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Fred Reichheld

Partner, Boston

"There is so much confusion about what loyalty means, confounded by an inclination to leap to metrics before managers really have a fundamental understanding of what it is they are after and why it makes sense for their organization. Historically, we looked at share of wallet, repurchase rates, and retention rates as useful metrics. But I've come to realize that they all have shortcomings. Even though retention rate is a wonderful metric that ties closely to the economics of an organization and is sort of black and white, it fails to reflect the possibility that customers can be trapped, inert, or maybe even taking advantage of you.

I've discovered the best way to measure loyalty is just to ask people one simple question, what I call the ultimate question: "Would you recommend us to a friend?" When customers recommend you enthusiastically to a friend or colleague, they are giving you the highest possible rating. They are, in effect, co-branding their own reputation with yours. We refer to them as "Promoters."

It's not just a vague concept - it's highly measurable. Take the percentage of customers (or employees) who would rate you a 9 or a 10 on this one question, subtract those who would score you at 6 or less (the Detractors), and you have a Net Promoter score. Managing to improve the Net Promoter score over time helps companies manage for better growth and profitability."

For more on this topic, visit www.theultimatequestion.com.

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