The following article originally appeared on The European Business Review.

Most companies these days are striving to focus more closely on their customers. Little surprise: we all live and work in a Web-savvy world in which customers have near-perfect information and a great deal of power. Customers blog, tweet, and text about their experiences in real time. Their reviews, assessments, and spontaneous protests overwhelm the carefully crafted messages of corporate advertising and public relations departments. Only companies that put the customer at the very center of their operations can successfully compete in such a world.

Many companies also want to make themselves more mission driven than profit driven. Again, no surprise. Corporate leaders understand that they can’t win and keep customers without first winning and keeping the best possible employees. Today, most talented employees want to pursue a mission, a purpose that transcends profits for shareholders.

But despite all the effort companies have put into these twin tasks, the vast majority haven’t made much progress. Their cultures remain centered on profits, ruled by financial budgets, governed by accounting metrics. Managers must make their numbers, business-unit heads their sales and profit goals. Leaders may value a customer focus, but what they track, discuss, and manage each day are the financial indicators. After all, customer loyalty and a mission, as objectives, are soft, slippery, seemingly impossible to quantify. In the rush of daily decisions and priorities, of budget pressures and sales quotas and cost accounting, the gravitational pull toward short-term profits is powerful.

And so companies, despite the best of intentions, drift into a vortex. They begin making decisions that alienate customers and employees. They allow themselves to be seduced by the easy lure of what can only be called bad profits.

The Siren Song of Bad Profits

Though bad profits don’t show up on the books, they are easy to recognize. They are profits earned at the expense of customer relationships.

Whenever a customer feels misled, mistreated, ignored, or coerced, profits from that customer are bad. Bad profits come from unfair or misleading pricing. Bad profits arise when companies shortchange customers by delivering a poor experience. When sales reps push overpriced or inappropriate products onto trusting customers, the reps are generating bad profits. When complex pricing schemes dupe customers into paying more than necessary to meet their needs, those pricing schemes contribute to bad profits.

You don’t have to look far for examples. 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 or bounced checks. Most airlines charge steep fees to change a ticket and in the U.S., travelers can pay as much as $100 for an extra piece of checked baggage. Many mobile-phone operators create pricing plans that cleverly trap customers into wasting prepaid minutes or incurring outrageous overages. Families all over the world regularly hit the headlines because they received a monthly bill for thousands of dollars or Euros or yen, all because they unwittingly violated the limits on their mobile-phone plan.

Bad profits strangle a company’s growth, primarily through the detractors they create. Detractors are customers who feel badly treated by a company. They don’t show up on a balance sheet, but they cost a company far more than most of the liabilities that traditional accounting methods so carefully tally. Detractors drive up service costs by reporting numerous problems. They demoralize frontline employees with their complaints and demands. They gripe to friends, relatives, colleagues, acquaintances—anyone who will listen, sometimes including journalists, regulators, and legislators. In the past, the accepted maxim was that every unhappy customer told ten friends. Now an unhappy customer can tell ten thousand “friends” through the Internet.

Granted, companies can always buy growth. They can encourage the hard sell and pay fat commissions to the salespeople who master it. They can discount heavily, offering temporary rebates, sales, or “free” financing. And they can make acquisitions. But all such moves are costly. They tend to create a profit squeeze, which in turn usually deepens the addiction to bad profits. Retail banks, for example, now depend on nuisance fees for as much as one-third of reported earnings. One mobile-phone operator calculates that proactively putting customers in the plan that was best for them would cut profits by 40 percent. This addiction to bad profits demotivates employees and accelerates a destructive spiral. Customers resent bad profits—but investors should, too, because bad profits undermine a company’s prospects.

The Alternative: Good Profits

Things don’t have to be this way. Some companies grow because they have learned to tell the difference between bad profits and good profits—and to focus their efforts on the good kind.

Good profits are dramatically different. If bad profits are earned at the expense of customers, good profits are earned with customers’ enthusiastic cooperation. A company earns good profits when it so delights its customers that they willingly come back for more—and not only that, they tell their friends and colleagues to do business with the company. Satisfied customers become, in effect, part of the company’s marketing department; they become promoters. The right goal for a company that wants to break the addiction to bad profits is to build relationships of such high quality that those relationships create promoters, generate good profits, and fuel growth.

The Vanguard Group of mutual funds offers a compelling illustration of good profits. A few years ago, Vanguard reduced prices by as much as one-third for customers who had recently made large investments or who had maintained healthy balances for an extended period. Vanguard’s management recognized that the economies of scale generated by those large-balance and long-tenured investors should be shared with those customers. The company had the opportunity to deliver more value to its best customers, widening the pricing gap compared to competitors’ offerings. When Vanguard did this, its core customers were so delighted that they increased their holdings and boosted referrals. That helped turbocharge Vanguard’s growth, pushing the company to the top of the U.S. mutual funds industry.

Nor is Vanguard alone in its pursuit of good profits. For example:

• Amazon.com could easily afford to advertise more than it does; instead, it channels its investments into free shipping, lower prices, and service enhancements. Founder and CEO Jeff Bezos has said, “If you do build a great experience, customers tell each other about that.”¹
• Southwest Airlines doesn’t charge for flight changes or for checked baggage; the carrier has also replaced the industry’s elaborately segmented pricing structure with a transparent pricing policy. Though little known outside the United States, Southwest now flies more domestic passengers than any other U.S. airline and boasts a market capitalization that tops the rest of the industry.
• Costco, the leader in customer loyalty among U.S. warehouse retailers, rocketed from start-up to the Fortune 50 in less than twenty years while spending next to nothing on advertising and marketing. Its customers are so loyal that the company can rely on positive word of mouth for its growth.

These companies’ approach to customers boils down to a simple precept: treat them the way you would like to be treated. What’s surprising is that so many company leaders articulate it in exactly these homespun terms. eBay founder Pierre Omidyar says, “My mother always taught me to treat other people the way I want to be treated and to have respect for other people.”² Colleen Barrett, retired president of Southwest Airlines, says, “Practicing the Golden Rule is integral to everything we do.” Andy Taylor, CEO of Enterprise Rent-A-Car, declares, “Golden Rule behavior is the basis for loyalty. And loyalty is the key to profitable growth.”

A truly customer-focused company is one that lives up to the Golden Rule. Employees treat customers the way they would want to be treated if they were customers. That means avoiding bad profits entirely.

Bad and Good Profits: How Can Companies Tell the Difference?

The idea that loyalty and good profits are the key to profitable, sustainable growth makes sense as far as it goes. But it raises as many questions as it answers. Most companies can’t even define loyalty, let alone measure and manage it. Are customers sticking around out of loyalty, or just out of ignorance and inertia? Are they trapped in long-term contracts they would love to get out of? Anyway, how can managers really know how many of their customers love the company and how many hate it? What practical gauge can distinguish good profits from bad?

Without a systematic feedback mechanism, after all, the Golden Rule is self-referential and simplistic, unreliable for decision making. I might think I’m treating you the way I would like to be treated, but you may strongly disagree. Where companies are concerned, satisfaction surveys often delude executives into believing that their performance merits top marks, while their customers are more inclined to give the company a mediocre grade-or even fail them. Business leaders need a hard, no-nonsense metric-an honest grading system-that tells them how they are really doing.

The search for that metric—the missing link between the Golden Rule, loyalty, and sustainable growth through good profits—is what has led to the Net Promoter® system of management.

The foundation: Net Promoter® score. Several years ago, we and our colleagues embarked on a quest to develop a simple, practical way to measure customers’ loyalty. After considerable research and experimentation, we found that the best method involved short, frequent surveys that asked just two questions. The first question is typically something like this:

On a zero-to-ten scale, how likely is it that you would recommend us (or this product/service/brand) to a friend or colleague?

The simplicity of the scale allows companies to take a quick measurement of customers’ feelings and attitudes. An open-ended follow-up question—usually What is the primary reason for your score?—enables them to hear the reasons for these attitudes in the customers’ own words. The method avoids the distortions imposed by the preconceived response categories of traditional customer-satisfaction questionnaires.

When we studied the use of these questions, we found that it is easy to identify promoters, detractors, and a middle group we call passives. Each group exhibits a distinct pattern of behavior as well as a distinct set of attitudes. And each calls for a different set of actions from the company.

• Promoters. People who respond with a nine or a ten are signaling that their lives have been enriched by their relationship with the company. They are loyal customers, typically making repeat purchases and giving the company a larger share of their spending. They talk up the company to their friends and colleagues. Any company should want to maintain promoters’ enthusiasm and to learn economical ways to create even more promoters. That’s the path to good profits and sustainable growth.
• Passives. People who give the company a seven or an eight got what they paid for, nothing more. They are passively satisfied customers, not loyal ones, and they exhibit a markedly different set of attitudes and behaviors. They make few referrals, for example, and when they do make one, it’s likely to be qualified and unenthusiastic. A company’s goal for this category is to improve its services, products, or processes, where possible, to the point where it can delight these customers and turn some of them into promoters.
• Detractors. And then there are the people who give a rating of six or below. They are dissatisfied, disaffected, even dismayed by how they are treated. They bad-mouth the company to their friends and colleagues. Companies confronted with detractors have to probe for the root cause of their disappointment, then apologize and determine ways to solve the problem. If there is no economically rational solution to the detractors’ discontent, then the company must learn not to acquire this type of customer in the first place.

If one central goal of a company is to enrich the lives of its customers, earning good profits and avoiding bad, these three categories are a measure of how well it’s doing.

But categorization was just the first step. We then wanted one simple number that could be tracked week in and week out to gauge a company’s progress and focus its improvement efforts. We wanted a metric that was simple, powerful, and easy to understand, a bottom-line number akin to net profit or net worth. So we decided to take the percentage of customers who are promoters and subtract the percentage who are detractors. The result is the Net Promoter score, or NPS (exhibit 1).

Our research over a ten-year period confirms that, in most industries, NPS leaders tend to grow at more than twice the rate of their competitors.

Creating a Net Promoter system. Over the past few years, thousands of innovative companies, including Apple, American Express, Allianz, Philips, GE, eBay, Facebook, LEGO, and Southwest Airlines, began using Net Promoter scores to track the loyalty, engagement, and enthusiasm of their customers. They liked the fact that NPS was easy to understand. And they liked it because it focused everyone on one inspirational goal—treating customers so well that those customers become promoters—and led to action in pursuit of that goal. They also appreciated the fact that it was an open-source method, which they could adapt for their own needs.

Over time, these companies developed and expanded the metric. They used it to help build employee engagement and commitment. They discovered new methods to extend its impact, not just to measure loyalty but to transform their organizations. They shared ideas with one another, and they built upon one another’s applications. In a remarkable explosion of creative intelligence, NPS soon morphed into something much more than a metric. Though the science is still young, it became a management system, an entire way of doing business. The initials themselves, NPS, came to mean Net Promoter system rather than just Net Promoter score.

And what a difference this system seems to have made. Listen to what a few of these companies’ leaders have to say about it:

NPS has galvanized our thinking and enabled the entire organization to focus on the customer. During the 1970s and ’80s, total quality management revolutionized the cost of quality in manufacturing. NPS is having a comparable impact in the current age.

—Gerard Kleisterlee, former CEO, Philips

NPS was a natural fit for Apple. It has become part of the DNA of our retail stores.

—Ron Johnson, founding executive, Apple Retail

NPS provides the litmus test for how well we are living up to our core values—it is the first screen I look at when I boot up my computer each morning.

—Walt Bettinger, CEO, Charles Schwab

The Net Promoter system helped us boost our long-standing commitment to customer focus to an even higher level. It has made us a better company.

—Michael Diekmann, CEO, Allianz SE

The Net Promoter system was a key part of Schwab’s turnaround, a period in which the company’s stock tripled. It has been a central element of Apple’s famous retail stores, which are believed to have the highest sales per square foot of any retailer anywhere. It has helped Allianz Insurance gain market share and retain more of its policyholders, American Express to provide better service to cardholders while lowering its costs, and British Gas to turn around its home heating service (see below). The system has proved to be a powerful engine of growth and profitability because it builds customer feedback into a company’s everyday operations.

But we don’t want to stop with system, because there is another S that permeates the companies that have achieved the most impressive results with Net Promoter. These companies embody a Net Promoter spirit of leadership, a distinctive philosophy that energizes the system. Leaders who exhibit this spirit believe that the essential mission of any great organization is to enrich the lives it touches—to build relationships worthy of loyalty, to eliminate bad profits, and to build good profits. A great organization must have a positive impact not only on its shareholders but also on its employees, its business partners, and especially its customers. Unless it earns the loyalty of all these stakeholders, its returns to shareholders will soon evaporate. Moreover, these leaders recognize that their personal reputation, their legacy, will be defined by how well they achieve that mission.

Phrases such as personal reputation, Net Promoter spirit, and enriching lives might lead you to infer that NPS is soft and nebulous. On the contrary, Net Promoter is where mission meets mathematics. A mission without a rigorous measurement, without an accurate gauge of success or failure, is just so much hot air. Only by systematically measuring its effect on people and their relationships can an organization gauge whether it is really living its values and enriching lives. Only then will it know whether it is truly customer focused and whether it is pursuing a mission that will inspire its employees.

That’s NPS’s reason for being. It provides a practical process that accurately assesses a company’s progress at pursuing good profits rather than bad, creating promoters rather than detractors. It provides a management system that can help a company capture the spirit and drive toward greatness.

Fred Reichheld is a Fellow at Bain & Company. Dubbed by the Economist the “high priest” of loyalty, he is the author of two previous books, The Loyalty Effect (1996) and Loyalty Rules! (2001), both published by Harvard Business School Press.

Rob Markey is a partner in Bain & Company’s New York office. He is global head of the firm’s Customer Strategy and Marketing practice.

Andreas Dullweber is a partner with Bain & Company in the firm’s Munich office. He leads Bain’s Customer Strategy and Marketing practice in Europe, the Middle East, and Africa.

British Gas: An NPS Turnaround

British Gas Services (BGS), the largest supplier of gas in the United Kingdom, utilized Net Promoter to help turn around its home heating installation business, which was losing money and hemorrhaging cash. First BGS trained all of its installation personnel in the NPS framework. It developed a rigorous scoring process, reporting daily Net Promoter scores for all of its seventy-five districts and for each individual installer and sales adviser. The company then established a standard feedback process whereby engineers who installed a boiler called their customers the next day to see if they had any questions or concerns.

The results: Net Promoter scores in this business increased from 45 percent to 75 percent over two years. Customer complaints declined 75 percent, which enabled BGS to reduce the number of people handling complaint resolution, also freeing up the time of managers to lead their teams. Bad debts declined more than 90 percent, since happier customers are more likely to pay their bills; cash flow turned positive; and profit margins increased to double digits. At the start of the period, the unit’s revenues were shrinking; by the end of the period, growth rates had surged to 30 percent a year.

*Adapted from The Ultimate Question 2.0: How Net Promoter Companies Thrive in a Customer-Driven World, by Fred Reichheld with Rob Markey (Harvard Business Review Press, 2011).

Notes

¹.BusinessWeek Online, “Online Extra: Jeff Bezos on Word-of-Mouth Power,” Aug. 2, 2004

².Adam Cohen, “Coffee with Pierre,” Time, December 27, 1999