A war has been raging for decades over whether or not customer satisfaction and loyalty drive profitability.  Proponents reasonably argue that happy customers will pay more, buy more, and spread goodwill through word of mouth.  Similarly, every marketer has heard the warning that an unhappy customer will condemn you directly to ten of his or her friends.  In the age of ubiquitous communications, an unhappy customer can indirectly trash you to billions of people.  The position of the proponents requires little further illustration.

Skeptics of the link between customer satisfaction and profitability actually make a convincing case, too.  The argument goes that there are tradeoffs between customer satisfaction and other factors that drive profitability – in particular, a tradeoff between productivity and satisfaction.

Take the business of delivering print newspapers.  Imagine that a newspaper delivery service makes sure that customers get a paper delivered to their property in good condition by eight in the morning come rain or shine.  This newspaper company could provide exceptional customer satisfaction by making sure that every paper is delivered with consistent daily precision on the mat at your front door.  To guarantee that level of service, the newspaper company would have to hire a lot more delivery people since the productivity per employee would drop precipitously. Without raising prices, that extra cost would obliterate profits.  Newspaper companies figured this out a long time ago. so your mornings, like mine, probably begin with an exciting treasure hunt through front yard hedges (assuming you don’t get your news solely electronically).

Back in 1997, Eugene Anderson and Claes Fornell from the University of Michigan, along with Roland Rust of Vanderbilt University, published an extensive study on the relationship between productivity, customer satisfaction, and profitability.  In 12 out of 16 industries they studied, businesses with high customer satisfaction measures earned higher average return on investment than those with low satisfaction.  The four exceptions were department stores, gas stations, newspapers, and supermarkets.  The characteristic these four shared relative to the other twelve was some degree of monopoly protection generally conferred by location advantage.  In each of the four, people would clearly have a better experience if the companies in question added extra human capacity.

Though academics will split hairs for years to come, your common sense tells you that it pays to deliver great customer satisfaction.  Great satisfaction is not meant to be blind and absolute.  Rather your goal is to optimize customer satisfaction in a profit maximizing fashion.  (Yes, there is that pesky efficient frontier concept again.)

You have no doubt noticed that I have been playing a bit fast and loose with the terms ‘customer satisfaction’ and ‘customer loyalty’.  Now, I will get a bit more precise.  Of the two concepts, customer loyalty is the more powerful one, because customer satisfaction is merely an ingredient of customer loyalty.  A satisfied customer may or may not come back for more.  A satisfied customer may or may not tell his or her friends.  A loyal customer will do both; he or she is a repeat satisfied customer who also spreads the good word about your product or service.

To build great loyalty, you need to measure it and continuously optimize it.  Here is how to do that.

Measure customer loyalty

Fred Reichheld, a management consultant at Bain & Company, wrote the most compelling and most accessible book on customer loyalty, The Ultimate Question: Driving Good Profits and True Growth.  While the following summary is no substitute for reading it cover to cover, I’ll attempt to distill its key lessons.

More accurately, Mr. Reichheld’s book should have been titled The Ultimate Questions, since he recommends a quality survey that has one question to measure loyalty and one question that allows you to continuously optimize it.  Let us explore the measurement question first.

The ultimate loyalty measurement question is the following: “On a scale of 0 to 10, how likely is it that you would recommend [Company X] to a friend or colleague?”  I have come across many brilliant and well-intentioned people that have embraced this question but missed one of the key subtleties: they apply a 1 to 5 scale to measure loyalty.  Now, that can make for a good measurement.  But, to be great, Reichheld prescribes a 0 to 10 scale.

Though this seems like nitpicking, the expanded scale is necessary to determine the Net Promoter Score (NPS) ™ for your product or service.  The NPS is calculated by starting with the percentage of “Promoters”, subtracting the percentage of “Detractors”, and ignoring the “Passives.”  These three groups are defined as follows with respect to how they respond on the 0 to 10 scale:

• Promoters (response 9 or 10): These are the customers that really love you.
• Passives (response 7 or 8): These are the customers that are merely satisfied.
• Detractors: (response 0 to 6): These are the customers that hate you, but have varying degrees of kindness.

By way of example, imagine that you survey 500 people and get 30% promoters, 60% passives, and 10% detractors.  Your resulting Net Promoter Score ™ is 20% (computed as 30% minus 10%).  The average firm tends to have scores between 5% and 10%, though negative scores are all too common.

In the absolute, the Net Promoter Score probably paints a rosier picture of customer loyalty than reality since the people that truly despise you will not do you the favor of responding to your survey.  However, great loyalty managers focus primarily on the trend of their score over time and secondarily on their score relative to the competition.

Though the Net Promoter score has its own detractors, I challenge you to find a loyalty measurement that comes even close in simultaneously being easy to apply and easy to interpret.  Start a continuous process today to measure customer loyalty that relies on this concept.

Optimize customer loyalty

In my opinion, the ultimate customer loyalty survey has not one but two questions (and preferably no more than two).  Measuring loyalty alone will tell you how healthy you are at a given point in time.  However, to figure out what you need to do to get a more steadfast following, you need to listen to your customers.

To optimize customer allegiance, you must ask the question: “What key improvement can we provide that would make you more likely to recommend us?”  The wording here is flexible, but the gist is to ask a straightforward question that will elicit improvement ideas from your customers.  From the promoters, you will learn why they came to love you in the first place and what you need to do to earn their continued loyalty.  From the passives, you will learn the potentially modest steps you can take to transform them into promoters.  And from the detractors, you just might figure out what it will take to convince them to stop posting nasty comments about your company all over the Internet.

As with any survey, your mission is to find the common threads and select the actions that deliver the greatest impact taking cost into account.  While it is true that your customers will not necessarily suggest every valuable idea, they will suggest most of them, and rest assured that the ones they suggest do matter.

If you ask people what they want, then you need to be prepared to systematically address their requests.  At the very least, you must acknowledge desires and provide an informational reply.  In many instances, customers will cite immediate product or service failures that need to be addressed. Research shows that customers who complained and had their problems solved are significantly more loyal as a group than customers that never had a known problem to begin with.  However, if a customer highlights a problem and you do nothing, then you can pretty much write them off.  It might have been better never to have asked in the first place.

Recap

In almost all industries, customer loyalty drives profitable growth. To become a great loyalty manager, you must institute an ongoing program to:

• Measure customer loyalty
• Optimize customer loyalty