“I’m bad to the bone”
George Thorogood

Investing your entire 401k in Enron stock.

Marketing Las Vegas as a “family friendly” destination.

Microsoft Bob.

Amongst the worst business ideas ever, customer experience zealots add “dependence on bad profits”. For the Net Promoterati, the label of “bad profits” is wielded like a medieval mob scene accusing an unpopular villager of witchcraft. It’s time to break out the pitchforks and torches.

I’m here to tell you it’s all wrong. Leave bad profits alone. What did they ever do to you? (Except reduce your NPS, of course.)

The latest assault on bad profits is from the UK government. Say what you want about murderers or perpetrators of mayhem, the British media hath no fury like a consumer wronged. It is thus that the BBC gleefully informed me that the government is working to stamp out the practice of charging fees that are “in excess”. Consumer groups welcomed the news. “Drip pricing” is going to be regulated. No, we are not charging for drips, it’s the unconscionable practice of revealing more and more incremental pricing as you go through the purchasing transaction. (for a humorous, but rude take on this, see the following Fascinating Aida video).

What’s next? Regulating the shipping and handling when you get “free” additional Shamwow products?   Overdraft fees. Interest rates that you might think come with a broken kneecap clause. Exorbitant roaming fees if you use your mobile phone while overseas. The government needs to step in and put an end to it now! Any government, please. 

My fists turn white with rage. Well, at least I’m mildly upset. I welcome bad profits. We need them to create opportunity and differential performance: your bad profits are someone else’s large, untapped customer base. 

Of course, I’m not in favor of deceptive practices. Forcing transparency is a legitimate role for regulators and nobody would condone dishonesty. But think for a second where “bad profit regulation” leads us.  

Take airline fees for bag check-in. Ban them. It might cost the airline $10 to fly your bags from San Francisco to New York. That might even turn out to be the flight you are on (no extra fee, yet). If they choose to charge you $50 it’s time to call in the Feds. Or MI6 perhaps. Surely airlines should only make profits from selling seats on the plane! Overpriced drinks and airplane internet services look pretty profitable also, why are they not free with the flight? Time to force airlines to adopt single-dimension pricing strategies. Then we can get after the banks, no way we should have to pay overdraft fees. Or at least, they should be something more reasonable – after all, providing an overdraft is not really a business good is it? Not like, say, buying virtual livestock on Farmville. Which should also be free, or at virtual cost, while we are at it. 

I hope the problem is obvious. What constitutes fees, bundled versus unbundled products and services, “unfair pricing” – what’s fair margin on a Gucci handbag? – all these aspects of good and bad profits need to be resolved by the market, not by regulation. Sure, force disclosure. Ensure costs are not hidden from the customer. But then let customers decide. 

Bad profits are a massive source of innovation and entrepreneurial activity. Netflix built a business due to Blockbuster’s overdependence on late fees. Southwest Airlines relies on “bags fly free” as a differential pricing strategy. Skype persuaded us that almost any profits on phone calls would prove to be bad. 

If you don’t like the particular flavor of profits you generate for a business, take your business somewhere else. It’s quite possible that others don’t share your priorities and feel that it’s a reasonable way to make money for shareholders and deliver value to customers. The market will decide and, if those profits really are “bad”, you can bet the next Scott Hastings will be building a company to capitalize on them.

"Reality is that which, when you stop believing in it, doesn't go away."- Philip K. Dick

Economists have micro economics and macro economics. Net Promoter leaders have micro NPS process and macro NPS process.

Micro processes, or operational processes are all about closing the loop, activating promoters – they are focused on the individual, customer or business. It’s customer experience improvement based on the “don’t just stand there, do something” school of management – and it works. To an extent.

You see, customers love companies that show commitment. Remember the old adage that a well executed service recovery actually improves the customer perception of your business? Well, it works to the extent that customers don’t get exhausted by a company constantly executing flawless recovery of errors that shouldn’t have happened in the first place. After a while, they just want to see the “Maytag repair man” strategy (the guy who has no real job to do because apparently the hardware never breaks) and not the “we try harder” approach. They want Yoda – “do, or do not… there is no try.”

Companies that focus entirely on tactical closed loop execution for detractor recovery risk making the same error in judgment that the lookout on the HMS Titanic made when he bragged “just wait until you see the turning circle on this baby at full speed”. Tactical execution just isn’t enough.

So companies need to figure out the macro process; how to identify the major shifts in their business that will be required in order to generate high levels of promoters. They need analytics, they need insight and they need data. They need root cause.

It’s a common misconception that NPS philosophy is deeply ambivalent around the issue of data analysis and diagnostics. While there are some  - very few in my experience – companies who never go beyond asking one or two questions of their customers, the vast majority of NPS practitioners develop techniques for mining diagnostic information in one way or another. These tools range from the traditional - a few insightful diagnostic questions embedded in a survey, to the absurd - dozens of complex questions that look more like a college entry exam, to the edgy - data mining of social media data to determine trends and meaning.

As a technology company we have our own preferred techniques of course, and we think you can get quite a lot for quite a little (burden on your customers). But the big point here is that you need to understand what you will do to change the existing dynamic of your business. And there is an art to this; attitudinal data doesn't lend itself to easy interpretation as, say, financial data sometimes does. It feels closer to "reading the tealeaves" rather than analyzing data and goes some way to explaining why there is a market research industry in the first place.

I must have witnessed over 100 strategy sessions around action planning. The only observation I can make with certainty is this: any strategic insight with a sporting chance of changing your enterprise is better than relying entirely on closed loop, or micro NPS techniques exclusively. You really need to know if there are "Detractors, Dead Ahead!"

You never get a second chance to make a first impression. If you are in the hospitality business, you might think that the first impression is at reception. Or perhaps you consider the visual impact of the hotel entrance as a starting point.

But in many instances, and to your eternal shame, it’s the shuttle bus.

For airport hotels, the shuttle bus is the transition from the tender mercies of the airport/carrier system into the care of the hotel. The airport doesn’t run the shuttle bus, the hotel does. And yet, the experience is so incredibly varied for such a simple idea. You just need to get me the last mile (or perhaps a couple) in safety, comfort and yes, a reasonable timeframe. Doesn’t seem too much to ask, does it?

Airport hotel customers are professionals. Think George Clooney in Up In the Air. They have high airline status so they can check in quickly. They fold their clothes with military precision so they can pack for a week’s travel and 3 climates in a rolling-cabin-case, all to save a few minutes in baggage claim (or a few hours depending on your luck). They are Hertz #1 club members. In short, they have business travel down to a fine art, all with the goal of minimizing down time. They don’t plan on spending more time getting from the terminal to the hotel than it took to get from New York to Atlanta.

Enter the hotel shuttle bus…but I’m getting ahead of myself. First, we need to think about airport hotels.

The whole point of the airport hotel is to provide quick and easy access to and from the airport. We’re not staying there for the luxury or breakfast-buffet options. If marketed as an “Airport Hotel” we may reasonably expect it to have fairly close proximity to the airport. Look – I can see it from the airport exit! Even better, from the runway as we taxi! It’s THAT close, I can almost touch it!

However, two universal rules always seem to apply to airport hotels.

1. However physically close, there must be no practical way of walking to the hotel. And if this rule is shamefully broken, there must be no smooth path to enable rolling luggage. Even Sherpa Tensing would give up on traversing the freeway/parking lots/swamp/minefield (mountain?!) that lies between the airport and the airport hotels.
2. To get there, you must take the shuttle bus. The local cab drivers, even if willing to break the rules and take such a short fare – “I waited 20 minutes to get to the front of the taxi rank – for THIS?” – must be coerced into refusing the journey. Some system of collusive rules must conspire to prevent any other option.

So that leaves us with the bus. Shuttle bus schedules operate in a system that has been modelled by operational research experts. The colder the outside temperature, the less frequent the cycle. Apparently, buses must slow down with cold weather. This ensures you only wait a long time when it’s too cold to wait a short time.

The routes are cleverly designed so that the bus will make multiple hotel stops and – here’s the sophisticated bit – will always reach your hotel last. This is designed to present you with all the alternative forms of accommodation that you declined because it was too expensive for your travel policy. I can now perform flash-card recognition of every entrance to Chicago O’Hare hotels in less than 15 seconds.

The bus must be driven either very slowly, à la Mr Magoo, or in the style of Mario Andretti, presumably to make up the time you spent waiting for the bus in the first place. There will be no seatbelts.

You probably have your own favorites. Mine is the “Hotel Hopper” system. Devised for London Heathrow Airport hotels, the transportation officer responsible has obviously never set foot in an airport, on a plane – let alone a bus! Is this the same Brit who, 100 years earlier, divided India from Pakistan without having been to India?

In a transport system that can whisk you to central London in 15 minutes on the Express train, it can take 45 minutes to reach a hotel visible from the runway. And you pay for the privilege because the buses seem to be run by the same people who offer double-decker bus tours of the city. Apparently, visiting 10 other hotels en route is worth a few quid.

Why should you care? If you run one of these hotels, your customer arrives cranky and frustrated. That’s the first customer experience they have of your brand. Aren’t you missing an opportunity?

"The Americans have need of the telephone, but we do not. We have plenty of messenger boys,"

Sir William Henry Preece (1834-1913)*

You will not have seen these last two predicitions anywhere else…or, at least, I predict that you haven’t!

5. Rethinking Customer Rankings: Big Brother has a Product Endorsement for you!

Customer rankings may have been pioneered by the likes of Amazon, but they have become pretty mainstream. Entire sites (think Tripadvisor) have built their business around the notion of an open pulpit for customers to opine on products, services, hotels - you name it. And it’s valuable stuff. You can’t help but be drawn to the advocacy – or lack thereof – that comes attached. We have learned to live with the natural limitations of the medium – significant sample bias for example – because it’s just so authentic, and we do love a strongly argued opinion. On just about anything.

Right now, you can read 101 customer reviews on Amazon of a PNY 1GB SODIMM Memory Module; yes, an add on memory chip for your computer. You would think this would be a pretty binary post; it either works or doesn’t. But you would be very wrong. There is alot to comment on (and most of it very positive, by the way).

But the novelty can wear off? How useful is this information?

When it comes to matters of personal preference, not very. Take hotels for example; a popular hotel depends a lot on your budget and definition of “luxury”. To some, a cheap clean budget hotel is going to be #1, for others it’s nothing short of the Ritz Carlton that will do. Both customers could be right, but both could be wrong in the context of what makes the best choice for me.

What we need is published customer feedback in the context of our own personal tastes, and the good news – if you can call it that – is that we are furiously populating the web with information about our personal tastes. Social media sites already have enough information about our tastes and friends to be able to filter details about products and services and provide us with a customer ranking from people just like us. Or at least what we declare to Facebook is “just like us”. Expect highly personalized guidance on purchasing as commerce guidance, based on customer reference, has the potential to replace significant advertising resources on the web.

6. As Economies start to Recover, Business will risk Forgetting the Lessons of Customer Loyalty in a Recession.

Tough times have a habit of getting you to focus on basics. If customer acquisition is hard, companies naturally focus on customer retention. Does that mean that, with economic recovery a possibility, acquisition will become easier? If it does, will we stop worrying about retention?

At a macro level, it seems unlikely that we will return to the “go-go” acquisition years of the 90s (the Chinese market being an exception). But for many individual firms, a strong rebound in business is likely to take management’s eye off the retention ball. Loyalty is a longer term leading indicator; if short term business is good, it’s human nature to shorten horizons. At the level of an individual company, customer loyalty has a habit of becoming counter-cyclical with the economy.

On the other hand, we are experiencing a generation of managers who lived through “the great recession”. There is every reason for them to remember the lessons learned; to use better economic circumstances to build a solid foundation for good profits. An improving economy is exactly the time to create loyal customers.

Best of luck with your Customer Experience Program in 2011!

* Sir William Henry Preece (1834-1913) was a Welsh electrical engineer and inventor. Preece was an empiricist, relying on experiments and physical reasoning in his life’s work.Upon his retirement from the British Post Office in 1899, he was made a Knight Commander of the Order of the Bath (KCB).

“It would appear that we have reached the limits of what it is possible to achieve with computer technology, although one should be careful with such statements, as they tend to sound pretty silly in 5 years”
John Von Neumann (1903 – 1957)*

‘Tis the season to be making predictions, and I’m not going to miss out on the annual opportunity to be proven wrong and demonstrate the world’s unpredictability. As smarter people than I have already made most of the well thought-through predictions, I’m going to try a different tack; my challenge is to come up with predictions you have not already thought of, or at least not heard somewhere else. This of course, increases the probability that they are simply wrong. Anyway, there are seven of them… as always your feedback is welcome! Here are the first 2...'

#1 Net Promoter Fusion

This is a trend that I believe is set to accelerate in 2011. It seems too self serving to simply say that Net Promoter will continue to gain adoption in 2011 (which it will) so perhaps a more interesting observation might be that it won’t be as distinctly “Net Promoter” as it was in the past. I believe that more companies will claim to be adopting Net Promoter, but when we look at their programs they may have little in common with prior years. This is not your father’s Net Promoter.

This is in part because NPS has always been a big tent. Beyond the standard calculation, and the notion of promoters, passives and detractors, there isn’t much else that is absolutely “standard”. Lots of companies run their Net Promoter programs with lengthy questionnaires that look more like traditional programs; adopt focus groups in support of their understanding of loyalty and otherwise do stuff that they have been doing for years without the benefit of the moniker.

On the other hand, some of our favorite staples of Net Promoter Discipline are well practiced in programs that don’t care about NPS. Closed loop action planning, verbatim analysis, widespread distribution of data to front line employees etc. can still be executed with the most arcane and compounded set of loyalty metrics.

During 2011, companies who claim to focus on NPS may find themselves with more in common with those who don’t, than with those who claim a similar methodological choice. So what? Well, it’s a timely reminder that companies are wise to stay clear of perceived methodological purity solely in the name of a flavor of customer loyalty program. Get the basic principles established and stay true to them, but don’t be worried about being wedded to chapter and verse.

#2 The Social Media Sandbox

The majority of industry pundits point to the inevitability of social media as a lynchpin of your customer experience program. And certainly there are lots of firms willing to sell you solutions – many quite useful – to the “opportunity” presented by twitter, facebook and their ilk. But in 2011, significant corporations will continue to treat social media as a sandbox; an opportunity to experiment and learn in an (ideally) fairly safe environment. In short, we will make less progress than we imagine.

The hypothesis that social media is primetime for customer experience has lots of supporters and few willing to disagree. If you are selling solutions, your incentive to push the idea as mainstream is obvious, but lots of companies desire the publicity from being on the cutting edge – or at least making sure they are not seen as social media luddites. So a stream of exciting ideas and case studies is virtually guaranteed. Don’t read that as an indication that the kinks are worked out.

We can expect a few, well publicized examples of major brands engaged in sharp swerves, if not u-turns, based on micro-communities of vocal social media users. These groups are now quite powerful relative to their size and, once empowered, are hard to ignore. Only time will tell if the choices companies make will be the right ones. We can also expect companies to experiment with social media favoritism: you might get a more rapid response to a problem by tweeting than calling the established 1-800 number. The consequences of such service bias are hard to estimate. 15 years of call avoidance efforts around use of the internet might look silly if we just found a new route for creating calls, and many firms will be hoping that their customers don’t catch on to the notion that going through the support operation is less effective than micro-blogging your unhappiness.

What is a well intentioned customer experience leader to do? By all means join the experiment, try a few simple ideas and see what you learn. But it’s pretty tempting to let others do the heavy lifting and make the mistakes. 2011 might be a year to watch and learn.

* John von Neumann (1903 – 1957) was a Hungarian-born American mathematician who made major contributions to a vast range of fields, including set theory, functional analysis, quantum mechanics, ergodic theory, continuous geometry, economics and game theory, computer science, numerical analysis, and statistics, as well as many other mathematical fields. He is generally regarded as one of the greatest mathematicians in modern history.

If you, like me, track companies who publish their NPS you probably are developing an inferiority complex about now. Every day I log in to a constant stream of announcements about companies posting 50, 60, even 90% NPS. Precious few of these fall in the camp of public companies who are informing the street - the majority of comments seem to come from either smaller companies, or large companies through "unofficial" channels.

Oh, and there are fair number of "benchmarks" and "awards" starting to come out from companies who sell services into the NPS space. After all, nothing picks up search engine hits better than "Large Company X gets our award for the highest NPS of 70% in their industry!" Corporate PR departments are not in a rush to disclaim such announcements, and these scorecard publishers are wisely more careful about publishing the bottom rung of their study.

So there you are, running your NPS program and sweating to create a 20% NPS. Your boss now wants to know why everyone else is at 50. You must be doing something seriously wrong! Or maybe not.

We like to think we know a thing or two about NPS scores. With apologies for the risk of hubris, we don't see the evidence, at a market level that these very high numbers are typical, nor do we see the anecdotal evidence amongst the large numbers of companies we discuss NPS with each year. So what gives?

Pants on Fire!

It's generally thought that Charles Wentworth Dike, who died in 1911, coined the term "lies, damned lies, and statistics" as a practice of using statistics to bolster a weak argument. However, I would argue this is an unlikely explanation and we should start with giving the benefit of the doubt to these publishers. Deliberate misrepresentation of data seems pretty rare.

Adverse Samples

It's quite possible that the companies publishing their NPS do not represent a good sample of the overall population. This topic is rich with irony; one of the classic tenants of NPS is that it should avoid heroic extrapolation from small data (especially in B2B) and act in favor of census. It's very plausible that only companies with very high NPS would seek to publish them. Of course, this risks looking silly, or at the least disingenuous should those scores decline and you - ahem - forget to update your readers. But this theory does hold water as long as you have a good sense of what is good in your own industry. The PR value of a 15% score in the cable television industry might actually be lost on the public at large but be relatively better than a 60% NPS in the luxury hospitality game. All these factors create upwards bias.

Equally, it's possible that the publishing of data is more likely by small, private companies rather than large public firms. Publically traded companies always worry more about lawsuits and the defensibility of their claims, so perhaps that's it. Or maybe, just maybe, a lot of small nimble companies tend to have higher NPS after all!

Getting the math wrong

We see enough sophisticated, large companies get the math wrong to suggest that any published score has no better than a 50/50 chance of being correct (meaning an accurate representation of the business) in any case. Sure, there are the eye-popping errors (0-11 scale, multi $bn publically traded firm) but the more likely error is around sampling or segmentation introducing bias into their numbers. It's hard to get a trustworthy data set, as you probably already know. Small error? Not necessarily, our benchmark data can differ by 20% or more from publically reported numbers of the same firm. Of course, our benchmark has built in errors also for absolute score reports.

Of course, you could ignore all the noise. My advice: focus on improving your own score. If you really want a comparison point, organize a comprehensive benchmarking study and draw your own conclusions.

[Editor's note: Download Satmetrix White Paper on Creating a Sampling Strategy for your Business]

Obviously not, or we wouldn't be asking...

The MIT Sloan Management Review poses this question and at first glance you would assume that this is a leading question. After all, “yes” makes for a short article.

However, the question raised reminds us of the reasons that most companies employ Net Promoter and why it creates change. Let’s start with the five questions posed by the article:

1. Can middle managers accurately describe your customer promise?
2. Can all members of your senior executive team name the three things that most undermine trust among your existing customers?
3. Is your brand really the best option for customers? Will it continue to be next month and next year?
4. Have you embraced any novel ideas that have produced significant innovations beyond the
   familiar during the past year?
5. Have front-line staff posed any uncomfortable questions or suggested any important improvements to your offering during the last three months?

Net Promoter is not a silver bullet to address these issues, but it does take a step forward towards several of them. For example, if a classic failing of companies is the inability of senior management to identify the top three things that undermine trust, you would expect any decent NPS root cause review with senior management to call out those three items. In terms of brand fit, the more interesting question relies on a segmentation model: for which of our customers IS our brand the best option and for which group ISN’T it? As you segment your NPS by behavioral or other segmentation criteria, again, the relative NPS between segments should be a strong lead as to where your brand is the best option.

But the question around front line staff is clearly where Net Promoter shines. Anecdotal voice of the customer information and closed loop processes serve to both engage the front line (they are part of coming up with solution and hence “important improvements”) and act as “aircover” for taking customer issues up the organizational chain.

So Net Promoter, through engagement with both senior management and front line employees, works hard to address the two information gaps that characterize the idea behind the information failure that’s at the heart of the article. A timely reminder of the right focus of your program.

Let’s say you have the absolutely best product on the market. You out-innovate your competitors and have dominant market share. Things are pretty good: your customers love you, you have the best Net Promoter Score in the industry and you are making amazing profits.

Competition ensues. Extraordinary profits are a signal to the capitalist economy; picture the scene in “Finding Nemo” where the seagulls all start shouting “Mine!” The profit pool is deep, come dive in the water is lovely. Sooner or later, the profit pool gets eroded; either someone out-innovates you or the availability of close substitutes reduces prices and profits. It’s hard to keep the party going.

Unless.

Switching costs are the enterprise’s solution to the long term seeming inevitability of eroded profitability. If you can create significant costs for your customers to defect, you delay the inevitable. It’s the fountain of youth for corporate profits. Wireless contracts, pharma patents, up-front capital expenses – all great switching cost strategies that defend profits beyond their sell-by date. All legal, and all smart business practice.

From a customer perspective, the benefits are less clear. Companies that enjoy significant switching costs typically also demonstrate lower Net Promoter Scores. Of course! You now have reduced incentives to innovate and take care of your customers. Comparative NPS rules the outcome and all of a sudden you have a leg up when it comes to customers making a real comparison. I may not like my current provider as much as new entrants, but with the hassle and costs of switching they may keep my business.

Although it’s not part of a plan, companies with higher switching costs almost inevitably end up with lower NPS, and firms who are subject to brutal competition are more likely to fight to raise their scores (or just concede market share). And all companies are trying to create switching costs.

The Apple/Adobe spat in the news is, at one level, a simple business conflict. Adobe benefits from standardized tools that run their popular flash technology on all kinds of devices. Apple benefits from creating differentiation around those devices. These two perspectives inevitably lead to competition. The question is, how does this game play out for their customers?

A lot hangs on Apple’s ability to execute their strategy of being best when they go it alone. Nobody else in the industry has been quite as  good,  quite as innovative, at creating products that allow their customers to remain loyal despite switching costs. Once you have your itunes library, your iphone, your Mac, your switching costs are significant but your vendor has not, yet, exploited them – to the contrary, they have rewarded your loyalty with innovation. But the conflict with Adobe seems to take this strategy to the next level. Developers are being told to choose sides – which they hate to do – and Apple customers may face less choices and higher switching costs as a result.

Apple will be successful in creating switching costs, they have done so for some time. They are comfortable going it alone. But the pressure will only get more significant if competitors can create promoters using popular technologies such as flash. The table stakes just shot up.

Read also Josh Bernoff’s take on this at Advertising Age. Or, for an alternative, a view I don’t subscribe to from Simon Dumenco in the same publication.