In 2004, the financial services firm Charles Schwab was struggling. Costs were spinning out of control, and the stock price had plummeted from $40 to just $6. Yet just four years later, Schwab had regained its position as an industry leader, and its stock price had tripled. A key part of the turnaround: Schwab’s Net Promoter® system, which helped the company provide world-class service while living up to the customer-focused beliefs that are at the heart of its strategy. “The beauty of Net Promoter,” says CEO Walt Bettinger, “is that it helps to simplify complex issues and helps people to make the right decisions. [It] makes people ask themselves: Is this the right thing to do for our customer, and is it economically appropriate for the firm?”
Rackspace is a young, entrepreneurial company in the fiercely competitive cloud computing and managed hosting business. It has grown rapidly since its founding in 1998. By 2011, its revenue run rate exceeded $1 billion and annual growth topped 30 percent. What distinguishes Rackspace from competitors, says CEO Lanham Napier, is the “Fanatical Support” it offers customers, and the process the company uses to measure and manage Fanatical Support is the Net Promoter system. “The goal of Fanatical Support is to create customers who are promoters,” says Napier. “Promoters recommend us to their friends, becoming an extension of our salesforce. Customers who are promoters are also more profitable, staying with us longer and buying more of our services…. The creation of loyal promoters not only reduces customer acquisition costs, it improves retention rates and inspires our Rackers [employees]. We have witnessed these results firsthand.”
Several years ago, American Express CEO Ken Chenault came to believe that his company’s service quality was not what it should be. Service had become “a backoffice cost center, focused on reducing expenses and executing transactions,” remembers Jim Bush, the executive Chenault appointed to lead the company’s service organization. “We were effective and efficient… but we were missing an opportunity to establish bonds with [our customers] and build more meaningful relationships.” Bush initiated a series of measures to improve service quality and improve the environment for its service employees. One of the key elements of his approach: launching a Net Promoter system, known internally as Recommend to a Friend. In just three years, American Express saw a significant increase in customer satisfaction scores, greater efficiency and service margins, and 50 percent lower employee attrition in its US service centers.
By now, most executives are familiar with Net Promoter scores, a method of measuring customers’ loyalty by sorting them into promoters, passives and detractors (see below, “Calculating your Net Promoter score”). But what is the Net Promoter system that has helped these three companies and many others reach—or remain in—the top ranks of their industries?
A Net Promoter system is a management philosophy, a way of running a business. Net Promoter companies commit to specific processes and systems that help everyone focus on earning the passionate loyalty of both customers and employees. The business payoffs are substantial, as Schwab and the others found. Loyal, passionate customers stay longer, spend more, contribute suggestions and sing your company’s praises to friends and colleagues. Loyal, passionate employees love working for you, come up with new ideas and go the extra mile to delight customers. That’s why loyalty correlates so strongly with sustainable, profitable organic growth. On average, an industry’s loyalty leader grows more than twice as fast as its competitors.
Financial benefits aren’t the only reason for implementing a Net Promoter system. Unlike conventional accounting, which often tempts companies to chase short-term profits at the expense of loyalty and even of ethics, the Net Promoter approach requires—and inspires—a company to do the right thing by its customers and employees. It is the business equivalent of the Golden Rule: Treat others as you would have them treat you. Judging by the idealistic statements in many companies’ annual reports, most CEOs are like Bettinger, Napier and Chenault: They want their companies to grow by enriching the lives of customers and employees. What they have lacked, until now, is a system that builds that goal into their companies’ everyday operations.
Boiled down to its essentials, a Net Promoter system has just three requirements. Net Promoter companies:
Regularly sort their customers into three simple groups: promoters, passives and detractors. Ideally, companies ask just two questions in their surveys: On a zero-to-10 scale, how likely is it that you would recommend us (or this product or service) to a friend or colleague? and What is the primary reason for your score?
Customers’ responses to the first question allow you to classify them as promoters (9–10), passives (7–8) and detractors (0–6). The responses also enable you to create a Net Promoter score (NPS®), which is simply the percentage of promoters minus the percentage of detractors. You can analyze this score by business, geographical region or any other segment, and you can track it from week to week to see how your loyalty-building efforts are working. It’s both your customer balance sheet and your ethical compass. “NPS is the first screen I look at on my computer when I arrive at the office each morning,” says Bettinger, Schwab’s CEO. “It provides a litmus test of how well we are living up to our core values.”
Develop processes for short-cycle, closed-loop feedback, learning, recovery and action. The “why” question is even more important than the score itself. It helps companies understand what they are doing right and what they are doing wrong. It enables them to begin the process of discovering the root cause of the customer’s experience— the deeper causes beneath the customer’s description— and then to take action to improve that experience.
“Closing the loop” involves sharing feedback from a customer—as soon as possible after it is received—with the employees most responsible for creating that customer’s experience. The relevant employees may be an account team, specific sales or service representatives and supervisors, or the product designers, engineers, pricing executives and others who help shape a customer’s experience with the company. Closing the loop also involves contacting customers whose feedback merits follow-up, so that you can probe deeper into their experience, remedy individual problems where possible and begin to address systemic issues. Of course, closing the loop is also an excellent way to find out what sorts of experiences are wowing customers and turning them into promoters, so you can deliver those more often.
Make it a top priority to earn the enthusiastic loyalty of customers and employees. That is, create more promoters and fewer detractors. This is the job of the company’s leadership. The most effective leaders regularly demonstrate their own commitment to earning customer and employee loyalty, and they expect a comparable level of commitment from others. This doesn’t typically happen unless the leaders have concluded that earning customer and employee loyalty is a top strategic priority—that getting customers to buy more, stay longer and tell their friends is one of the primary ways the company will deliver great financial and strategic results.
Leadership commitment is essential partly because the system is always a balancing act. Employees naturally want to delight customers, but they must do so in economically rational ways. So the CEO and CFO need to understand the vastly different economics of promoters, passives and detractors and ensure that people in the organization have the tools for making appropriate trade-offs. Moreover, a Net Promoter system typically requires making thoughtful investments, assigning the most talented leaders to important initiatives and adjusting incentives and organizational structures to facilitate cooperation among departments and functions. Finally, a Net Promoter system is likely to require significant investments in IT systems, training and the like. Only an organization’s leaders can commit the necessary resources.
The simplicity of the Net Promoter score sometimes creates the misperception that it is all about one question and the resulting score. But the leaders of great companies, such as Schwab, Rackspace and American Express, understand that the score is just the beginning— the catalyst. It is the full system that creates the conditions for real change and improvement.
Elements of the system
Implementing a Net Promoter system involves at least eight essential elements (see Figure 1). Future articles in this series will examine these elements in depth, showing how companies have dealt with the challenges and how they have built robust processes and practices in each area. The following summarizes some of the tasks involved:
- Accurate scorekeeping. Over time, companies find that they must develop, test and fine-tune their sampling and survey techniques so that everyone in the organization feels complete confidence in both the individual customer classifications and the organization’s Net Promoter scores.
- Loyalty economics. Determining the differing lifetime value of promoters, passives and detractors can help you gauge the value of investments in improving the customer experience.
- Root-cause searches. To track down the root cause of an individual customer’s experience, Net Promoter companies ask themselves, What about this customer, this situation, our marketing, our products or our operations produced the given result? This is not a question that can be farmed out to a market research firm.
- Closed-loop procedures. Companies need to develop practical, consistent methods for sharing feedback with employees and contacting customers to learn more about their experiences.
- Learning. Employees must be able to experiment with what works best for customers. The organization as a whole needs systems for discovering improvement opportunities in products, policies and procedures.
- Action. To create more promoters, companies have to resolve individual issues, help employees solve problems or “wow” customers on their own, address systemic issues and improve products and services.
- Robust support systems. Large, complex organizations that run on enterprise software often require significant IT investments to integrate Net Promoter processes into their broader operating systems.
- Commitment and communication. Leaders find they must not only commit to the Net Promoter system, they must constantly communicate to the entire organization the importance of the system and the values that underlie it.
Implementing a Net Promoter system isn’t easy, and it isn’t for everybody. The Net Promoter approach defines the cultural values and core economics that affect every aspect of a company’s business system and competitive strategy. The most successful companies work hard on all eight elements, and they try hard to live up to the Golden Rule values that are the system’s foundation.
But when you do it right—as Charles Schwab, Rackspace and American Express have discovered—you leave the competition in the dust.
Fred Reichheld and Rob Markey are authors of the bestseller The Ultimate Question 2.0: How Net Promoter Companies Thrive in a Customer-Driven World. Markey is a partner and director in Bain & Company’s New York office and leads the firm’s Global Customer Strategy and Marketing practice. Reichheld is a Fellow at Bain & Company. He is the bestselling author of three other books on loyalty published by Harvard Business Review Press, including The Loyalty Effect, Loyalty Rules! and The Ultimate Question, as well as numerous articles published in Harvard Business Review.
Calculating your Net Promoter score
The Net Promoter system begins with scores from customer surveys: On a scale of 0 to 10, how likely would you be to recommend this company (or this product) to friends and colleagues? Ratings of 9 or 10 indicate promoters; 7 and 8, passives; and 0 through 6, detractors. The Net Promoter score is simply the percentage of promoters minus the percentage of detractors (see chart above).