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Archive for May, 2009

What’s Your Breaking Point?

I recently had an epiphany, as I have been thinking a lot lately about the drivers of customer satisfaction and how these drivers affect customer loyalty. My conclusion is that not all factors are the same. Some factors are penalty factors, some are reward factors, and some are a combination of both. A penalty factor is a factor in which customer satisfaction needs to exceed a minimum level of competency to meet the expectation that the customer has. If it doesn’t, you are penalized.

For a golf facility, condition of golf cars likely would be a penalty factor. The customer expects the golf car to be clean and to provide transportation for 18 holes. As long as the golf car meets this expectation, the facility will avoid any penalty. The point where this expectation is met is the breaking point for this penalty factor. Any improved satisfaction above and beyond this point on the factor of condition of golf cars will not translate to any tangible benefit of having a more loyal customer.

Other factors may be reward factors, where if the customer is delighted the facility will realize a significant reward in customer loyalty. On reward factors, the point where the customer is delighted is the breaking point on these reward factors. If satisfaction is above and beyond that point, it will translate into significantly higher customer loyalty. As satisfaction drops below that point, it will not result in any tangible decrease in customer loyalty.

Some factors may actually be a combination of both penalty & reward factors. For instance condition of greens may be both a penalty factor and a reward factor. The facility may need to achieve a minimum level of performance on condition of greens, so that they don’t realize a penalty in terms of customer loyalty. But if that facility delights the customer in satisfaction on condition of greens, they may realize a substansial reward of improved customer loyalty.

In between the breaking points of penalty and reward on the factor of condition of greens may in fact be a dead area, meaning increased satisfaction in between these breaking points will not translate to any significant improvement in customer loyalty.

By understanding what factors are penalty factors, what are reward factors, what factors are a combination of both and where these crucial breaking points are, you will be able to invest wisely to maximize your ROI of enhanced customer loyalty.

Illustration of Breaking Points for Penalty, Reward & Combination Factors

Incidentally, I came across an interesting article related to penalty and reward factors in the McKinsey Quarterly on “Maintaining the Customer Experience.”

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Fred Reichheld

Fred Reichheld, author of The Ultimate Question and contributor to the Harvard Business Review, is widely regarded as the expert on the Net Promoter concept, and he recently provided an updated perspective. Because of the importance of this concept, NGF has incorporated much of Reichheld’s findings in our Voice of Customer program.

Reichheld has been an exuberant leader of the Net Promoter score as the only number you needed to know. In Reichheld’s article, the One Number You Need to Grow, he wrote “Your net promoter score provides valuable insights into how to get more promoters and fewer detractors.” But Reichheld views are changing, and at a recent conference his opening statement was:

“Maybe the score, NPS, was a mistake. It’s not the score; it’s what you do with the score to make promoters.”

The beauty of the Net Promoter methodology is the simplicity of the metric. Unfortunately many companies are only focused on their Net Promoter Score and don’t focus at all on the process to improve the customer experience. This strategy is akin to a professional golfer obsessed with his score and giving no thought or consideration to the next shot at hand; or the head coach of a football team concerned only that his team is down by two touchdowns with no strategy or plan to score.

When you think about the NPS in this context you can see that the score is just that, a score. It can allow you to keep track of how you’re doing, but it doesn’t provide any insights into how to develop more promoters. It’s good to see that Reichheld has recognized that to drive growth, organizations have to apply hard work and commitment to improve the customer experience.

Organizations that have tried the strategy of just asking the ‘would-you-recommend’ question have found that this approach inevitably results in frustration and no sustainable growth. The necessary strategy to foster growth is to learn the root cause of loyal and disloyal customers and then to have an action plan to improve the customer experience.

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General Electric’s Philosophy on Net Promoter Score (NPS)

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Based on NGF research, a facility’s customers are more likely to issue positive referrals if most of its customers are promoters. On the other hand, customers are more likely to issue negative referrals if most of the facility’s customers are detractors.

Proportion of Customers Postively Referring by Promoters

This empirical evidence demonstrates that by growing the proportion of customers who are promoters, you will be growing the number of customers who will issue positive referrals.Proportion of Customers Negatively Referring by Detractors
Conversely if you grow the proportions of customers who are detractors, you will be growing the number of customers who will issue negative referrals about your business.

I think the reliability of NGF’s loyalty metric is extremely impressive, as the different data points are all quite close to the trend line.

These charts simply illustrate that all promoters and detractors are not created equal!

For facilities that have a very few amount of promoters, those promoters are less likely to positively refer. As the proportion of customers who are promoters grow, their likelihood to refer also increases.

The reason for this is that when someone issues a referral they are staking their reputation on that referral.

    Customers that are promoters at facilities that have a large amount of detractors will be less likely to go against the grain and positively refer. These promoters will know that any referrals they issue will be risky referrals. As these new customers they refer will likely not have a good experience and will come back to them expressing displeasure that they were referred. Therefore, these promoters will be less likely to stake their reputation (through a referral) on a facility with low customer loyalty as they will know there is a greater chance the referred customer will have a bad experience.

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As you can see below, the rates at which consumers issue referrals, both positive and negative impacts have increased significantly after our most recent benchmark update.  

Referral impact from promoters before recent benchmark update

Referral impact from promoters before recent benchmark update

Referral impact of promoters after benchmark update

Referral impact from promoters after benchmark update

Referral impact from detractors before benchmark update

Referral impact from detractors before benchmark update

Referral impact of detractors after benchmark update

Referral impact from detractors after benchmark update

NGF’s research results within the golf industry is supported by that of other research organizations that track referral rates for consumers in industries outside of golf.   We see that consumer behaviors across the board are evolving, as they are talking to friends and colleagues more frequently through social networks like facebook, myspace and linkedin.   Additionally, consumers have become so inundated with mass marketing messages that they are less responsive to those messages and becoming even more responsive to referrals that friends and colleagues make.

How does this increased impact from customer referrals translate to dollars for your golf business? 

Before our most recent benchmark update, a 10% drop in customer loyalty points at a typical golf facility would translate to approximately a $165,000 drop in total customer worth. 

Now after our benchmark update, a 10% drop in the customer loyalty index at that golf facility would translate to approximately a $215,000 drop in total customer worth!

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