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

StewardshipMichigan Agriculture Leaders On Toledo Water Ban: We Want To Be Part Of The Conversation
August 8, 2014
Leaders of Michigan agricultural organizations said Thursday that the government should not have a “knee-jerk reaction” based on last weekend’s water ban in Toledo due to fertilizer run-off in Lake Erie. Read More
ManagementRussia Bans U.S. And EU Ag Product Imports In Ukraine Sanctions Battle
August 7, 2014
Russian President Vladimir Putin has banned the import of agricultural goods from countries that have imposed sanctions on Russia. Read More
EmployeesAsmark Institute Dedicates New Training Center To Ford West
August 6, 2014
The Asmark Institute plans to recognize the retired industry leader's years of service to the fertilizer industry at the new state-of-the-art facility in Owensboro, KY. Read More
LegislationUSDA: Quick Implementation Of Disaster Assistance Programs A ‘Top Priority’
July 9, 2014
USDA has processed 106,000 payments to farmers in 40 states across the country who suffered livestock and grazing losses between Oct. 2011 and passage of the 2014 Farm Bill. Read More

Trending Articles

Equipment2014 Product Of The Year Voting
September 19, 2014
Many new products were introduced to the ag retail marketplace this year. From this group, CropLife IRON and its consulting partners have selected five finalists for the Product of the Year award. Please cast your vote today to help us determine the winner. Read More
FertilizerFall Fertility 2014: Forecasting Fertilizer Use
September 7, 2014
Great crops this year have tapped the soil, and fall work is definitely called for, but how challenging will that get? Read More
CropLife 100CHS To Build $3 Billion Fertilizer Plant In North Dakota
September 5, 2014
The fertilizer plant in Spiritwood will be the single largest investment in CHS history, as well as the single largest private investment project ever undertaken in North Dakota. Read More
EquipmentNew Holland Acquires Miller-St. Nazianz
September 3, 2014
The assets of Miller acquired as part of the transaction will become part of New Holland Agriculture, a CNH Industrial brand, building on a successful four-year partnership between the two companies. Read More
CropLife 100Pinnacle Acquires East Kansas Chemical
September 2, 2014
Ranked 82nd on the CropLife 100, East Kansas Chemical will operate as part of Pinnacle's Performance Agriculture brand. Read More
MAGIE 2014 ShowStopper
EquipmentJohn Deere Again Wins MAGIE ShowStopper Award
August 25, 2014
For the second consecutive year, John Deere was honored at the Midwest AG Industries Exposition (MAGIE) for its new R4045 sprayer. Read More

Latest News

Syngenta
Crop InputsSyngenta Launches Plant Breeding Academy
October 1, 2014
Syngenta announces the release of its Breeding Academy, a global initiative designed to enable the continued development of scientists at Syngenta and beyond. Read More
FertilizerFertilizer Outlook And Technology Conference Set For No…
September 30, 2014
Conference participants can expect to gain perspective on the outlook for agriculture and major fertilizer materials and inputs from industry experts. Read More
MicronutrientsVerdesian Acquires Micronutrient Supplier
September 30, 2014
Verdesian Life Sciences has acquired QC Corp., a producer and supplier of granular and dry micronutrients and ferrous sulfate products. Read More
Eric SfiligojHearing From Young Ag Voices
September 30, 2014
Potential future leaders in ag retail had the chance to shine at the recent Mid America CropLife Association meeting. Read More
WebinarsUpcoming Webinars
September 30, 2014
Register for one of our upcoming Webinars or access our archive of past Webinars to view recordings of presentations that may be of interest to you. Read More
Crop InputsSyngenta Appoints New Chief Operating Officer
September 29, 2014
Jon Parr will succeed retiring COO John Atkin at the end of the year. Read More
CropLife 100South Dakota Wheat Growers To Add Grain-Agronomy Facili…
September 26, 2014
Planned to be constructed in Kennebec, the facility will be located along the soon-to-be rehabilitated line of heavy-rail service from Chamberlain to Presho. Read More
CropLife 100GROWMARK Announces Vice President Appointments
September 25, 2014
Two individuals have been appointed Vice President positions on the GROWMARK executive team. Read More
FertilizerFertilizer Industry Organizations Join Global Alliance …
September 25, 2014
The Fertilizer Institute, the International Plant Nutrition Institute and the International Fertilizer Industry Association are encouraging the industry to promote the proper use of fertilizer products to minimize their environmental impact. Read More
Precision AgARA Organized Precision Forum Hits Capitol Hill
September 24, 2014
The Coalition for the Advancement of Precision Agriculture (CAPA) hosted its inaugural Precision Ag Forum, Sept. 18, in Washington, D.C. Read More
FertilizerFactors To Consider When Placing Fertilizer With Seed
September 24, 2014
The type of crop, fertilizer source, row spacing and soil environment all affect how much fertilizer can be safely applied with seed. Read More
FertilizerSidedressing Manure Into Corn Has Promising Results
September 24, 2014
Applying manure to growing crops can boost yields, reduce nutrient losses and give livestock producers another window of time to apply manure to farm fields. Read More
FertilizerWhen To Sample Manure For Analysis
September 24, 2014
Because the goal is to collect a sample that represents the manure actually being applied, the best time to sample is during loading or field application. Here's why. Read More
Syngenta
Seed/BiotechSyngenta Faces Second Lawsuit Over Agrisure Viptera Cor…
September 23, 2014
A second company has sued Syngenta AG over sales of genetically modified corn seed not approved by China. Read More
StewardshipCover Crops Field Guide For Farmers Expanded
September 23, 2014
Farmers interested in planting cover crops to improve soil health now have an updated and expanded resource in the second edition of the Midwest Cover Crops Field Guide. Read More
HerbicidesArysta LifeScience Launches Contest For Wheat Growers
September 23, 2014
The Flush after Flush Photo Finish contest encourages farmers across the U.S. to participate through Instagram or Twitter using the hashtag #FlushAfterFlush. Read More
FertilizerCF Industries Confirms Merger Of Equals Discussions Wit…
September 23, 2014
CF Industries Holdings, Inc. has confirmed that it is in preliminary discussions with Yara International regarding a potential merger of equals transaction. Read More
StewardshipProgram To Examine Ag-Related Practices, Policies To Pr…
September 22, 2014
A panel discussion on October 14 will include a significant discussion on key issues and solutions related to all aspects of harmful algal blooms. Read More