Critical Review: “The Microeconomics of Customers Relationships”
Robert Morgan
Capella University
03/25/2015
Unit 1 – Assessment 2

Reichheld, F. (2006). The Microeconomics of Customer Relationshops. MIT Soan Management Review, 47(2), 73. Retrieved from http://search.proquest.com.library.capella.edu/docview/224965299?accountid=27965
This review evaluates “The Microeconomics of Customers Relationships” by Fred Reichheld. The article presents a method to raise a company’s net-promoter score (NPS). The review will show that the NPS is a simplistic but valuable tool that has to be used with caution.
Summary
Reichheld (2006) starts his article by defining NPS and poses these five questions: “Why is the connection as strong as it is?”, “How does the quality of customer relationships affect the economics of a business?”, “Can the microeconomics of NPS itself ultimately be quantified and managed?”, and “How does a company raise its NPS — and on which customers should it focus its efforts”. In answering these questions, the author quantifies the value of the customer by giving value to word-of –mouth, retention rate, margins, annual spends, and cost efficiencies.
In the second main section, Reichheld (2006) discusses how to Increase the NPS Strategically. The strategy promotes three priorities for increasing the NPS. The first priority is to invest in the company’s core customers (promoters). These customers are return customers which have a positive effect on the business (Reichheld, 2006). The second priority is addressing the customers that have a negative impact on the business (detractors). Although having a negative effect on the business, these customers are still profitable and the company can invest time in trying to satisfy them (Reichheld, 2006). The third priority is finding new promoters in the current customer base (Reichheld, 2006). The author state that this can be done two ways. The first is moving the average e customer up to a promoter and the second is transitioning the detractors to promoters (Reichheld, 2006).
Reichheld (2006) concludes with “The value of NPS, like the value of any good metric, is that it allows experimentation. A company that produces NPS data regularly and with sufficient granularity can track and assess its strategic and tactical moves month in and month out”.
Evaluation
The main point of the article is that the NPS is directly related to growth of a company. As Reichheld (2006) points out that this growth relationship “…is still open to debate, but the logical connection is strong…”. In webpage “Concerns About Net Promoter”, Martha Brooke (2014) states that, “As it turns out, net promoter scores may not predict growth at all, and the net promoter question is no more accurate than any other customer feedback question”. By stating that the idea is open for debate, Reichheld is saying that the NPS should be used with caution and may not apply to all.
There are two main issues addressed in the article. The first is identify and quantify the customer base and the second is strategically increasing the NPS. Addressing the first issue, Reichheld analyzes the value of the customer by giving a value to word-of –mouth, retention rate, margins, annual spends, and cost efficiencies. If this idea is applied to a business, the business would have to evaluate and analyze its structure in great detail. This analysis would give the business a greater understanding of their current customer relationship. In today’s market, the uses of social media has given word-of-mouth a greater impact on business relationships. Reichheld briefly notes this and in BRAND METRICS: The net-promoter score movement (2007) states:
The marketing fraternity has long been aware of word-of-mouth (WOM)'s importance in such critical areas as repeat buying behaviour, brand equity and corporate reputation management. But it has now acquired even more speed and potency as the internet and blogs help facilitate global conversations. As societies become more cluttered with ads and products are less differentiated from each other, it is vital that WOM becomes a measurable marketing tool.
The second issue, strategically increasing the NPS, Reichheld (2006) presents a straight forward strategy of invest in your core, address the detractor, and find additional promoters. Promoters are the source of positive word-of-mouth and eighty percent (80%) of referrals (Reichheld, 2006). With a more than eighty percent (80%) negative word-of-mouth, the detractors have a great impact on the business (Reichheld, 2006). With this simple strategy, a business could potentially increase profit by keeping their promoters happy and transiting the defectors to an average customer.
Ethical Considerations
Information usage is the main ethical dilemma associated with NPS. Information from customers “can be created, omitted or withheld, suppressed, amplified or exaggerated, diminished or distorted” (McKinley, 2013). With rankings from one question being the only data gathered, it would be easy to use only the data that would yield the wanted results. Having a system in place that insures an appropriate data pool was analyzed would reduce the chances of un-ethical behavior.
Conclusion
The NPS can be used as a guide for company growth. A small business can use it as an inexpensive guide while a large company can use it along with other supporting data to make decision about company growth. “The simplicity of the Net Promoter score sometimes creates the misperception that it is all about one question and the resulting score. But the leaders of great companies, such as Schwab, Rackspace and American Express, understand that the score is just the beginning— the catalyst. It is the full system that creates the conditions for real change and improvement.” (Markey & Reichheld, 2011)

References
BRAND METRICS: The net-promoter score movement. (2007, April 16). Brand Strategy, 40-41. Retrieved March 20, 2015, from http://search.proquest.com.library.capella.edu/docview/224157996?accountid=27965
Brooke, M. (2014). Concerns About Net Promoter. Retrieved March 24, 2015, from InterAction Metrics: http://www.interactionmetrics.com/Net-Promoter-Score-Keiningham.asp
Markey, R., & Reichheld, F. (2011, December 08). Introducing: the Net Promoter System. Retrieved March 24, 2015, from Bain & Company: http://www.bain.com/publications/articles/introducing-the-net-promoter-system-loyalty-insights.aspx
McKinley, M. (2013, December 08). Retrieved March 25, 2015, from VSFS: https://is.vsfs.cz/el/6410/zima2013/NA_LaEC/um/McKinley.pdf
Reichheld, F. (2006). The Microeconomics of Customer Relationshops. MIT Soan Management Review, 47(2), 73. Retrieved from http://search.proquest.com.library.capella.edu/docview/224965299?accountid=27965