Book Excerpt: Word-of-Mouth Economics at Dell

Book Excerpt: Word-of-Mouth Economics at Dell

Some marketers may shy away from measuring the Net Promoter Score because it sounds too complex.

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Book Excerpt: Word-of-Mouth Economics at Dell

Some marketers may shy away from measuring the Net Promoter Score because it sounds too complex. But others are not daunted. To show how it is done, a Bain team used the approach to quantify the value of promoters and detractors in the personal-computer business. The team used only publicly available data so that what it did could serve as a model for companies that lack sophisticated databases. Indeed, the same approach can be used by prospective investors—even by competitors—to understand a firm's customer-relationship economics.

The Bain team focused on the industry leader Dell, and calculated the value of detractors and promoters for Dell's consumer business. While securities analysts estimate that the average consumer is worth $210 to Dell, in fact a detractor costs the company $57 while a promoter generates $328. Let's review the process the Bain team followed, focusing especially on the economics of word of mouth. The word-of-mouth factor was the biggest source of difference between the average value of a customer (based on conventional accounting methods) and the true economic value of promoters and detractors.

The team first worked with Sametrixs to develop a brief e-mail survey that screened public lists for Dell customers. Researchers then asked those customers a series of questions, including why they had selected Dell over its competitors. The results showed that a little more than 25% of Dell's new customers came to the company through referral from friends or colleagues. The survey also asked the "would recommend" question to determine the customer's status as promoter, passive, or detractor, along with how many positive or negative comments they had made to friends or colleagues. The responses revealed that 60% of Dell's customers were promoters, 25% were passives, and 15% were detractors. Based on the number of positive and negative comments reported by these promoters, passives, and detractors, the team then estimated that the 8 million consumers who were Dell customers at the beginning of 2003 made about 40 million positive and 5 million negative comments.

Now here's a step-by-step calculation of the value of this positive word of mouth:

  • In our survey, 25% of new customers said the primary reason they chose Dell was referral. So 1 million of the 4 million new customers Dell acquired in 2003 came from positive word of mouth.
  • Since each new customer is worth an average of $210 each, those 1 million new customers were worth $210 million to the company.
  • If 40 million positive comments generated $210 million in value, each positive comment was worth $5.25.
  • Given that the average promoter reported making positive comments to about eight people a year, the promoter's positive word of mouth is worth $42 (8 x $5.25).

The survey also asked customers about their average annual spending, their tenure, and the number of times they called Dell's customer support, all of which enabled the team to estimate the other economic advantages. Overall, the researchers found that promoters were worth $118 more than an average customer, or $328. If this analysis were done with Dell's internal data, the number would probably be higher, since it would be possible to quantify the superior value of referred customers over time. It would also be possible to track more accurately the repeat-purchase behaviors of promoters.

When estimating the cost of detractors, the researchers first found that detractors accounted for most of Dell's negative word of mouth. To estimate the cost of these negative comments, the survey asked customers how many positive comments from friends or colleagues were required to neutralize each negative comment. On average, customers reported that it required at least five positive comments to neutralize one negative. Since survey data indicated that each detractor made negative comments to about four people a year, each detractor was neutralizing 20 positive comments that would have been worth $5.25 each. So on this count alone, each detractor was costing the company $105 a year.

The survey also revealed that detractors called customer-service reps almost three times more frequently than average customers, spent less per year, and were less likely to repurchase from Dell. Over the life of their relationship with Dell, detractors generated a total of $267 less than average customers, meaning that each detractor actually was destroying $57 in value for Dell and its shareholders.

This calculation surely underestimates the full cost of detractors. Our analysis ignored the effect of negative word of mouth on existing customers; it ignored the negative spillover that unhappy consumers might have on Dell's corporate business; and it ignored any negative impact of dealing with unhappy customers on the motivation and commitment of Del employees. Nevertheless, it provides a reasonable estimate for evaluating investments targeted building better relationships.

The Bain team's approach reveals the powerful economics of customer promoters. In 2003, as noted, Dell had about 8 million individual customers. The 15% who were detractors cost the company about $68 million (1.2 detractors at $57 loss per detractor). Converting just half of those detractors into average customers—not an unrealistic target, given that other companies with high Net Promoter Scores typically generate only 3% to 8% detractors—would add more than $160 million annually to the bottom line (600,000 detractors at $267 improvement per conversion). This simple math could help Dell managers place the right level of priority on reducing detractors and increasing promoters. Dell or any other company can evaluate major investments aimed at improving the customer experience, because these proposals can now be subjected to the same rigorous economic analysis already applied to other investments.

In short, by moving beyond traditional customer-satisfaction surveys and by rigorously tracking NPS, you can finally create a link between customer feedback and cash flow. You can begin to squeeze bad profits out of your income statement and tune up your growth engine for consistently superior performance.

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