience. It refers
to the percentage of promoters minus the
percentage of detractors within a customer
base. For a more detailed explanation
of the NPS, please note Figure 1.
Performance
10
Identifying ways to leverage promoters
through reference programs, by providing
tools that facilitate their naturally
occurring word-of-mouth behavior and
by amplifying their messages through
community and social media, is a promising
next development in the evolution of
how companies can benefit from NPS.
Emotional Fingerprint™
Based on several in-depth benchmark
research studies on customer satisfaction,
loyalty and NPS, Ernst & Young developed
a new customer metric, the Emotional
Fingerprint™. We have discovered that
there are clusters of customer emotions
within every organization that drive
and effect value for an organization.
Awareness of these clusters of emotions
puts organizations in a better position to
initiate actions to increase or decrease
their NPS. By evoking certain emotions
in delivering customer experiences at
moments of truth over the course of the
contract, you are able to improve your
customer relationships in the short term.
How can NPS help to improve
customer orientation?
Another feature of NPS is that it can be
used as a strong KPI in order to drive
change in stimulating the customer
orientation within your company.
Multinationals like General Electric and
Philips have successfully implemented
NPS as a single key metric of customer
experience. To be successful, certain
questions need to be tackled, including
how to manage customer experience and
its beneficial outcomes – increased loyalty
and higher NPSs – and how to change the
behavior of your employees and customers
across the customer touch points.
The NPS as a KPI is a means to create
a more customer-centric company as it
influences company culture, employees
at all levels, company values, strategies
and operations. It enhances the mindset
of making investments for long-term
“good” profits instead of costs for shortterm “bad” profits. The NPS is easy to
communicate and interpret at all levels of
the organization. It provides an indication
of the percentage of the customer base
that consists of truly loyal customers:
the percentage of your customer base
that is willing to recommend you minus
the percentage that is not. Managers as
well as front-line employees can interpret
the NPS and can come up with ideas of
how to improve the customer experience
in order to create more promoters.
Performance
Conclusion
The NPS is a valuable metric to discover
practical implications for business growth.
It enhances the ability to assess the true
value of the customer base. However,
knowing the NPS is only the first step of
the customer experience journey. The
metric itself is not the answer. Companies
need to learn what actions they can take
to increase the number of promoters
and decrease detractors. Once you
determine what has to be changed and
take the steps to empower employees
across the enterprise, you may start to
see an impact on loyalty and growth.
Author
Jan Willem Rietdijk is an Executive Director
focusing on Customer Relationship Management in the
Advisory Practice, Ernst & Young, Netherlands.
Net Promoter Score ® is a registered trademark
of Satmetrix Systems, Inc., Bain & Company,
and Fred Reichheld.
Emotional Fingerprint ™ is a registered trademark
of Ernst & Young LLP
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