Frictionless formulas

I have recently read two similar business books. They are similar in that they both discuss formulas that can be implemented in an organization to measure profitability and business success. However, one formula is very simple while the other is more complex (at least IMHO). Let’s see if you can guess which is which:

The Ultimate Question, by Fred Reichheld

The Ultimate Question According to Reichheld, the “ultimate question” you should ask your customers is: “How likely are you to recommend us to a friend or colleague”? This question is based on a 0 to 10 scale.

Your customers are then divided into three categories based on the number they chose. Those who answered 9 or 10 are categorized as Promoters (enthusiastic evangelists), those that answer 7 or 8 are categorized as Passives (satisfied but bored customers), while those that answered 0 through 6 are categorized as Detractors (unhappy customers). Using these categories, you can derive your Net Promoter Score by using the following formula:

% of Promoters (P) minus % of Detractors (D) equals Net Promoter Score (NPS)

in other words:

P – D = NPS

Return on Customer, by Don Peppers and Martha Rogers

Return On Customer Peppers and Rogers explain the proper balance between current profit and long-term value. Both short-term and long-term value comes from the only business asset that ultimately matters: customers.

According to Peppers and Rogers, a customer can create value for a business in two ways: by increasing the company’s current-period cash flows, and by increasing its future cash flows. Maximizing Return On Customer (ROC) optimizes the mix of both current-period and future profits, to create the most enterprise value possible, as quickly as possible.

The formula for Return On Customer (ROC) is:

A firm’s current-period cash flow from its customers plus any changes in the underlying customer equity, divided by the total customer equity at the beginning of the period.

in other words:

Which formula do you think would be easier to spread? (hint: I had to cut and paste one formula instead of simply typing it because of the math symbols). I am not saying that one formula is better than another (actually, I think both are very valuable). What I am saying is that the less friction a message has, the greater chance it has of being spread by word of mouth (given that the messages are of equal greatness).

Whether your message is a business formula, a movie plot, or political platform, “friction” can be caused by complexity, being commonplace, or the fact that your product or service must actually be experienced to be enjoyed. Regardless of the reason, friction causes your message to grind to a halt. If you make your message as frictionless as possible, you’re well on you way to spreading your message.

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6 Responses

  1. Great point — you’re right on. (In fact, I think it’s a key message in the book “Made To Stick”, which, I admit, I haven’t read yet, but is getting great reviews).

    But that DOESN’T mean the frictionless message (in this case, NPS) is the RIGHT message, or the right thing to do.

    The lesson for me, here, is this: It’s up to Peppers and Rogers to fix their message — not that we should accept Reichheld’s, simply because it’s the [more] frictionless one.

  2. rshevlin –

    I think you are right, frictionless does not equal right. We have used both formulas at my company, but one is simply spreading faster than the other.

  3. And, on my front yard, weeds spread faster than grass.

    If you get a chance, check this out:

    http://marketingroi.wordpress.com/2007/01/11/stop-measuring-your-net-promoter-score/

    And be sure to read Larry Freed’s comment to the post.

    Thanks.

  4. rshevlin, great post about NPS! The point of my original post was not really about the formulas themselves as it was to remind us all to remove friction as much as possible in marketing. However, now is a good a time as any to weigh in with my specific opinions about NPS. I’ll use your post points as the framework.

    NPS does not explain the WHY behind the recommend. This would be true if all you asked was the recommend question. The likelihood to recommend question should always be followed up by “why would you (or would not) recommend’. Herein lies the actionable data.

    NPS shows intentions not true behavior. I would whole-heartily agree with this flaw of NPS. I think it would be much better if you can ask customers who have actually recommended your product why they recommended your product and what message (specific words, tone, place) they used. If you can capture the recommendation in real-time, even better.

    NPS doesn’t capture inherent consumer differences. This can happen. However, if you ask the why (or why not) they are likely to recommend question, you have a better chance at capturing the inherent differences of segment that simply does not recommend anything.

    NPS can incent undesirable behavior. Agreed. But I think this is a problem with the company and not necessarily with the metric. Most metrics can be influenced or “gamed”. Anything that can be done to reduce the unwanted behavior (third party validations, not conducted on-site, etc.) should be used.

    Uses funds better deployed elsewhere . I have seen companies that have gone through the expense of collecting NPS (and a whole lot of other data on their customers) that was never used. I agree that some companies should be using their funds for better purposes.

    All in all, I wouldn’t call NPS a “weed” as you have suggested, but it does have some points that must be considered by any organization before it is implemented. If used, I think it should be only one tool in a marketer’s toolbox.

  5. Thanks for looking and the thoughtful comments.

    You know, when I made the “weed” comment I wasn’t really thinking specifically about the NPS. It was more about how something less than desirable could spread faster than something desirable.

    But the more I think about it… the more I like the “NPS as weed” analogy.

    Going back to my lawn example… if it weren’t for some of the weeds, I’d have a lot of empty brown patches.

    My point: sometimes a weed is better than nothing. Same w/ the NPS: I guess it’s better than nothing.

  6. Bill- I appreicate you spotlighting Fred Reichheld’s book and bringing attention to Net Promoter Score.

    However, I see you have listed some inaccuracies regarding NPS as a tool for measuring customer loyalty. I urge you to read a recent blog post by Dr. Laura Brooks of Satmetrix who addresses some of these issues:
    http://netpromoter.typepad.com/laura_brooks/2007/09/building-value-.html#more

    I was going to send you a personal email but could not find an address on your blog.

    Sincerely,
    Deb Eastman, CMO of Satmetrix

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