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

ManagementConsolidation Update
June 22, 2017
Editors Paul Schrimpf and Eric Sfiligoj discuss progress on manufacturer consolidation, and another big move for Midwest cooperative Central Valley Read More
ManagementPlotting Corn, AGCO/Asmark’s Applicator Training Center, and Bayer-Monsanto Sell-Off News
June 15, 2017
Editors Paul Schrimpf and Eric Sfiligoj talk about their recent visits to Columbus, OH, and Bloomington, IL, along with an Read More
ASMARK AGCO Applicator Training Center
EmployeesAsmark, AGCO Open Training Center for Beginning Applicators
June 13, 2017
AGCO Corp. and the Asmark Institute have opened a new Applicator Training Center, created in a collaboration between the two Read More
CHS St. Paul, MN fertilizer terminal
LegislationICGA Praises President Trump’s Remarks on Waterways Infrastructure
June 12, 2017
Illinois Corn Growers Association President Justin Durdan, a farmer from Utica, issued the following statement regarding President Donald Trump’s comments Read More
Trending Articles
PrecisionAg Vision Conference
Precision AgPrecisionAg® Vision Conference: Focused on the Future
June 13, 2017
PrecisionAg® is pleased to announce the return of its PrecisionAg Vision Conference, October 10-12, 2017. Based on overwhelmingly positive response Read More
Redbanded-stinkbug-on-soybean-Photo-credit-Thomas-County-Ag
Crop InputsExperts: Mild Winter, Early Planting Will Increase Soybean Insect Threat
June 12, 2017
Higher than average temperatures this past winter affected much of the nation, especially the South and Midwest. The National Centers Read More
Eric SfiligojMonsanto ‘Picks Its Battles’ by Nixing Deere Deal
May 23, 2017
Having been in the trade journalism game since the mid-1980s, I remember several watershed moments during my career. One of Read More
Migrant farm workers
LegislationTrump: Immigration Crackdown Won’t Impact U.S. Agriculture
May 16, 2017
President Donald Trump said he would seek to keep his tough immigration enforcement policies from harming the U.S. farm industry Read More
AGCO Ratliff featured
Eric SfiligojRemembering Robert Ratliff
May 15, 2017
With all the fast-paced happenings in agriculture this spring, with multiple mergers in the works and planting season in full Read More
Case sprayer nozzle closeup
EquipmentSpray Application: A Nozzle Renaissance
May 2, 2017
If you had asked four-decade ag veteran Mark Bartel, President of Wilger Inc., just a few years ago what lay Read More
Latest News
Crop InputsArkansas Plant Board Votes to Ban Dicamba — Now W…
June 23, 2017
The Arkansas State Plant Board has voted to pass a proposed emergency rule to ban the use of in-crop dicamba, Read More
Engenia soybeans
Crop InputsBASF: ‘Closely Monitoring’ Dicamba Situatio…
June 22, 2017
BASF, whose Engenia herbicide is the target of more than 200 drift complaints in Arkansas, emailed the following statement to Read More
ManagementConsolidation Update
June 22, 2017
Editors Paul Schrimpf and Eric Sfiligoj discuss progress on manufacturer consolidation, and another big move for Midwest cooperative Central Valley Read More
Palmer pigweed seedhead in cotton
Crop InputsThreat of Dicamba Ban Looms in Arkansas
June 22, 2017
The Arkansas State Plant Board has rejected a proposed ban on the use of dicamba herbicide, but a procedural error Read More
Potash Agrium
Crop InputsAgrium-PotashCorp to become Nutrien upon Merger Complet…
June 21, 2017
Potash Corporation of Saskatchewan Inc. and Agrium Inc. have announced today that once the anticipated merger transaction closes, the new Read More
Crop InputsMidwestern BioAg Hosts TerraNu Fertilizer Plant Opening…
June 20, 2017
Last Friday, Midwestern BioAg was joined by over 80 local farmers, media and staff to celebrate the grand opening of Read More
Soybean Field
Industry NewsAligned Ag Distributors Names New President
June 19, 2017
Aligned Ag Distributors LLC announced this morning the appointment of Mary Tolke to the position of President/CEO, effective July 1. Read More
ManagementPlotting Corn, AGCO/Asmark’s Applicator Training Center…
June 15, 2017
Editors Paul Schrimpf and Eric Sfiligoj talk about their recent visits to Columbus, OH, and Bloomington, IL, along with an Read More
Seed/BiotechDow AgroSciences Announces Launch of Enlist Corn for 20…
June 14, 2017
Enlist corn will be commercially available in the U.S. for the 2018 growing season. Dow AgroSciences announced the launch today Read More
ASMARK AGCO Applicator Training Center
EmployeesAsmark, AGCO Open Training Center for Beginning Applica…
June 13, 2017
AGCO Corp. and the Asmark Institute have opened a new Applicator Training Center, created in a collaboration between the two Read More
Power to Do More Contest Winners
HerbicidesDow AgroSciences Announces Three Winners in Power to Do…
June 13, 2017
Thousands of votes have been cast and three farmers have been awarded the power to do more with a $10,000 Read More
Frogeye leaf spot
FungicidesStrobilurin-resistant Frogeye Leaf Spot Threat Looms wi…
June 13, 2017
Heavy spring rainfall throughout the South and Midwest delayed planting and created the perfect environment for diseases like frogeye leaf Read More
PrecisionAg Vision Conference
Precision AgPrecisionAg® Vision Conference: Focused on the Future
June 13, 2017
PrecisionAg® is pleased to announce the return of its PrecisionAg Vision Conference, October 10-12, 2017. Based on overwhelmingly positive response Read More
CHS St. Paul, MN fertilizer terminal
LegislationICGA Praises President Trump’s Remarks on Waterwa…
June 12, 2017
Illinois Corn Growers Association President Justin Durdan, a farmer from Utica, issued the following statement regarding President Donald Trump’s comments Read More
Wheat Growers
UncategorizedWheat Growers Names Tracy Linbo as Senior Vice Presiden…
June 12, 2017
Wheat Growers has hired Tracy Linbo as Senior Vice President of Agronomy. Linbo joins Wheat Growers after having served 10 Read More
EquipmentAgTech Summit Aiming High for Modern Farming Solutions
June 12, 2017
THRIVE AgTech, in partnership with SVG Partners and Forbes, is hosting the third annual Forbes AgTech Summit June 28-29 in Read More
Central Valley Ag Randolph, NE
Precision AgLand O’Lakes Invests in EFC Systems
June 12, 2017
Land O’Lakes, Inc. has made a minority equity investment in EFC Systems, Inc., an ERP (Enterprise Resource Planning) and precision Read More
BRANDT
Crop InputsBRANDT Products Approved for Use with New Cropping Syst…
June 12, 2017
BRANDT, a leading manufacturer of specialty products for the agriculture and turf markets, has announced that 11 BRANDT formulations have Read More