Net Promoter Community

Some customers never switch brands. Regardless of how badly let down they are, how poor the performance of the organization and even, in some instances, with a deep personal dislike, bordering on hatred, for the employees and management. They may reduce their consumption, but switch to a competitor? Impossible!

I’m referring to football (soccer) fans.

Let’s leave The World Cup aside for a moment (although clearly my muse today). National pride and identity is so closely tied into this event that you can’t abandon your brand without abandoning your country – that’s a pretty significant switching cost. Like it or not – and they don’t right now – the citizens of France are tied to their national team. So instead, let’s talk about club level sport.

Clearly, brand performance is not necessarily the basis for brand selection or loyalty. You wouldn’t follow Leeds United down the tables, or become a lifelong Chicago Cubs fan if superior performance of your brand was the entire basis for choice. Assuming that we get more utility from our brand winning, rather than losing, we should all behave more like those sport watchers who just woke up one morning and decided to support The Lakers, or Chelsea. But in most instances we don’t. We have huge switching costs, based on a sense of loyalty to the brand that surpasses all elements of brand performance.

Growing up in Liverpool, I wasn’t presented with a choice as to which team to support. I was told, earlier than I remember that I was a Liverpool supporter. As it happened, Liverpool was doing quite well at the time (now I’m showing my age) but that wasn’t the point. I was expected to be loyal forever, win lose or draw. This was my brand, my team.

Is there anything we can learn from this? Clearly I’m at risk of stretching beyond all logic a topical item if we try and figure out the underlying meaning of NPS from the behavior of sports fans. However, it does remind me of things we know about brand behavior. First, group behavior matters, we want to be part of a crowd. If everyone around you supports a team (which, with teams tied to geography, frequently happens) your affinity for the brand provides you with a sense of group benefits. If, like you, all your friends love their iphone, that gives you group benefits. If everyone has positive word of mouth, so much the better, but being outside the crowd is lonely even if you feel you have a superior product based on your own experience. Ask Zune fans.

And loyalty is clearly a human emotion. We are not entirely rational in our choice of brands. Logic is not the only basis of loyalty, we are human after all. Our brand memory of better days may well prompt loyalty well beyond the point where performance has long fallen off.

So, back to the TV to see if England can win The World Cup. In this instance, my positive brand memory is in black-and-white, and I hadn’t learned to walk, that’s how long ago it was.

In a recent HBR blog, McKinsey consultants Magni and Atsmon point out that in China, to paraphrase the famous maxim on politics, all word of mouth is local. They further suggest that word of mouth is a more powerful force for Chinese consumers than for their equivalent in the US or UK.

As Net Promoter Score is essentially a word of mouth measure, this intrigued us. Would NPS be more powerful in China than the west?

We know that there are cross cultural differences in NPS – we (Satmetrix) publish benchmarking if that’s important to you – but this question goes further, suggesting a higher correlation between NPS and growth in the middle kingdom.

I’d suggest the jury is still out on this one. As nations modernize, consumers tend to build higher levels of trust in brands which has the effect of reducing their reliance on word of mouth. If I show up in a new city, I don’t ask locals if the Starbucks is any good in Dallas, I just assume that the brand carries their promise. It is only when brand proliferation and choice saturates the marketplace that people refocus their efforts on recommendation.

Or at least that’s the theory. Maybe a society being thrust rapidly into 21st century consumerism with it’s local, social infrastructure still intact will never unlearn the practice of reliance of word of mouth over word of advertising.

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.

I’m really enjoying the Olympics. I’m not entirely sure why, I’m a hopeless skier and generally not what you would call an athlete, so I certainly can’t identify with the folks who take part. Maybe it’s because, as I get older, I start to appreciate just how dangerous these sports are. Freed of the invulnerability that youth confers, I’m finally sensitized to the danger of these sports. For most of the summer Olympic sports, sure, you could sprain an ankle. This year, for obvious reasons, we have a heightened awareness of the danger of sliding down snow and ice at speeds of 90mph.

And with that sensitivity comes admiration and awe.

Which I don’t share for the television coverage.

It’s not that I don’t enjoy the actual TV show here in the US. Bob, Al, Chris etc… enjoyable commentary, superior angles of coverage… it’s all good. No, my issue is TAPE DELAY as an instructive lesson in how you tax your customers and damage your long term business.

First, it’s painfully in-your-face obvious, here on the west coast, that there is tape delay. It can’t be pitch black in San Francisco and sunny in Vancouver.

Second, we expect live sports to be live. And it’s ridiculous to ask us to “avoid” the results. Heck the Wall Street Journal – yes, the Journal – carried the live news of the US/Canada hockey game last night right there on its home page. I couldn’t open up the website of a business newspaper without seeing the result. So, even on a Sunday, there is no longer the suspense of live TV.

We know why they are doing it. Moving coverage to “prime time” which is, inconveniently, not the time that the sporting events occur, helps sell advertising. Except that it has the completely opposite effect in the long run – converting people to the real existential threat for advertising paid television – TIVO. If I can’t watch it live, I might as well TIVO it, so I can skip the commercials. And now I’m mad that I didn’t get the chance to enjoy the suspense of seeing if Bodie could actually win the gold on the slalom leg.

I’m a promoter of the Olympics, a detractor of the network strategy and bearish on the long term business model that drives customers away from live sports – the only remaining defensible segment of the advertising driven television market.

What’s in the water in Detroit these days? First you see GM teaming up with eBay – a deal that has the potential to finally shake up the buyer experience in the auto industry, and now they are talking about "money back guarantees". They must be crazy.

It’s logical that a "near brush with death", like GM’s bankruptcy, should create an unfreezing of business practices. Yet somehow, many people never quite expected even this kind of disruption to force change in the industry. What GM is doing, if it succeeds, is re-writing the rules for the automobile industry and they, as the company with nothing to lose, is in the perfect position to do so.

So what do you do if you believe you have a competitive product, but a legacy problem with detractors? Word of mouth is negative, net promoter scores low, and the competition has built a considerable advantage over the years playing the game by the old set of rules.

Obviously, we would recommend building an “army of promoters” as a long term strategy for growth, but what if you don’t have until "the long term?" Answer: change the rules by which your competitors won the previous round. Provide an insurance policy that encourages trial and, assuming trial is successful; you have a potential mitigating strategy for your brand shortcomings. Clever.

Of course, look at this from another angle. A guarantee costs money, even if just a small percentage of buyers take GM up on their offer. And that cost can be viewed as a cost of brand weakness, a tax on a low NPS. It may turn out that as other companies consider matching the offer, post sales costs become another source of competitive cost advantage for NPS leaders. I would suspect it’s already the case to some degree.

In the meantime, those costs make good sense for GM, as does turning the buying experience on its head using eBay. You never know, the next big disruptive move might be to change the notion of customer loyalty and how it is measured.

If the market doesn’t punish you for bad profits, Uncle Sam might.

Wall Street is scrambling to understand the financial implications of the Obama administrations new policies towards credit card companies. Reading the definition of revenue sources that will be restricted in the future, it reads awfully like a list of classic bad profits. According to the Wall Street Journal (subscription required), the credit card companies most affected are those who rely on “… portfolios that are skewed toward late-payment fees, over-limit fees and penalty repricing”. Yup. Sounds like bad profits to me. Sounds like they are getting what was coming to them.

But hold on.

If this practice was so bad, why did the market not simply take care of the issue? The argument for government involvement is usually around market failure; why did the armies of detractors of these credit card companies not bring them to their knees? Faced with such disaster, wouldn’t the executive leadership eliminate this scourge of their business?

From our studies in the credit card space, we do know that these practices create detractors, churn and low profits. One plausible explanation of the industry failure to self-address, is the absence of players who have chosen to capitalize on an alternative competitive strategy. In the airline industry, one airline charges for bags and another instantly responds with advertising that it is “bag charge free”. This has not happened to the same degree with credit cards (although I would welcome examples to the contrary). It’s plausible that the segment of customers who are being hit with these bad profits are either so unattractive that the high NPS players don’t want them, or they self select bad profit providers through lack of financial understanding (hence the argument for regulation around opaque rules by the issuer).

At a more macro level, the response to Blockbuster Video’s “late fees” was the creation of Netflix. If existing competitors don’t want to eliminate bad profits, sooner or later new entrants will. It would be ironic if the US government’s efforts to eliminate bad profits simply displaced new entrants into the market.

You may have missed it, but advertising just died. At least, some very credible sources have pronounced the industry dead. And this, as you can imagine, has a lot of people upset.

It's no surprise that in a recession companies are cutting their ad budgets. It's a variable cost so easy to target quickly. If your growth plans just flat-lined (flat IS the new up) then your marketing communication budgets just went the same way. But that's business as usual. The real news is the argument that this is more than just a cyclical change in the business, this is an existential issue. According to some, advertising just doesn't work anymore.

It's widely accepted that advertising is changing format. Internet and search advertising has been eating away at more traditional media for some time. Newspapers are essentially (and practically) going out of business - witness the Hearst group shutting down the Seattle Post-Intelligencer or the Sun-Times Media group filing for bankruptcy. Bob Garfield from Advertising Age (hardly a magazine with no stake in the current model) makes a strong argument for the transformation of the industry.

The conclusions he draws:

Newspapers: dead
Magazines: dead

“Chicken Little, don your hardhat. Nudged by recession, doom has arrived”

Even if Bob does a great job articulating the transformation it's not off the scale on the controversy-o-meter. You could almost argue that this view of transformation has become conventional wisdom. But this month, there were worse prognostications to come.

Prof. Eric Clemons from Wharton really put the cat amongst the pigeons when he made the case for extinction, not transformation.

“The problem is not the medium, the problem is the message, and the fact that it is not trusted, not wanted, and not needed,”

Basically, Eric makes the argument that arguing that this is a transformation in delivery is not the point. The point is that nobody wants the package, and nobody is paying attention any more. Of course, this change doesn't happen overnight. Amazon took years to kill the retail book industry; online sales didn't polish off Circuit City for a decade. But once the change is set in motion, there isn't a lot anyone can do to stop it. Inertia in business, entrenched skills and practices all contribute to change being slower than pure business logic might dictate but this is a bandwagon that is gathering steam. The Economist piles on:

“…every business needs revenues—and advertising, it transpires, is not going to provide enough”

in reference to the new dot-com businesses hoping to monetize eyeballs for riches. Eric even goes so far as to disrespect the mighty search engine, describing search engine advertising as "misdirection". Heresy! You mean that search engine optimization is an industry with no future? Search has been the one big success story in internet advertising - really the only business to make any money.

If advertising is getting less and less effective, companies will be forced to face a reality. Not a new reality, but one that has been neatly - if rather inefficiently - bypassed by resorting to comfortable historical choices. Advertising's decline in efficiency drives the relative efficiency of word of mouth, already a source of major advantage for leading firms significantly higher.

We already knew this. Companies like Amazon, Zappos and Starbucks - even Google ironically - grew primarily through word of mouth. Stories of meteoric internet success were usually stories of word of mouth, not examples of companies propelling themselves to success though superbowl advertising (the inverse was usually true). But the status quo persisted. It's easy to point to change aversion, career skills protection as the root cause. But the real change of course was the internet finally giving voice to customers as both an accelerant to great businesses and a compelling alternative to company brand messaging. You no longer own your brand. Your customers own your brand and they are exercising their ownership in full view.

Now some interesting outcomes connect NPS with firms’ word of mouth efforts. NPS really represents word of mouth capacity.

Capacity (economics), the point of production at which a firm or industry's average (or "per-unit") costs begin to rise, usually because some factor is fixed (often capital or land).

Exceed your word of mouth capacity as a business, and your growth needs to be driven by less efficient models - mainly advertising. It's hard to quantify this effect, but the extremes are easy to understand. A business with an NPS of zero has zero word of mouth capacity. The only way it can generate demand is through traditional advertising methods - that represents a very significant P&L disadvantage relative to competitors in its industry with higher NPS. We know that loyalty leaders - in a specific industry - have lower costs and this is one of the sources of that competitive advantage. A company with an NPS of 70% has such a significant capacity that - if they can mobilize it - they won't need advertising at all. Hence, Amazon.

But relative advantage in an industry is not the entire story. We know that some industries are characterized by low NPS - even amongst the best firms. Industries with low NPS winners are likely to be at a profitability disadvantage relative to firms who are competing in industries with high NPS. We would expect high margin industries to have high NPS on average.

There is also a strong argument to be made that higher nominal NPS has a disproportionate effect on word of mouth and demand generation efficiency. In other words, efficiency is not a linear progression as NPS rises. This fits with our intuitive sense of hyper growth associated with NPS leaders.

What drives this nonlinearity? One factor seems to be that promoters in high NPS companies seem to actually advocate for that brand more than promoters in low NPS companies. Vince Nowinski has some data to support this; check out his whitepaper. Why might that be the case? In part it could be social - people enjoy promoting products amongst other positive promoters. The opposite effect could hold true. If you had a great experience with a firm, but everyone around you is negative, you may choose not to advocate, as your sense of personal risk has just gone up. If misery loves company, apparently advocacy does as well.

Oh and remember that traditional advertising industry? Well, it turns out that the efficiency of traditional advertising may, in fact, be tied to NPS. High NPS companies actually get a lift because their advertising message is more likely to be received by promoters, of whom there are more. Once again, this makes intuitive sense. If you are positively predisposed to a brand, you are more likely to be receptive to that brand's message.

Will firms embrace this shift? Necessity is the mother of invention. Either firms evolve, or new entrants will finish them off with a superior, high NPS business model. There seems a lot of that going around right now.

It’s often the conclusion amongst product companies – and Silicon Valley companies doubly so – that Net Promoter is a soft science that engineers don’t align with. So it was pretty interesting to see Logitech use NPS as a significant part of their product development and improvement culture. Take heed product – centric companies, these guys know how to make this work.

Logitech is the $2+bn company whose products are right in front of you every day. I’m typing on a Logitech keyboard but it was the mouse that roared for Logitech – they dominate the computer mouse market and split hairs around segmentation. I counted 30 mice on their website alone, and that doesn’t include OEM product. Perhaps less well known are their totally cool products around home audio and video under the Harmony and Squeezebox brands – of which my home is littered. A strategy of selective technology acquisition has broadened the product line and reach of the company and, notwithstanding the recent bumps we are all feeling – has resulted in a story of near unmitigated success.

From an NPS standpoint, two approaches stood out for me. First, they look at product line NPS and can stack rank the performance of their products. This has the benefit, especially in the mouse line, of being able to quickly identify which products are gaining market acceptance and which are not connecting with customers (excuse the subtle pun). Engineers and product managers responsible for lower performing products move quickly to identify root cause, but the ultimate action might be to cut the product completely.

The second innovation for them was the creation of a customer experience gate through which any new product release must pass. Before any product goes out to market the customer experience team must sign off on it, with prior NPS root cause data as a good basis for predicting its acceptance. And of course, they have blocked product from launch in the past as a proof point that they take the process seriously.

Seeing products through a promoter creation lens helps engineers think differently about creating the best possible overall experience. The company has invested in software technology for their webcam products as they realized that, to create a great webcam experience, you needed to have more than just a good hardware device. Logitech has learnt those lessons quicker than most now they are in close dialog with their customers.