Calculating The Value
Figuring out how promoters and detractors "add up" to improve or hurt the bottom line is very important.
December 2, 2008
Studies across many industries have shown that approximately 80% of customers who defect are actually satisfied. Over the past few months, I have introduced the idea of customer experience being the best predictor of future customer purchases. I believe this is increasingly true for ag retailers.
Consider the situation. Although the industry is highly technical, and agronomic knowledge or grain marketing moxie is vital, this knowledge is widely shared among competitors. In fact, the whole agribusiness industry is a perfect example of a tide of increasing competence lifting all boats. How do retailers create a long-term differentiated advantage in this situation? I believe the only sustainable approach is to deliver customer experiences that are perceived by customers to be superior to what your competitors offer.
As customers interact with a company they segment themselves into Promoters, Passives, and Detractors based on how effectively they believe the retailer has delivered a quality experience. Promoters are actively engaged with your company, and are highly willing to recommend you. Passives are not engaged, and will only give you a weak recommendation. Detractors are actively not engaged with your company and based on their perceptions and experiences would never recommend you. They are a toxin that destroys your profitability.
Most of the real value in a retail operation is created through word of mouth economics. Growth comes when the positive word of mouth from Promoters exceeds the negative word of mouth from Detractors. Passives aren't talking about you, which, of course, is another problem. In this column, we'll compare top line sales behaviors of each customer segment which will get us ready to look at word-of-mouth economics next month.
Crunching The Numbers
Here are some recent numbers my company, AgKnowlogy, has found through our Customer Experience Monitor with a leading retailer. The pie chart shows the breakdown of Promoters, Passives, and Detractors within their business. Their current Net Promoter Score is 33%, based on subtracting the percent of Detractors from Promoters. Just as various medical diagnostics measure the health of a patient, a companies Net Promoter Score (NPS) is an excellent leading indicator of the health of the business based on future customer loyalty. An NPS of 33% leaves room for considerable improvement.
I am often asked what a company should do first regarding its customer segments. We'll return to this in more detail, but my best advice is to "stop the bleeding." What is causing customers and prospects to form Detractor perceptions of your company? Guessing at this will not be helpful, as the reasons are typically not immediately apparent. However, the effort required should not delay identifying areas of detraction and focusing on them in order to create some quick operational wins. Over time, however, you will need to strategically move from repairing customer experiences to focusing on creating more Promoters. This is the only way of achieving long-term success. Let's look at some numbers that support why this is. The bar chart shows key differences in sales for the above retailer this year for his Promoters, Passives, and Detractors. We found Promoters purchased more than 4.5 times as much as Detractors, and almost two times the value of Passives. Farm size was not a factor.
The numbers stare at you, don't they? I can't convince myself it is not mission critical to increase the numbers of Promoters and reduce the Detractors for a business. In fact, there are four behaviors that clearly identify the benefits of Promoters in your business.
- They repurchase at a higher rate.
- Promoters are your most loyal segment.
- They are fairly immune to competitive attack.
- Promoters tend to purchase across your product categories.
AgKnowlogy has repeatedly shown that category penetration is itself linked to customer loyalty. As a cautionary note, most retailers have a long way to go in this area, particularly when it comes to seed. Promoters tend to be most active in referring you to other prospective customers. They create extensive positive word of mouth that is vital to your business. On the other hand, your sales or marketing efforts can fall on the deaf ears of prospects who have heard about the problems of your Detractors.
Finally, Promoters will offer you constructive feedback that is useful in improving your business.
Keogh is president of AgKnowlogy. E-mail him at firstname.lastname@example.org or call 905-478-2282.