Re: PML ...... getting better?
They should probably read this...
Profits earned at customer expense will doom firms .
By Philip Lee - Nov 22, 2006
AsiaOne
AN organisation that is wallowing in healthy profits might suggest that it is doing well because it is customer-oriented.
This is not always so.
So says renowned guru on customer loyalty, Mr Fred Reichheld, 54, who has spent years researching the dynamics of this subject. He is widely recognised as one of the world's leading authorities on business loyalty - both that of staff and customers and often speaks on the link between corporate ethics and profits.
In an interview with Karen Christensen published in the fall edition of Rotman, the magazine of the Rotman School of Management, University of Toronto, Mr Reichheld says that in business today, there is only one set of reliable metrics for gauging success and that's the accounting figures.
But he says these figures don't help in distinguishing between "good profits" and "bad profits" .
He defines good profits as the kind earned from delivering great experiences and value to customers turning them into loyal promoters who will tell others about the company.
Bad profits are those earned at the expense of customer relations and customer welfare.
"But good and bad profits are indistinguishable from each other on a spreadsheet," he points out.
Asked for examples of companies earning bad profits, he comes up with quite a number.
Cellular telephone providers in America, and probably those in Canada as well, are examples, he says. Other which came in for criticisms are hotels, car rental firms and airlines.
Cellphone companies tend to charge loyal customers with the highest prices and give the best prices to "switchers" - those who move to another telco. And every opportunity they get, they seem to want to grab an extra dollar from you.
Says Mr Reichheld: "For example, if I dial directory assistance on my cell phone today, my provider will charge me US$3 - for something that costs them 30 cents."
As for hotels, he says they charge outrageous amounts for guests who use the room telephone to dial out. A car rental firm charged him an extra half-day rental for being 40 minutes late in returning the vehicle and when they discovered he had forgotten to fill up the gas tank which was half full, they asked for US$75 to top it up.
And airlines charge US$80 for an extra piece of luggage and US$100 to change a ticket.
"They just forget about the notion of actually being obligated to deliver good value, and earning your trust by treating you right; instead they're looking for ways to nickel and dime you," says Mr Reichheld.
He adds: "Firms like this lose customer trust, and as a brand, they are going to find it very difficult to expand into adjacent businesses."
Obviously alluding to North American companies, he says most of them have become addicted to these "bad profits."
"It's bad for customers, obviously, because they hate being manipulated, abused and disrespected," he says.
"But it's bad for employees too because most employees hate carrying out these policies that have nothing in common with the Golden Rule behaviour." And they also feel embarassed to work there," he says.
"These policies destroy growth, so investors hate them too. And every business person should hate them because they give business a black eye."
Mr Reichheld also feels that 30-question customer satisfaction surveys many US firms carry out are all a hogwash.
Rather than do this, he suggests: "The first thing to do is to talk to your own employees, and figure out what it is that they aren't happy about, and get their input to fix it."
He adds: "I was never a fan of 30-question surveys that waste your time, where response rates are lucky to be 10 per cent; you think to yourself - who are these 10 per cent of people who are so bored or lonely that they take the time to fill them out?
"And let's face it, what can you learn from this group about your profitable customers?"
He said the most meaningful customer survey he found was that of Enterprise-Rent-a-Car, which asked just two questions, the second a follow up on the first.
The key question was: "How likely are you to recommend us to a friend?"
He said a company's true balance sheet is the percentage of customers who are promoters - those who gave 9s or 10s - in the question survey - minus the percentage who are detractors who rate the company from zero to 6. So the "net", or Net Promoter Score (NPS) is really the equivalent of the company's net worth going forward.
"It's a far better predictor of growth than any of the metrics that accountants work so hard to tally up," says Mr Reichheld.
He says the challenge for good companies is getting more promoters (customers who recommend the firm to friends). Most companies have customers who are "passively satisfied".
"But how can you wow or delight these people in an economically rational way. That is the US$64,000 question."
He said from a study of 30 industries, it was discovered that the average NPS leader was growing at 2.5 times the rate of their competition.
"It's so obvious - there's only one way to grow profitably, and that's to treat your customers so that they come back for more - and hopefully bring their friends."
"It's so simple, and yet the accounting conventions completely ignore it."
"Instead, we measure profits and that's how we set our budgets, that's how we pay bonuses, so that everyone in the organisation is wired up to care about profits; but before long, companies fall into the trap of "bad profits", which destroys their growth," says Mr Reichheld.
Asked for the best way to build an effective customer feedback system, he says Step 1 is to remove this job from the marketing department.
He says what is needed is a rigorous, reliable feedback system that is audited and trustworthy - that investors can believe in and that bonuses can be based on.
"My advice is to get the CEO's office to build a process of finding your Net Promoter Score that can be trusted by all stakeholders. Once this is set right, the marketing group will be well positioned to develop tools to enter meaningful dialogues with customers.
"For as long as marketing tries to hold onto to this satisfaction survey stuff, the end results won't change, and bad profits will continue to dominate," Mr Reichheld says.
