One of the most exciting and promising developments in marketing is the emergence of something called Net Promoters as an increasingly critical metric that drives corporate performance. First described by Fred Reichheld two years ago in Harvard Business Review, followed by his recently published book The Ultimate Question, Net Promoters is now being adopted by a growing number of highly respected firms, including General Electric, Intuit, and SAP.
What does it do? In a nutshell, it provides simple but very powerful analytical rigor to what is arguably the most important source for spreading positive buzz about a company: its own customers. Companies that earn the highest Net Promoter Scores—a metric defined by the number of those customers highly likely to recommend the firm ("promoters") less those unlikely to recommend ("detractors")—typically achieve the highest rates of profitable growth in their marketplace. Reichheld's research shows that this simple indicator is a powerful predictor of profitable growth.
Why is this good news for marketers? Because, first, marketing is positioned to play a central role in the effort to, in a sense, turn customers into a key component of your sales and marketing department. That's precisely what SAP, for example, has been doing ever since Reichheld's seminal HBR article was published.
In addition, such programs appear to have real potential for not only generating impressive ROI—which is increasingly critical for marketing programs to demonstrate—but also having a clear impact on top-line growth. In mature or maturing industries (like technology), where there's only so much room left for real innovation or product differentiation, companies must distinguish themselves by how well they treat their customers and how likely such customers are to say good things—which suggests that customer referral and promoter programs will be around for the long term.
Let's take a quick look at what a customer promoter or reference can mean to a firm's growth.
The Impact on Growth
A promoter is a customer who, when asked how likely he or she would be on a scale of 0 to 10 to recommend a company, answers with a 9 or 10. In other words, such customers are highly likely to recommend.
When a company generates such a customer through a combination of acquisition marketing and delivering a positive customer experience, it generates incremental value in two ways. First, regardless of whether a recommendation is made, when a customer provides a high rating on "likely to recommend," it is a strong indicator of retention and loyalty, establishing that customer as more profitable than neutral or negative customers (Reichheld's "passives" or detractors). This is the basis of Reichheld's Net Promoter Score—the net of promoters less detractors, encouraging companies to improve the customer experience to improve profitability. Here your growth comes from earning a greater share of customer wallet.
Average Customer Value
+ Additional Retention Value
+ Additional Price Premium
= Value of Promoter Customer
Note: The value of a detractor customer is based on a decreased value from defections and a negative price premium which reduces their value below the average customer value.
The second source of incremental value comes from the new customers generated through referrals from promoters who proactively take action to recommend a firm—and this has far greater potential for growing a business as we'll see in the calculations below. A customer who gives loyal business year after year generates tremendous lifetime value for a firm; a customer who brings in new customers each year generates far more lifetime value.
The power of word of mouth to influence purchase decisions is typically greater than that of promotional marketing. In his book The Tipping Point, Malcolm Gladwell describes the critical role and dynamics of Mavens, Connectors, and Salesmen, spreading both positive and negative word-of-mouth influence.
The amount of natural referrals that customers initiate on their own, without your company's involvement, will be driven by the number of these influencers that become your promoters, the importance they place on recommending, and the opportunities they have to recommend. Incremental value is driven by the number of referral opportunities that a combined Promoter-Influencer will have and the percentage that will convert from a referral to a sale.
Promoter Customer Value (as detailed above)
+ Additional Referral Sales (which equals Referral Opportunities * Referral Close Rate)
– Incremental Sales Cost to Manage & Close Referrals
= Value of Promoter-Influencer Customer
Marketing's great opportunity is to increase the number of promoters for their firm and help such customers who aren't natural connectors and influencers do what they're already inclined to do: spread positive word of mouth. Many firms, such as HP, Microsoft, Intel, and Oracle, already have in place organizations designed to do this, often called customer reference or customer evidence programs. In particular, they help recruit and deploy customer referrals in the following ways:
- Improve the customer experience. Reichheld's premise is that investments in the customer experience will improve customer lifetime value and easily provide growth in profits beyond what can be attained through customer acquisition. A better customer experience can increase promoters and/or decrease detractors, which demonstrably improves profitability and growth.
- Motivate referrals. The first step in increasing referrals is to make it easy for enthusiastic customers to refer others. This can be done through marketing programs that ask customers directly for referrals, provide customers with materials they can pass along, or offer rewards for referrals (a practice that can work against you in some cases).
- Promote referrals. A customer reference program goes beyond motivating referrals and allows you to take some control of the referral process, capturing the recommendations of promoters in written or electronic testimonials, speeches and presentations, media interviews, and other methods and putting these in front of your best prospects. Any customer can be asked to participate in a testimonial, case study or reference, but the message that a strong Reichheld-type promoter conveys will surely have much greater impact.
By integrating Net Promoter programs and customer reference programs, marketing can achieve dramatic impact on firm performance. Here's how one firm is already doing so.
Coleen Kaiser, vice-president of customer value and reference services, was brought in by senior management to fix the company's reference program, which was languishing with about 1,700 reference customers (a small number for a firm the size and global reach of SAP). And what references they had were having no real impact on sales, according to after-sale "win-loss" reports.
Kaiser came across Reichheld's HBR article and was struck by Reichheld's conclusion, which is simple and profound: Companies with the highest Net Promoter Score in their industry invariably gain the highest revenue growth rates in their industry. Another term for promoters would be "enthusiastic references."
To her delight, Kaiser found that in its regular customer satisfaction surveys, SAP was already asking the precise question that Reichheld uses to determine Net Promoter Score ("How likely is it that you would recommend SAP to a friend or colleague?"), and even using his 10-point scale in the answer. Thus, Kaiser could immediately start crunching numbers to see the Net Promoter Scores that each of SAP's various businesses had and what their impact was. She could also see how many promoters were actually in the SAP reference program. She was in for a surprise.
Kaiser uncovered two significant findings:
- The success of SAP's various businesses is indeed driven by the Net Promoter Score they enjoy. Those with higher Net Promoter Scores enjoy higher rates of revenue growth, just as Reichheld's research predicts.
- The reference program was not leveraging the firm's promoters, its best references. Remarkably, very few of these enthusiastic references were actually in the reference program. This explained a major puzzle: Despite the obvious importance of references to the sales process, SAP customers rated references as "neutral" in importance to their decision to buy. Kaiser realized that the references that SAP was supplying to prospects weren't helping close deals because the references weren't particularly enthusiastic about SAP!
This strongly suggested that if she brought the company's promoters into the SAP reference program and started leveraging them, it would make a substantial impact on company performance. That's precisely what Kaiser began to do. And, armed with the data from Reichheld's research as well as her own internal findings, combined with key Board allies, she got the resources she needed to do so.
Impact on SAP (and Growth of Its Reference Program)
Here's what happened in the 2.5 years that followed the program launch:
- The number of SAP reference customers has grown from 1,700 to more than 6,000 over the last two-and-a-half years, due in part to the firm's increased investment in its customer reference program.
- Where previously less than 20 percent of the promoters were in the SAP reference program; today, over 90 percent of the firm's promoters are in the program.
- Like many firms with reference programs, SAP uses a wide variety of methods to help its references get the word out, including personal referrals, media interviews, case studies and success stories, and industry and user events.
- Just two years ago in after-sale "win-loss" surveys, the importance of references to closing deals was "neutral." Now, references are one of SAP's highest-ranking competitive advantages. References are, in fact, helping SAP to close deals and distance the company from the competition.
Over the next few years, two reference-related measures will become part of the core measures used internally by executive management to measure firm performance. One will be Net Promoter Score. The second will be how many "value customers" Kaiser's team can bring into the reference fold. The goal is to achieve a significant number of customers that are willing to share the quantitative benefits they have experienced as a result of implementing SAP's solutions.
When a program can demonstrate such results and gain such visibility, it gets resources. Kaiser's staff in the global team has tripled over the last few years.
Reference-Based Marketing Programs
SAP has taken a proactive approach to develop reference customers as part of its integrated marketing and sales efforts. Reference programs capture the enthusiasm of promoters to establish a competitive advantage when positioning the brand, attract new prospects during lead generation, strengthen credibility and minimize risk during vendor selection, and win management approval during close.
Marketing communications that incorporate customer references can reach a larger and more targeted audience than customers making referrals on their own. The enthusiastic voice of promoters incorporated into these marketing initiatives can outperform the average marketing message:
Promoter Customer Value (as detailed above) + Incremental Leads & Sales (which equals Increased Close Rate * Marketing Reach) – Incremental Sales Cost to Manage & Close Referrals = Value of Promoter & Influencer Customer
Supporting an ROI Analysis
The return on investment analysis will be based on the incremental profits generated from the investments in changing the customer experience, facilitating or rewarding referrals, and capturing and marketing reference customers. Summarized below are key inputs into the ROI calculation:
- Determine the incremental value of increased promoters and decreased detractors. As a number of people, such as Reichheld, James Heskett, and Don Peppers and Martha Rogers have shown, improvements in the customer experience can dramatically multiply lifetime value. This is based primarily on increased retention (or share of customer) and the price premium paid.
- Assess incremental referrals and close rates. As noted above, referrals and reference customers should improve the effectiveness of both sales and marketing. Keep in mind that you also want to reverse the negative impact that detractor word-of-mouth has on lost sales.
- Account for the incremental sales cost. For customer-initiated referrals, as well as those generated from marketing, be sure to assign a different value for referral activities that generate a closed sale than those generating a lead since there are additional sales costs to convert leads to sales. The incremental value must be net of that additional investment required.
- Determine the investment required to capture customer reference content. When replacing existing marketing content with customer reference content, your ROI analysis will compare the incremental investment to the incremental profits generated. The incremental investment will include the costs for contacting customers, collecting reference information, preparing the content, and managing a referral database (both hard costs and labor costs). Incremental profits come from the increase in leads, conversion rates, and total purchase value that result from enthusiastic references.
- Determine the marketing investment to promote customer references. The ROI on implementing new customer referral programs will take into account the total investment for the program (included all costs noted above), plus the marketing campaigns to communicate the referral content. This is assessed against the incremental profits generated (also as noted above).
There are numerous approaches for marketing to tap into the profit potential that exists in increasing and managing positive customer referrals and references. The more insight you can gain into determining the potential value, the better you can develop and test initiatives to create profitable, customer-centric marketing.
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