Net Promoter Economics
Net Promoter Economics
Promoters and detractors exhibit dramatically different behaviors and produce dramatically different economic results. The value of a promoter or a detractor can be quantified. Given the vital role of word-of-mouth, indeed, it must be quantified. Several factors (noted below chart) distinguish detractors and promoters - and why companies need to increase the number of promoters and decrease the number of detractors. In the case of Dell, while securities- analyst estimates indicate that the average consumer is worth $210, in fact a detractor costs the company $57 while a promoter generates $328. Overall, they found that promoters were worth $118 more than an average customer, or $328 (see chart).
Quantifying the Value of Promoters and Detractors: Dell Case Study
Source: The Ultimate Question: Driving Good Profits and True Growth by Fred Reichheld
Retention Rate: Detractors generally defect at higher rates than promoters, which means that they have shorter and less profitable relationships with a company.
Margins: Promoters are usually less price-sensitive than other customers because they believe they are getting good value overall from the company. The opposite is true for detractors: they're more price-sensitive.
Annual Spend: Promoters increase their purchases more rapidly than detractors. The reason is that they tend to consolidate more of their category purchases with their favorite supplier. Promoters' interest in new product offerings and brand extensions far exceeds that of detractors or passives.
Cost Efficiencies: Detractors complain more frequently, thereby consuming customer-service resources. Some companies also find that credit losses are higher for detractors. (Perhaps that is how the detractors extract revenge.) Customer-acquisition costs are also lower for promoters, due to the longer duration of their relationships and to their role in generating referrals.
Word-of-Mouth: Quantify the proportion of new customers who selected your firm because of reputation or referral. The lifetime value of these new customers, including any savings in sales or marketing expense, should be allocated to promoters. (Between 80 and 90% of positive referrals come from promoters. Detractors, meanwhile, are responsible for 80 to 90% of the negative word-of-mouth, and the cost of this drag on growth should be allocated to them).
Note: For more information on the above noted factors and calculations, read Chapter 3 of Fred Reichheld's The Ultimate Question: Driving Good Profits and True Growth. For information on calculating the lifetime value of your average customer, see Chapter 2 of Fred Reichheld's The Loyalty Effect.
