How to Measure Customer Loyalty
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Perhaps more than in any industry, advisors know the importance of customer loyalty and the role it plays in client retention and referral generation. But few advisors have ever tried to systematically measure the client loyalty in their practice.
Here’s a way to do that.
Recently, I attended a talk by Fred Reichheld, a long time partner with consulting firm Bain & Company (the same firm that Mitt Romney worked for after graduating from Harvard Business School).
Reichheld is one of the pioneers in the area of promoting customer satisfaction and loyalty as a core strategy to drive business growth. In 1996, he published The Loyalty Effect, one of the first attempts to rigorously quantify the financial payoff from satisfied customers.
In 2003, he published an article in the Harvard Business Review, titled “One number you need to grow.” He introduced a simple 12-word question and a resulting measure called the “net promoter score” that correlates with customer loyalty and can focus organizations on creating higher levels of customer satisfaction.
12 words to measure loyalty
The net promoter score (NPS) starts with one simple 12-word question that customers are asked to answer on a scale from zero to 10. That question:
How likely are you to recommend us to a friend or colleague?
Customers are then put into three categories:
- Promoters (score 9-10) are loyal enthusiasts who will keep buying and refer others, fueling growth.
- Passives (score 7-8) are satisfied but unenthusiastic customers who are vulnerable to competitive offerings.
- Detractors (score 0-6) are unhappy customers who can damage your brand and impede growth through negative word-of-mouth.
The NPS is the percentage of promoters less detractors – what’s left are your net promoters. So if you have 30% of clients scoring you a 9-10 (your promoters), 50% a 7-8 (your passives) and 20% a 0-6 (your detractors), your NPS is 10.
In the US, recordings of NPS north of 70% have been attained by USAA in banking, Costco and Apple. Other firms using the NPS metric to track satisfaction include Charles Schwab, Amazon, Intuit (maker of Quicken), General Electric and Procter and Gamble.
In a presentation at a conference, a senior executive of TD Bank explained how they used the NPS i to shift from satisfaction-focus to loyalty-focus. With high satisfaction scores, it was hard to identify issues and motivate employees to improve. By moving to a net promoter-approach using willingness to recommend as the metric, they uncovered new issues and identified the best practices of top-performing branches. TD is now rolling out the NPS methodology throughout the bank to include all functions that impact customer service.