Monique S. Webster
Reichheld, Fred (2006). The Microeconomics of Customer Relationships. MIT Sloan Management Review. Vol. 47, No. 2
Article Summary The purpose of this article author, Fred Reichheld discusses the microeconomics of customer relationships. How customer relationships affect a company's growth rate and the financial performance. Various companies like, General Electric Company uses "net-promoter score" as a metric tool to determine the customer relationships in its company. The NPS system is based on one key question, "How likely is it that you would recommend us to a friend or colleague?" and then divided into three main cluster groups: promoters, passives, and detractors. Each of these cluster groups help to determine the impact of customer relationships. Promoters have the highest repurchase accounting for more than 80% of referrals for new customers. Passives the second cluster group accounting for more than 50% of referrals for new customers and detractors account for 80% negative referrals for new customers.
The article discusses the value of a promoter or a detractor and learning how to understand the values numerically of why and how customer relationships impact a company's financial performance. The article provides two diagrams one to briefly demonstrate the value of promoters and detractors and illustrates how a company can identify with customers who can help benefit the company as well as those who can harm the company. The factors of NPS such as word of mouth, cost to serve and annual spend, margins, retention, and average customers are key proponents of the metric tool that is used to motivate a company to become more focused on improving its products and services for customers. The second diagram, the customer grid demonstrates NPS and customer profitability for a company. The customer grid is designed to help show companies how to be strategic in analyzing each segment with samples of customers, which grid segment a company should focus on, allocation of resources, and designing ideas for each segment. Reiccheld in this article briefly demonstrates how the net-promoter score tracks how customers represent a company to their friends, associates, etc. Reichheld discusses that this consumer representation is free marketing that greatly influences business growth.
Article Evaluation After reading the article, Reichheld use of the net-promoter score can be a very influential tool for many companies. The metric tool system helps classify customers for a company by dividing them into groups of promoters, passives, or detractors. The article illustrates how the NPS measures the dollar value of customers based on customer satisfaction levels. Customer relationships are a vital part of any company's success so it is very important for companies to strategically plan to manage its interactions with its customers. The goals of any company are to find, attract, nurture and retain customers and to measure the value of customer relationships when implementing the company's strategy plan. I think Reichheld use of the NPS tool is also an effective measurement method and can force top executives and management to focus on creating profitable and happy customers. Reichheld metric tool is a very straightforward approach to rating customer satisfaction levels. However, one may question if Reichheld metric tool is the most reliable tool to use for a company. The article states that customers are only asked one question, "How likely is it that you would recommend us to a friend or colleague?" This is not the most important customer satisfaction question and it is not the only indicator for a company's growth. NPS is not based on behavior, measuring how many customers say they would be likely to recommend, rather than how many are customers are actually doing so. The question may be irrelevant in many business industries in which it will offer no validity in rating customer satisfaction. Companies with customer level information systems can readily link a customer's loyalty to key indicators at the customer level such as profits, revenues, and tenure to measure the value of committed and loyal customers.
Article Conclusion Reichheld, NPS is based on the fundamental perspective that every company's customers can be divided into three categories: promoters, passives, and detractors and by asking one simple question. Promoters and detractors exhibit dramatically different behaviors and produce dramatically different economic results for a company. The factors that distinguish detractors from promoters explain why it is so compelling for companies to increase the number of promoters and decrease the number of detractors in their business. Reichheld method tool is based on simplicity, but can be criticized that the NPS is based on a question that is too generic to be meaningful. Reichheld believes that customer surveys should evaluate the specific interaction that takes place and not the intended behavior (the recommendation to friend or colleague) after the fact.
