From the July 2006 issue of Research Magazine • Subscribe!

Book on Question Contains Answers

The Ultimate Question: Driving Good Profits and True Growth.

By Fred Reichheld. Harvard Business School Press. $24.95.

Fred Reichheld, director emeritus of Bain & Co., became a well-known book author with the 1996 release of the national bestseller Loyalty Rules, in which he demonstrated why companies that ignore the reasons behind employee defections face a dismal future of low growth, weak profits and shortened life expectancy. His newly released title shines a similar spotlight on customer relationships.

Reichheld is quick to point out that a company's addiction to "bad" short-term profits misleads and ultimately alienates customers, who then "undermine growth by creating legions of detractors." He cites the financial services industry as a leading example of an industry that misleads its customers. Financial firms, he says, "like to throw around terms like fiduciary and trust in their advertising campaigns, but how many firms deserve these monikers? Mutual funds bury their often-exorbitant administrative fees in the fine print, so that customers won't know what they're paying. Brokerage firms slant their research to support investment-banking clients, thus bilking their stock-buying clients. Retail banks charge astonishing fees for late payments and bounced checks."

This kind of behavior results in detractors, customers who feel they've been badly treated by a company -- and as a result, cut back on purchases, switch to the competition and warn others to stay away from the company they feel has done them wrong. "The Ultimate Question" points to a recent Bain study that found that only 22 percent of the world's major firms achieved real sustainable growth of even 5 percent a year from 1994 to 2004. "It seems like no coincidence that so many companies are having trouble growing and so many companies are addicted to bad profits." Thus, Reichheld believes that satisfying customers is the most important business goal beyond making any money at all.

The author then boils down the distinction between good profits from bad into a simple (and indeed, the "ultimate" question): How likely is it that you would recommend this company to a friend or colleague? The resulting metric, called the Net Promoter Score or NPS, is rooted in the fundamental perspective that every company's customers are either promoters (loyal enthusiasts), passives (satisfied but unenthusiastic) or detractors (unhappy customers). "The best way to gauge the efficiency of the growth engines is to take the percentage of customers who are promoters (P) and subtract the percentage who are detractors (D)" to calculate the NPS, writes Reichheld.

"The Ultimate Question" can be useful to advisors, describing several tips for estimating the economic effects your NPS can have on your business:

Retention rate. Since detractors defect at higher rates than promoters, it's possible to determine the average tenure of your customers.

Margins. Promoters are less price-sensitive than other customers because they believe they are getting good value overall from the company.

Annual spend. Promoters consolidate purchases with their favorite suppliers and are willing to upgrade to higher-priced products.

Cost efficiencies. Detractors consume more customer relationship resources.

Word of mouth. Referred customers usually have superior economics themselves; they also have a higher propensity to become promoters, which accelerates the positive spiral of referrals.

MARY SCOTT is the co-author of "Companies with a Conscience." To contact Mary, see www.companieswithaconscience.com or write to maryscott303@comcast.net.

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