Good Profits = Growth & Customer Promoters

At the recent Word of Mouth Marketing Association (WOMMA) conference in Orlando, Fred Reichheld of Bain & Company delivered a keynote based on his new book… The Ultimate Question: Driving Good Profits and True Growth. He argues that customer satisfaction is more important than any business criterion except profits, and that one simple question can best measure customer satisfaction (and thereby result in a strong Net Promoter Score): “Would you recommend this business to a friend or colleague?”

He says that too many companies are addicted to bad profits:

While bad profits don’t show up on the books, they are easy to recognize. They’re profits earned at the expense of customer relationships. Whenever a customer feels misled, mistreated, ignored, or coerced, then profits from that customer are bad. Bad profits come from unfair of misleading pricing. Bad profits arise when companies save money by delivering a lousy customer experience. Bad profits are about extracting value from customers, not creating value. 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 are contributing to bad profits.

Bad profits work much of the damage they produce through the detractors they produce. Detractors are customers who feel badly treated by company – so badly that they cut back on their purchases, switch to the competition if the can, and warn others to stay away from the company they feel has done them wrong. Detractors don’t show up on any organization’s balance sheet, but they cost a company far more than most of the liabilities that traditional accounting methods so carefully tally.

He goes on to argue that the only way for companies to create truly sustainable growth is to focus on good profits – by carefully segmenting and prioritizing customers, and focusing on creating true value for them.

 
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. If bad profits are earned at the expense of customers, good profits are earned with the 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 becomes, in effect, part of the company’s marketing department, not only increasing their own purchases but also providing enthusiastic referrals. They become promoters. The right goal for a company that want 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.

While these principles are common sense, Reichheld does a good job articulating why companies today fail to embrace them, and offers suggestions and case studies to systematically change. (I think these lessons are particularly relevant to large dysfunctional bureaucracies or public companies under extreme pressure for short-term profits.)

Of course, as warned by the cover of his book, Reichheld argues how his Net Promoter Score (NPS) is the best way to measure and analyze customer satisfaction and increase good profits.  Having lived through far too many flawed and useless customer satisfaction surveys at various companies, the theory behind NPS makes a lot of sense – so much that I’d like to explore applying it at the company where I now work.

Although there was unnecessary repetition, and a few weak self-serving examples, “I would recommend Reichheld’s book to a colleague or friend.” On a scale of 0-10, I give the book an 8.

Sidebar:

1. Reichheld gave super heavy-duty praise to Dell for its innovation in customer satisfaction and dedication to so-called good profits. I would love his point of view on Jeff Jarvis’s Dell Hell saga. Conversely, I’d love Jeff Jarvis’ point of view on Reichheld’s analysis of Dell. (I own a Dell with premium add-on service, and my experience has been neither good, nor bad. Just very mediocre. I bought Dell because of perceived value…lots of features, low price.)
2. Reichheld notes that while typical fast-food managers earn around $50,000 a year, operators at Chick-fil-A, an NPS leader, average more than $170,000 per year, and some exceed $400,000 (and they close on Sunday). I’m definitely in the wrong business!