Get customers to sell for you
More entrepreneurs are embracing a simple metric that measures referrals - and helps boost profits.
(Fortune Small Business) -- 63 is the number for Quickparts.
It appears in the annual report, gets discussed at meetings, and lest any employee forget, 63 periodically flashes on the flat screens that appear throughout the Atlanta headquarters of this fast-growing maker of custom parts for clients such as Intel (INTC, Fortune 500) and Whirlpool (WHC).
Back in 2006, Quickparts' number was 48, which is none too shabby. But here's the difference between 48 and 63, according to co-founder Ronald Hollis: a 25% increase in customer referrals. That helped drive record profits in 2007 on $23 million of revenues, up from $17.5 million in 2006. This year Quickparts is aiming for 65.
"We want to just keep driving the number up," says Hollis, 41.
What exactly is this magical metric? It's called a Net Promoter Score, and essentially it measures customer satisfaction and referrals. The score represents the proportion of customers who are promoters - those so delighted that they praise a product or service to all within earshot - minus the detractors.
Posting the score to employees, and encouraging them to boost it, can help a business owner focus her staff on customer service. And inquiring into the sources of customer enthusiasm and anger can help the owner and her staff identify and bolster their strengths, while addressing their shortcomings. Hollis, for example, learned from his NPS follow-up that customers seeking price quotes online wanted more customized quotes, which he now provides.
NPS has been adopted and praised by large corporations such as Allianz Group, Pitney Bowes (PBI, Fortune 500), and Intuit (INTU). Dan Henson, the newly appointed CEO of GE (GE, Fortune 500) Capital Solutions, describes NPS as "one of the most powerful tools we've ever employed at GE." Now, facing a weak economy and intensified competition from larger companies, many entrepreneurs are smartly tapping in.
"NPS is really taking off with small businesses," says John Jantsch, who writes a popular blog called Duct Tape Marketing. "I can't tell you how many e-mails I'm getting from NPS adopters or those looking to get started."
Devotees - including the owner of a chain of Texas tanning salons, a Colorado franchiser of memory-improvement centers, and the head of a Delaware answering service and call center - laud NPS for its simplicity, contribution to revenue growth, and ability to identify exactly what is exciting customers or exasperating them. To be sure, some detractors say that NPS is simple to a fault, and we will hear more from them in a moment. But first, let's examine what NPS is and how it works.
NPS is the brainchild of Fred Reichheld, a partner at the Boston consulting firm Bain & Co. and a pioneer in the study of customer loyalty. He spent a decade searching for a simple way to measure those customers so gaga about a product or service that they'll praise it to anyone who will listen. According to Bain's research, a company's promoters are responsible for 80% or more of new customer referrals, making this group a key to revenue growth.
Here's how NPS is implemented. First, ask your customers to rate you on a scale of 0 to 10 based on the question, How likely is it that you would recommend this company to a friend or colleague? Then sort the responses into three groups: promoters (9's and 10's), passives (7's and 8's), and detractors (0's through 6's). The percentage of promoters minus the percentage of detractors equals your score. A company with 75% promoters and 15% detractors, for example, would have an NPS of 60.
What do you do with this number? Drive it up, of course. Relentlessly up. That is achieved by asking a couple of additional questions, beginning with: May I follow up with you at a later date?
The permission clause is a key to NPS, according to Reichheld. The goal is to get constructive criticism from willing customers. You then contact those who agree to talk and ask one final question: Why did you give us this rating? Some of the most useful feedback comes from detractors. The idea: Unhappy customers will give you an earful, perhaps revealing some serious shortcomings of your business. Cure what ails this tough crowd and convert detractors into promoters, and up climbs your NPS. But some companies also seek feedback from passives (the 7's and 8's, who can take you ... or leave you) and promoters (the 9's and 10's, who love you almost as much as your mother does).
According to Reichheld, the average U.S. company has an NPS of about 15. This varies by industry, with some, such as the makers of consumer packaged goods (score 24), faring pretty well, while others, like telecom/cable (- 4), are real dogs. No matter what the industry, each tends to have some companies with NPS scores well above 15. As a rule of thumb, score above 50 and you're a star.
Not everyone, however, believes in the predictive power of Reichheld's numbers. His detractors contend that the metric's simplicity is, well, simplistic. One such naysayer, Claes Fornell, a marketing professor at the University of Michigan's business school, did a comparison of NPS and the American Customer Satisfaction Index, a highly regarded survey that he developed using multiple variables. Fornell's finding: The ACSI has a margin of error of +/- 3.3%, while NPS has a margin of error of +/- 10%, meaning that an improvement of five points in your NPS, to 55, could in reality be no improvement at all.
"It's pretty clear that the person who put this together has no statistical background," he says dismissively.
For his part, Reichheld contends that he simply touched a nerve when he created a demystified metric that put all the complex-modeling guys on notice, threatening their livelihoods. But guess what? Reichheld also quietly gives ground on that issue of statistical accuracy. In The Ultimate Question, his 2006 book on NPS, he claimed that a 12-point increase in the metric leads, on average, to a doubling of a company's rate of revenue growth. Reichheld and his colleagues at Bain have backed off that claim, now saying only that increases in NPS can lead to increases in revenue.
There's no denying there are valid questions about NPS's statistical accuracy. Equally undeniable: NPS has the force of a revolution, and many businesses swear by it. To research this story, FSB spoke with more than 20 small businesses, and none regretted adopting the metric. What follows are profiles of three business owners, all enthusiastic converts to NPS, but each citing different benefits.
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