Reichheld, Fred

Fred Reichheld
Fred Reichheld is a Director Emeritus of Bain & Company, and in January 1999 was elected the firm’s first Bain Fellow. His consulting work and research have focused on helping clients achieve superior results through improvements in customer, employee, and partner loyalty. In the June 2003 edition of Consulting magazine, Mr. Reichheld was included on the list of the world’s top twenty-five consultants.

Mr. Reichheld’s work has been widely covered in the Wall Street Journal, New York Times, Fortune, BusinessWeek, and the Economist. The Economist refers to him as the “high priest” of loyalty, and the New York Times states that he “put loyalty economics on the map.” He is the author of eight Harvard Business Review articles on the subject, and his two previous books are The Loyalty Effect (1996) and Loyalty Rules (2001). His most recent book, The Ultimate Question, was published in March, 2006.

Ultimate Question book cover asks ...

Your new book is called The Ultimate Question: Driving Good Profits and True Growth. The obvious question is what is "the ultimate question"?

FR: "The ultimate question" is the one question you can ask your customers that will help you understand whether you've delivered great service and great value, whether the profits you're earning are good profits.

So what's the question?

FR: The question itself is really simple. "How likely is it you would recommend us to a friend?" Because you wouldn't recommend a product or service enthusiastically to a friend unless it not only provided great value and great service, but you're also confident that you can trust that company to live up to the Golden Rule standard of behavior.

That begs the question, why is this news?

FR: I have to take a step back. Why is it news? Because despite everyone giving lip service to the importance of customer service, and good value in being customer centric, the truth is much of the world doesn't work that way. I think there's a fundamental flaw in how we measure our success in business today. The problem that I saw was that accounting might be the only metric of success that has any real credibility, at least with investors and senior executives. Yet the accounting rules can't tell the difference between good profits and bad profits.

What do you mean by bad profit?

FR: Bad profits are the profits that are earned by a business that are completely legitimate according to generally accepted accounting principles (GAAP), yet they flout the Golden Rule. They destroy the growth of a business because they alienate customers and employees. Bad profits are the result of the dirty tricks that either mislead, coerce, dupe, or disrespect customers, thereby turning those customers into detractors.

A good example of bad profits: the crazy price that hotels charge for using the phone in the room, or the absurdly high prices that car rental companies charge you for gasoline to refill the tank if you return the car without having filled it yourself. They're everywhere.

A lot of people think that it's just this or that industry. It's just my cell phone company charging me 3 dollars for directory assistance when it should cost 35 cents. Well, it’s just my bank who abuses my trust with nuisance fees. No—bad profits are pervasive. And they have not only destroyed growth; they’ve destroyed company reputations, and the reputation of business in society.

I remember working on launching the website at a hotel. This was in '99, and there was a webcast going on. For some reason, I had to call back to Boston to get online. And then I forgot that I was connected. I made a long distance phone call to Boston for close to four hours and I ended up getting about a 400 dollar phone bill.

FR: Oh, I can top that. I was in London and called my wife for 45 minutes, and it was a 500 dollar phone bill.

I was apoplectic. I went down to the front desk and I said, "Are you crazy? Are you out of your mind?" Just the initial act of raising my voice, I wasn't getting too nuts yet, I wasn't throwing telephones, but just like that, they cut it in half.

FR: Because the staff knows it's wrong.

Exactly. It was so pitiful. Everybody involved in that transaction had to feel rotten. If it was so simple for this guy to cut the bill in half ...

FR: You said the word and he knew it was bad. It was inconsistent with Golden Rule ethical behavior. When they do something like this, which they do all the time, companies convince their employees that the job of a business is not to serve their customers and treat them ethically but to pick their pocket when you can get away with it.

If everyone is getting away with it what hope is there that they're going to change?

FR: That's the thing. When customers are treated that way and when employees have to implement those policies, they both stop investing in relationships. Their loyalty diminishes. When you don't have loyalty, you don't have growth. I've yet to find a company who has been able to consistently, profitably grow without earning the loyalty of customers and employees.

So by booking bad profits, these companies are thinking that they're boosting their earnings this quarter, but they're wrecking their potential for profitable growth.

The cost of bad profits comes pretty quickly. A rational investor, for instance, really does not want bad profits because the most valuable thing that drives stock prices is profitable growth. If you really destroy the potential for profitable growth, you've hurt the investor as well as the customer and the employee. You've hurt society for that matter, because if you stop customers and employees from investing in relationships; you stop the innovation and creative process.

The relationship part is the hardest. After 100 years, we have the accounting principles buttoned down.

FR: There's room for improvement.

At one level, numbers don't lie. A 10 is a 10, and 128 is 128. When people try to approach the relationship aspect ...

FR: People presume it's soft and it's nice, but not vital in a world where we're measured on our success by accounting profits. But who wants to live in a world where loyalty is irrelevant or dead? Loyalty drives all sorts of good things, not the least of which is profitable growth; to say nothing of meaningful relationships and communities that are worthy of investment.

What you're saying is that we need to bring one more element of humanity to business. I'm noticing that it's a common theme with some of the other business books I've read recently. You bring up the idea of the Golden Rule; treat others the way you'd like to be treated. Be human in your dealings with other humans.

FR: The Golden Rule is one of the most powerful and attractive ethical principle ever. It's a cornerstone of most of the world's major religions. Yet because it's just a thing you say, as opposed to something you measure, it hasn't had the impact in business that it should. I hope what separates this book from a lot of other good books that have good messages, is that I'm arguing for a crisp, practical measure that lets you know how well you've lived up to the Golden Rule, and therefore, how fast you can grow.

That's what seems to set your book apart—turning what we think of as a soft concept into some pretty hard numbers. Could you explain the measurement strategy?

FR: Think of this as where math meets the Golden Rule. I think one of the reasons that satisfaction surveys have failed us is that they haven't taken seriously the need to have an auditable, credible metric that has principles about how you gather it and how you report it. I've been searching for a measurement of relationship quality that could be raised to the same standard as accounting principles, where people take it just as seriously as they do profits.

The exciting news about The Ultimate Question is that it does yield a practical metric. It's one question yielding one score, the promoter score, that helps businesses rigorously measure and manage relationship quality. The Net Promoter Score comes from the very basic idea that customers fall into three categories.

The first category is promoters, people who love your product, invest in relationships, and give positive word-of-mouth. The second category is the passively satisfied. This is the vast majority of customers who have nothing negative to say, but frankly if there was a better deal that came from somebody else, they'd defect in a minute. The third category is the people who are angry. They're the detractors. They complain. They make your employees embarrassed. They wreck your reputation. They destroy your growth.

Can you categorize customers systematically? Yes, with one question. What we found is if you ask that ultimate question, consistently, systematically, "How likely is it you'd recommend us to a friend?" on a 0 to 10 scale, the customers who give you a 9 or a 10 on that question, they're your promoters. They give 90 percent of the positive word of mouth. They drive your growth. They are your true assets. Passives? They're here today, but might be gone tomorrow. Detractors are your liabilities. The 0 through 6's are the detractors.

What we've developed is a system that functions like net worth. Net worth is the difference between your financial assets and liabilities. It's a central measure of success in business. Net Promoter Score takes your asset of the future, the customers that create all of your cash flow—the 9's and 10's, your customer asset, and subtracts the liabilities, the 0 through 6's. The score is your net worth or the net value of your customer base going forward and it determines your growth.

I don't quite understand the scale.

FR: It's a 0 to 10 scale. We examined many styles of scales, starting with yes or no scales. "Would you recommend to a friend, yes or no?" We considered 4-, 5-, and 7-point scales. We looked at them all and came away with a pretty strong conclusion that 0 to 10 works the best for several reasons. One reason is that it seems to be wired into everybody's DNA. Since caveman days people have used that 0 through 10 scale for all sorts of purposes. It's reinforced by grades in school. Everybody knows that a 9 and a 10 are an A- and an A, and B's and C's are 7's and 8's, and so forth. You fail if you get 0 through 6. Worldwide, everybody knows what it means.

It seems that the top 5 numbers are all that matters. Six through 0 is all the same.

FR: Well, it's not all the same. Zeros are really angry, and 6's are just a little irritated. The point is, what action do you want to take? I break the responses into three categories because there are three actions to take. With a promoter, figure out what you did right, and do more of it. Listen to those people very carefully because they're your future. For the passive responders, it's different. You need to explore with them what it would take to get them excited about doing business with you. For detractors, you should take the same action with a 0 or a 6. Someone should get in touch with them, apologize, determine the root cause, and try to fix it economically.

In the book, you said you'd decided that customer satisfaction surveys are a crock of ...

FR: No, that's an overstatement, and I'm guilty of it a number of times. But what do I really think about customer satisfaction surveys? They've failed us. We have bad profits happening all over because the primary weapon or tool—the satisfaction survey—that companies have used to measure relationships and service quality hasn't worked.

There are a lot of reasons why satisfaction surveys haven't worked. They're not collected in a very serious way. They're really research tools as opposed to serious process metrics. Everybody rolls their own and has their own philosophy about point scales and sampling methodology. You give out thousands of these surveys, and maybe 10 percent of people respond. The 10 percent who respond are a group of people who must be the most lonely, compulsive, and bored. We take their input and extrapolate that to the rest of the customers who are probably more rational, sane customers who don't waste their time on these things. And we think that we're going to learn something. The result is so clear.

I've had guys who run these satisfaction surveys threaten to sue me. They're so angry about my criticisms—this is how they make a living. They really believe they're doing a good thing, but it's not working. When I point that out it's infuriating to them. But the evidence is just so clear. When Bain case teams look at the relationship between satisfaction surveys that our clients are using and customer behavior, there's very little relationship. Sixty to 80 percent of customer defectors said they were satisfied or very satisfied on the survey prior to their defection.

If you go a step further to CEOs, do they really believe in satisfaction scores? You can get the transcripts for phone calls of stock analysts interviewing CEOs. We did a word search to see how many of those CEOs mentioned customer satisfaction, or any variation of those words in those interviews. It was less than 8 percent.

So CEOs don't think it's very relevant to investors. But the real kicker is this. We actually looked at the institutional investor records. They have to report why they've invested in the specific stocks they've chosen. Of the 8,000 or so mutual funds that we did a word search on, six mentioned customer satisfaction as a reason for investing in the stock. Here's the scandal that never happened. Some hedge fund breaks into J.D. Power or Gallup, or any of these other survey firms, steals the satisfaction data, and invests on it because satisfied customers are happy customers, happy customers are loyal customers, loyal customers make you grow, growth will drive your stock price up—you know you'll get rich. Why have you never read that headline?

Because investors know that satisfaction surveys, executed the way they're done today, have very little say about what a company's growth rate will be or how profitable they will be. It's a big sham. Everybody is playing along with this sham, but in the end capital markets are ignoring most satisfaction research. They care about metrics that really predict future cash flows.

In order for the Net Promoter Score to work, you have to sample a lot of customers.

FR: I'd move away from a sample to a full census. Every customer ought to get asked the ultimate question with one follow-up question. What we see is when companies do that well, they can get 80â€"90 percent response rates. When customers are convinced that you're not going to waste their time with these 30 question surveys, that you're taking it seriously, that there's a closed loop process where somebody's going to take action on that ...

While I was reading your book I wrote a note in the margin a few times, "People like to help."

FR: They like being asked their opinions and they really like it when their opinions are listened to and drive actions. Why are there 10 percent response rates to satisfaction surveys? Because people know it's a waste of their precious time. "You know, I gave a 'completely dissatisfied' last time, and I never heard from anybody and nothing changed." This is, obviously, a waste.

Yeah. And the call comes during dinner most times.

FR: The government did the right thing by offering no-call lists that make the sales calls at dinner illegal. If you get a call from a survey firm you should say, "Listen, I'm not going to hang up on you, but I'll answer one question. What's your best one? Give me your ultimate question." That would be fair.

I'm going to do that the next time. So what you're advocating is to rely on the promoters to grow your business; that's the good profit.

FR: The truth is, the promoters grow your business profitably, even if you don't know it. A lot of companies think you grow your business through advertising and marketing promotion. That costs a lot of money—and often doesn't really grow your business. What really grows your business is creating more promoters.

Which is basically word of mouth marketing. Are you familiar with Dave Balter and BzzAgent?

FR: Yes, I am.

Dave is one of our Cool Friends. What do you make of a company that offers a group of promoters already prepackaged?

FR: I think what Balter's business will evolve toward is helping companies identify their promoters and helping get that message out. The notion of taking a random group of people and asking their opinions—I think that's a good business, but not a great business.

I do think that Balter's company, and others in that space are on to some very important ideas, and that it really is word of mouth and recommendations that drive growth. And the more they understand that and provide the tools that will help people measure it and manage this core process, the better their business.

I think Dave would love that. He wouldn't have to manage this whole group of—what do they have now—600,000 BzzAgents.

FR: I have an open mind on that, but I don't think that's the most central value that these firms are going to add. Leading companies have rapidly embraced Net Promoter Scores. In fact, GE, the most admired company in America, if not the world, has embraced Net Promoter Scores, and is rolling them out across all of its businesses. Jeff Immelt spent a whole paragraph in this year's annual report explaining Promoter Scores, why they're important to GE, and how they're going to drive executive compensation.

Firms are discovering that, like Six Sigma, Net Promoter Scores are much more than a metric. It's a whole set of disciplines and tools that let you manage your business better. Intuit has adopted NPS and found that you should talk to your promoters and ask them what it is they really like so much. If they're really enthusiastic about recommending you to a friend, ask them what they'd say to a friend and that becomes your advertising copy.

That brings to mind the current excitement over consumer generated content. There's the example of GM encouraging people to make ads for them. Now, I'm not sure of the final results with that campaign. There were some great ads and then there were some brilliant ads from detractors.

FR: Most companies don't measure this carefully. The truth is, there's a war going on out there between your promoters and your detractors. It's a war for growth. You win if you've got a lot more promoters than detractors, and you lose if you don't. The average company today has barely more promoters than detractors. The Net Promoter Score of the average North American company is somewhere between 0 and 10. If you were perfect, and had 100 percent promoters, you'd have a score of 100. If you were terrible, and turned 100 percent of your customers into detractors, you have a negative 100. The average company today has a score between 0 and 10 positive. That explains why most companies can't grow profitably. People think companies are growing faster than they are, but if you look at the thousand largest firms in the world, only 20 percent or so have managed an annual real 5 percent profitable growth over the last decade. That's not that impressive, is it? And yet, only 20 percent of the companies have achieved it; 80 percent have failed to achieve it.

If you start measuring net promoter scores, quantifying the size of the army that's for you versus the army that's against you, (your promoters and your detractors), you'll see the real challenge to your growth. It's your own customers (or former customers) who you've turned into detractors.

It's a little bit like analysis. You figure out who the promoters are, and then the next step is actually more difficult; understanding what you've done right.

FR: Right, what can you do tomorrow to make those people even more excited? You can't just keep doing the same thing. That bores people. The best companies listen to those promoters, and invite them into the tent to help them innovate.

A great example of that is SAS. They've organized their tech reps, who deal with customers by phone, into small teams who vote a captain, who attends a customer council every few weeks. The job of that captain is to listen to what customers are saying to his or her colleagues; they bring that to a ballot committee. A ballot then goes out to customers, and customers prioritize the issues. The ballot vote is made transparent, and SAS prioritizes their R&D dollars based on this representative democracy model.

So you bring your customers and your frontline employees into the process of prioritization and innovation.

I was at the SXSW conference a month and a half ago. A small company called Threadless was there. It's three guys in their 20's. People submit t-shirt designs to them—so it's all from their community—and they have the community vote on the designs. Once a week they print the winning design, and they pay 1,500 dollars and give prizes to the person who submitted the design.

FR: That's a great story. I'll look them up.

Great. They're expanding it in other ways now. It's tapping into the community to do all the work, and these guys are just sitting around thinking of new things to do. It's all about figuring out ways to include people. It seems brilliant because not that many people are doing it, yet it's so obvious.

FR: That loops us back to this notion that accounting, because it's been the way everyone has measured success, blinds us to what really drives profitable growth. I think profitable growth occurs when your customers and your employees invest in relationships. They invest their time, their energy, their creativity, their money. It's those investments that generate opportunities for value creation and win-win solutions.

A lot of people talk about communities, bringing the customers into the tent, but most of the good ideas have always come from customers and employees interacting. The notion of Net Promoter Scoring gets you to measure how well you're doing at creating a community where your employees and customers want to invest in your success.

I believe the explosion of the Web has started this kind of thinking. There's so much energy being devoted to online communities and social software, which I think are feeding into exactly what you're talking about here.

FR: No, I think it's going to help change the world, but it won't change the world without a reliable metric. With no reliable metric, people are not going to be able to separate the form from the substance, the puffery from the real pragmatic truth.

One last question, Tom Peters has a slide that he uses in his speeches that says that if a woman likes a product, service, or company, she'll recommend it to 20 other people but a guy will recommend it to 2 other people. Those aren't the exact numbers, but there's a huge significant difference between them. I'm wondering if gender has been worked into this Net Promoter Score. If a company's audience is all women, are they promoting it more quickly? Or is that too fine of a detail?

FR: That's a great question, and I need to think more about that. I do have the data to look at that. It did not jump out at me, but I'm going to go back and look.

I'd be interested to hear if there's actually any data to support ...

FR: I can test that, because we've asked hundreds of thousands of people how many recommendations, positive or negative, they've given for a product or service over the last six months. In many cases, we have the data on their gender. I have noticed that women, in general, understand my argument much more quickly.

But both men and women should be embarrassed that less than 50 percent of Americans have a favorable opinion of business today. Business represents the predominant institution in Western civilization, and yet most Americans are not favorably impressed. Bad profits have really convinced the majority of our citizens that profitable business has little to do with treating people right or earning their loyalty. That is a serious problem for everyone in our society.

I think about this a lot. We're all bombarded with news of Enron and Tyco, and it's simple to get really disgusted about that and to step from there to "businesspeople are crooks." We know that's not true. We have our small local businesses that many of us love. But I think in a way we see them as different entities. We understand that this is a business, but these are people. Whereas we hear stories about Enron and they're not real people to us.

FR: I don't believe that Enron is the reason people don't trust business, or have an unfavorable opinion. These scandals certainly don’t help. But the reasons for unfavorable attitudes about business result from people’s experience in their daily lives. It's when they return the rental car and they get charged 8 dollars a gallon, or some dirty trick on their cell phone or hotel phone bill. The evidence is in the Net Promoter Scores. When you ask someone how likely he is to recommend their vendor to a friend, the truth right there is that there are almost as many detractors as promoters.

Why detractors? Because they've experienced these dirty tricks and they don't trust the company. This isn't some theory about value; this is about people’s own personal experience with their suppliers. It's really ugly. So all of these efforts at service quality, satisfaction scores, ethical behavior, they're all really nice things, but they haven't worked nearly well enough. Half of our society thinks business is bad because business is hooked bad profits. Business has gotten addicted to bad profits. Accountants can't tell the difference between good and bad profits. That's why I wrote the book. Business leaders really must begin to systematically ask the ultimate question—and to hold themselves and employees accountable generating good profits.

I want to thank you for doing that. I think it's a very important message. I just hope that people can understand that it's not that difficult to ...

FR: It's one number. One statistic derived from one question. It can't get much simpler than that. It is not simple to implement the changes implied by this one number—but without it, we really don’t have much of a chance for driving good profits and true growth.

Fred, thank you very much for your time.

FR: Thank you.


The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value (Coauthor with Thomas Teal)
Loyalty Rules: How Today's Leaders Build Lasting Relationships
The Ultimate Question: Driving Good Profits and True Growth


Ultimate Question


Net Promoter