Word Of Mouth Economics

We have been discussing that customer experience is different than satisfaction, and how these experiences directly impact loyalty. Based on their experiences with your company, customers and prospects can be segmented into Promoters, Passives, and Detractors. Promoters are highly willing to recommend you to another grower. Detractors will not recommend you and look for opportunities to criticize and speak poorly about your company.  My goal this month is to help you understand the impact of this word of mouth (WOM) on your bottom line and energize you to take action on this aspect of your business. 

For our case study, we will look at a hypothetical ag retailer with 1,000 customers. Of these customers, 500 are Promoters, 300 are Passives, and 200 are Detractors. His Net Pro­moter Score (NPS) is therefore 30%, which is fairly low. The average Net Present Value (NPV) of a customer is $10,000 (X = $10,000). Promoters typically purchase at a higher rate than average, but we will simplify the math.

  • Promoters make seven positive comments and zero negative comments to other customers and prospects.
  • Passives make two positive comments and one negative comment.
  • Detractors make zero positive and eight negative comments.

It takes five positive comments to prospects to generate a new customer. Each negative comment from a Detractor neutralizes seven positive comments.

Promoters buy 2X the average customer. They buy at higher margins, have fewer bad debts, and defect at 0.5X the average rate of other customers, so their NPV excluding WOM is 3X the average customer.

Detractors have a negative NPV of negative 0.75X the average customer due to bad debts, complaints you need to service, and a short tenure. This excludes their WOM effect.

To explore the economic WOM of customers, we will ask three questions:

  1. What is the full value of a Pro­moter if customers generated by referral are worth 2X the value of an average customer?
  2. What is the value of a Detractor?
  3. What is it worth to convert a De­tractor into a Promoter?

An Income Machine

The WOM effect from Promoter referrals is an incredible income machine. It takes five positive comments to generate a new customer, so each positive comment is worth $10,000/five or $2,000. Each new customer generated from referral however is worth $20,000 (2X the average). There­fore, each positive comment from a Promoter is worth $20,000/five or $4,000. Since each Pro­moter makes seven positive comments, a Promoter’s positive WOM is worth is worth $4,000 X seven = $28,000.

Now we add the Promoter’s NPV of $30,000 to the WOM value to arrive at the Promoter’s full value of $58,000. This turns the traditional approach to selling upside down, doesn’t it? Rather than prospecting for new customers, increase your NPS and let Promoters spread the good word about you. They purchase deeper into your bundle of products and services, are less price sensitive, and they make referrals.

To start the calculation of how De­tractors hurt your business we begin with the average value of a customer, which is $10,000. Detractors have a negative NPV due to time-consuming complaints, excessive price sensitivity, and high turnover. We assume their negative NPV is 0.75X (the value of an average customer). The NPV of a Detractor is therefore -$7,500.

Unfortunately, the WOM effect with Detractors is larger than with Promoters. Each Detractor makes eight negative comments and each negative comment neutralizes seven positives. Therefore, each Detractor cancels out eight X seven = 56 positive comments. Since each positive comment is worth $2,000, the negative impact of Detractors is 56 X $2,000 or -$112,000. When you add the Detrac­tors own negative NPV to WOM economics, the impact is -$119,500.  
Some readers may think this example is untrue. I modified it from real-life consumer and business-to-business results, so I am confident in the validity. Most Detractors are created from the experience gaps they encounter during the process of doing business with a supplier. I suggest thinking of this as the estimated drag on your business by customers whose experiences were not met.

What is it worth to convert a Detrac­tor to a Promoter? It is fashionable to suggest chronically disgruntled customers should be shunted off to competitors whenever possible. Other than for the most seriously toxic Detractors, this is a mistake. The first reason is because Detractors can give us insight into gaps in our service delivery that should be fixed. Second, they represent a large income opportunity if their problems can be addressed.

We have estimated that a Detractor costs the business -$119,500 through their own negative value and WOM. We have estimated that a Promoter is worth $58,000 including their positive WOM. So by converting a Detractor to a Promoter, the change in value to your business is the difference between these two numbers or $177,500. 

Assuming differences in individual retailers, the numbers are a reasonable estimate of what is happening in your business today. Promoters will recommend you to another grower and generate increased revenue through their purchases and WOM. Detractors are a drag on your profitability.

The best way of taking the pulse of your business and beginning to focus on repairing service gaps that create Detractors is to directly measure your customers’ experience with you compared to competitors. Ag­Knowlogy has developed the Cus­tomer Experience Monitor to help retailers quantify, understand, and take action on the customer experiences that impact loyalty and profitability.

The stakes are too high to not measure how business results are created by how customers evaluate your performance against their priorities.

Leave a Reply

Management Stories

Allen Summers Asmark Institute PSM Training
EmployeesAsmark Institute Sponsors 25 ResponsibleAg Auditor Training Scholarships
June 21, 2016
The Asmark Institute has announced plans to provide 25 scholarships through their affiliated State fertilizer and agrichemical associations to help encourage Read More
LegislationVilsack Christens WinField Crop Adventure, Talks Monsanto-Bayer, GMO-Labeling and TPP
June 17, 2016
The WinField Crop Adventure grand opening ceremonies at Fair Oaks Farms (near Winemac, IN) welcomed USDA Secretary of Agriculture Tom Read More
Crop InputsFields of the Future: WinField Doubles Down with Agri-Education Center Investment (w/Photo Gallery)
June 16, 2016
Land O’Lakes, Inc., joined by Agriculture Secretary Tom Vilsack, today will host Fields of the Future, a live broadcast about Read More
Trending Articles
Food IT
Industry NewsCalifornia Event Will Mix Ag And Tech Professionals To Explore IT Solutions
June 20, 2016
Silicon Valley is hot on agriculture, and an upcoming event in California will bring together the food and tech industries Read More
Monsanto Luling Plant
Eric SfiligojWhat’s Next For Monsanto?
May 31, 2016
For the folks at Monsanto’s headquarters in St. Louis, MO, it has been an eventful few weeks. Back on May Read More
Soybean Plant closeup
Industry NewsMonsanto Rejects Bayer Bid; Open To More Talks
May 25, 2016
Monsanto Co, the world’s largest seed company, turned down Bayer AG’s $62 billion acquisition bid as “incomplete and financially inadequate” Read More
Eric SfiligojPity The Monsanto Haters
May 23, 2016
An old saying goes thus: “Be careful what you wish for. You just might get it.” Given current events, there Read More
Monsanto Luling Plant
Crop InputsReport: Bayer Eyeing Monsanto For Possible Mega-Merger
May 16, 2016
Bayer AG is exploring a potential bid for U.S. competitor Monsanto Co. in a deal that would create the world’s Read More
Aerial Drone
Precision AgA Deeper Dive Into The Future Of Precision Ag
May 9, 2016
For about two decades now, through the good and the bad times, the ups and the downs inherent in agriculture, Read More
Latest News
Allen Summers Asmark Institute PSM Training
EmployeesAsmark Institute Sponsors 25 ResponsibleAg Auditor Trai…
June 21, 2016
The Asmark Institute has announced plans to provide 25 scholarships through their affiliated State fertilizer and agrichemical associations to help encourage Read More
Kennebec Elevator
CropLife 100Wheat Growers Celebrates Kennebec Elevator Grand Openin…
June 21, 2016
Over 250 patrons and guests were on hand to celebrate Wheat Growers’ Kennebec Elevator grand opening. South Dakota Secretary of Read More
Land O Lakes
Industry NewsLand O’Lakes To Acquire Ceres
June 20, 2016
Land O’ Lakes, Inc. and Ceres, Inc. have announced that they have signed a definitive merger agreement under which Land O’Lakes Read More
Food IT
Industry NewsCalifornia Event Will Mix Ag And Tech Professionals To …
June 20, 2016
Silicon Valley is hot on agriculture, and an upcoming event in California will bring together the food and tech industries Read More
LegislationVilsack Christens WinField Crop Adventure, Talks Monsan…
June 17, 2016
The WinField Crop Adventure grand opening ceremonies at Fair Oaks Farms (near Winemac, IN) welcomed USDA Secretary of Agriculture Tom Read More
Crop InputsFields of the Future: WinField Doubles Down with Agri-E…
June 16, 2016
Land O’Lakes, Inc., joined by Agriculture Secretary Tom Vilsack, today will host Fields of the Future, a live broadcast about Read More
Bayer sign
Crop InputsMonsanto Turns Back Bayer Again
June 14, 2016
Bayer AG’s bid to buy Monsanto Co. for more than $60 billion has hit an impasse that could pose a Read More
Young Corn Field
Crop NutritionNext Generation Of Nitrogen Efficiency Technology Conve…
June 13, 2016
Commodity price projections indicate farmers will continue to face tight margins again this year. Delivering higher yields and more bushels Read More
Industry NewsLa Crosse Seed Acquires Cover Crop Solutions Brand
June 10, 2016
La Crosse Seed announces that it is the new and exclusive owner of the entire family of brands of Cover Read More
ManagementTravel Plans and EU Rejection of Glyphosate, Biotech Cr…
June 9, 2016
Editors Paul Schrimpf and Eric Sfiligoj talk about upcoming trips and the latest in the European Union’s moves against glyphosate Read More
Aspire with Boron
Crop InputsStudy: Aspire with Boron Ups Alfalfa Yields
June 8, 2016
Alfalfa growers are successfully improving yields through the cutting season by applying an important micronutrient. In a recent study, The Read More
Industry NewsAGCO Announces Tragic Death of Longtime Employee
June 8, 2016
It is with deepest regret that we announce the passing of our dear friend, colleague and customer advocate-in-chief Kevin W. Read More
Wheat Field North Dakota
Industry NewsBASF Inks Northern Seed for Clearfield Wheat R&D Li…
June 6, 2016
BASF has licensed Northern Seed LLC to perform research and development of BASF’s proprietary and patented Clearfield technology in wheat. Read More
ManagementBayer/Monsanto, EU/Glyphosate, Corn/Soybeans
June 2, 2016
Editors Paul Schrimpf and Eric Sfiligoj discuss the latest regarding industry mergers, the glyphosate debate in Europe, and an update Read More
Growers looking at soybeans
Industry NewsKoch Licenses 2 Marrone Products For North American Dis…
June 2, 2016
Koch Agronomic Services (Koch), with support from its affiliate, Koch Biological Solutions, has secured exclusive rights to sell REGALIA Rx Read More
Gypsum
Industry NewsBeneficial Reuse Management Launches GYPSOIL BLENDABLE
June 2, 2016
Beneficial Reuse Management (BRM) has introduced GYPSOIL BLENDABLE, a new high-quality pelleted gypsum fertilizer that supplies 17% sulfate sulfur and Read More
StewardshipAgrible Joins Field To Market To Pursue Sustainable Sou…
June 1, 2016
Agrible, Inc. has joined Field to Market: The Alliance for Sustainable Agriculture as an associate member. As a leading multi-stakeholder Read More