In the final part of our Three Part interview series with Rob Markey, Bain & Company, we share insights from Mr. Markey on how to better execute surveys, whether to introduce incentives to improve survey responses, and get his opinions on whether NPS or other metrics will eventually influence share prices on public exchanges.

Oh yes, we’ll also get to the bottom of whether there really is “just one question” to get a grip on customer loyalty.

Many firms have response rates to surveys in the single digit range. Some respond by offering incentives to drive up response to their NPS surveys. Mr. Markey stated that “at Bain, this is evidence that you are not earning your customer’s feedback”, adding that “offering incentives is almost always a sign that a flaw exists in the customer feedback process”.

Listening to the results that do come in and making change on the front lines will earn your way to 30-40% response rates over time. Rackspace, one of the examples cited in The Ultimate Question 2.0 gets above 60% response rates to its surveys. “Here’s why” stated Markey “Rackspace earned participation in its surveys because they are meaningful to the customer”.

According to Markey, being satisfied with a 5 – 15% response rate is dangerous. Business should seek the root cause for low response rates and test surveys across groups that are weighted to promoters, passives and detractors. “Detractors are less likely to respond to a survey than prompters” said Mr. Markey, and “bias needs to be rationalized through testing”.

When I asked Mr. Markey if measures of customer value predicted by NPS or other scores would one day influence share price and market capitalization, he said that “it was already happening.” Though he cited confidentiality, Markey stated that “an average category leader in NPS scores grows at least 2X competitive growth rates”, adding that “several nationally recognized investment firms pay attention to NPS as an indicator of companies they would invest in”.

I couldn’t let my time with Rob Markey end without asking one big question: Is there just one question that companies can use to predict and / or measure customer loyalty? Markey explained that “when done on an apples-to-apples basis, NPS correlates closely with other measures such as satisfaction, but that “if the goal is to find the best statistical predictor of individual customer behaviour, most likely a multi-variable index will be superior to any single metric index”.

For example, the investment firms cited earlier use NPS as a predictor of value, though it’s not the only metric considered. Having said that, Markey added that “in many instances, NPS will replace traditional customer satisfaction metrics, mostly for the practical superiority of the NPS system”.  “Not a single loyalty leader measured their way to success” said Markey, adding that “it’s hard to get employees fired up about some metric”.

For Markey and Reichheld, the metric is the starting point. It is the metric that provides the compass to navigate the path forward, but it is the system that is the path itself. The victory in where they have arrived with “The Ultimate Question 2.0” is that the system has been created and business now has a reliable option to predict customer loyalty and to help bring continuous improvement to the enterprise.

My interview with Rob Markey about the new book, The Ultimate Question 2.0 “How Net Promoter Companies Thrive in a Customer-Driven World”, continues today with a closer look at how the “score” has evolved into a “system”.

The book includes a number of case studies ranging from Charles Schwab to Apple Retail to The Progressive Group of Insurance Companies. One common element of execution employed by each firm was to include a short-cycle, closed-loop feedback mechanism that turns survey results into usable business intelligence that front-line managers and employees can use to better serve customers.

Mr. Markey emphasized the importance of collecting accurate NPS survey scores but also to determine the root cause of interactions that leads to people becoming “promoters” or “detractors”. Was a price too high? Could a better deal be found at a competitor or did the competitor allow more flexibilities in service agreement rules? Whatever the reason, it is essential to be able to deliver feedback from customers to the employees most directly responsible to deliver enhanced customer experience. Through the accumulated experience from working with multiple companies across varied industries, Markey and Reichheld were able to dig deeper and understand practical methods to create change.

Markey stated “Everyone in the enterprise managing a customer touch point needs to build greater understanding of where they stand with their customers, whether front-line personnel or executives… for real change to take effect, business people have to translate elements of feedback into usable and actionable items that customers can understand.”

The second critical element Markey noted was the ability to connect NPS improvements to robust economics at the enterprise level. Markey explained “managers must be able to demonstrate what it’s worth to improve NPS scores versus the competition, or the value of changing a detractor to a promoter”.  This is aspect of developing a learning environment through working with multiple enterprises that has helped to transform the score into a system.

Markey capped off this line of thinking by sharing three essential elements to successfully putting NPS to work in your business:

1. There must be a reliable way to evaluate and sort customers and employees as promoters, passives, or detractors. This evaluation must then lead to identifying customer behaviors that can be analytically tied to positive business outcomes
2. An organization must create a fast-cycle, closed-loop learning process to deliver survey as well as verbatim results to customer-serving personnel. The organization should engage in “deliberate practice” over time to demonstrate to customers that they are listening to their critiques and expression of preferences.  This could be the most distinguishing characteristic of the three elements as traditional customer satisfaction research is anonymous and misses the opportunity to establish two-way communication with customers
3. The commitment to earning the loyalty of customers must be a top priority of the organization and be supported from the top down. This commitment must be embodied in daily actions and NPS must have a high level visibility with employees. Firms putting their weight behind NPS initiatives in a sincere manner earned the best results.

When asked about finding the balance between focusing on the customer and enabling employees / associates to deliver critical feedback, Markey responded “low employee engagement is impossible to coexist with high customer NPS”. He continued “a company may create a temporary market advantage through innovation or pricing, but it is difficult to sustain high levels of scores without employee engagement”.  “It’s not just the right thing to do”, added Markey, “it’s necessary to rise above the competition”.

Interestingly, only about half of the firms encountered by Bain & Company over the past 5 years working with NPS take such a position. Reflecting on the recent economic downturn, Markey cited that “the companies which entered the global financial crisis with higher reserves of goodwill and higher NPS experienced lower dips than the general marketplace”.

In the final part of the series later this week, we’ll share some interesting tips from Markey on successful survey execution and find out if there really is “just one question” that can be used to determine customer loyalty levels within a business.

In a previous post I mentioned that I was the beneficiary of a serendipitous moment in which I was given the opportunity to interview Rob Markey, a partner in Bain & Company’s New York Office and head of the firm’s global Customer Strategy and Marketing practice.

The topic was a new book, The Ultimate Question 2.0 “How Net Promoter Companies Thrive in a Customer-Driven World”, which Markey co-authored with Fred Reichheld and published in September. The book was a revised and expanded edition of The Ultimate Question, the original book published in 2006 which introduced the world to the Net Promoter Score (NPS).

When I spoke with Mr. Markey, he was quick to shift my focus from “book review” to developing an understanding of how NPS had evolved from a scoring metric to a system which had developed through the collective experience of the thousands of companies working with NPS since 2006. With so much to talk about in a brief period of time, I have crafted a three part series of posts covering the interview, of which this is the first.

Having received a copy of Fred Reichheld’s book, The Loyalty Effect upon walking into the doors of Frequency Marketing in 1999, I was more than familiar with Reichheld’s ground breaking thought that “loyalty” had to be formed with top-down strategy that included not just customers, but also employees, shareholders, even suppliers.

This timeless path to creating sustainable competitive advantage has been followed by thought leaders in the loyalty marketing industry, though much of what we see in the market today known as loyalty or rewards programs have fallen short by focusing on customers, while giving a disappointing hand-wave to the interests of the other constituents.

There are voices in darkness supporting Mr. Reichheld’s original thesis. One industry group has emerged, the Enterprise Engagement Alliance, which is “dedicated to the concept that engagement is an enterprise-wide endeavour that begins with people and ends with profitability”. The organization’s principle mission is to support research and education to help brands “make the connection between engaging people in business and long-term financial performance”. Colloquy has a renewed focus on Enterprise Loyalty, and I have taken my stand by preferring to frame our work for clients as delivering Customer Strategy. In my opinion, every organization needs a well planned and executed Customer Strategy, while not all need a “Loyalty program”.

Markey started off by sharing that his initial interest in this topic came through reading Reichheld’s 1990 article “Zero defections: quality comes to services”. Markey’s curiosity to identify tools for making decisions on behalf of customers instead of just shareholders led him to Bain and Company and he has been working closely with Mr. Reichheld ever since.

Markey told me that this 20 year quest has led him to adopt a simplified notion of the ultimate objective – to transform the golden rule from something nice to say about customer relationship management, to something that can be implemented and drive tangible results to a business. Working with Reichheld, a system of thought was developed that, if implemented as intended, would lead to sustained market improvement and to making good decisions to earn customer loyalty.

When asked about the central point of the new book, Markey explained that the 2006 “one big question” book was meant to introduce the thesis, explain the metric construct, show how to measure, it and lay out the argument for adoption. In essence, it was a starting point.

When asked what he had learned in the years between 2006 and today, Markey pointed to the fact that Bain & Company has worked with dozens of companies around the world to implement NPS in their operations and have seen tremendous results returned, from lower churn rates, lower acquisition costs, and improved sales and profitability per customer.

In short, the “score” had become a “system” with a solid methodology to help firms guide implementation and enough market feedback to confidently predict results. Part Two of the three part series will cover how the systems works as well as share the three essential elements to successfully putting NPS to work in your business.

Editor’s Note: Frequency Marketing has since become LoyaltyOne, while The Loyalty Effect still sits on the shelf in my office, dog-eared as all good books should be.

Sometimes you work really hard for a small break. Other times serendipity shows its face and good things fall into your lap.

I’ve been lucky over the past month. First, I had the opportunity to interview Rob Markey, co-author with Fred Reichheld of The Ultimate Question 2.0, an update of the first version of the book which familiarized us with the Net Promoter Score. The book hit the market this month and you can find a good review of it on the Kobie Marketing blog, The Muse.

During October, Loyalty Truth will be featuring a three part blog series covering my interview with Mr. Markey. Stay tuned as I think you’ll find his comments interesting as well as see how Net Promoter Score has developed from a scoring metric to a practical management system that has been implemented with good results by many well-recognized brands.

The second piece of good fortune was my attendance at the ShopperTech Lead Marketing Conference. Al McClain and the good folks at RetailWire organized an afternoon of panels and I was able to participate in a discussion of loyalty marketing with BJ Emerson of Tasti D-Lite, Dan Frechtling of DS-IQ, and Bill Nasshan from Bi-Lo supermarkets. An executive summary of the conference can be found here.

To my surprise, one of the keynote sessions was given by Matthew McNerney and Tim Keiningham of IPSOS Loyalty. The two presented a new measure of customer loyalty, The Wallet Allocation Rule, which will be profiled in October in the Harvard Business Review.

The Wallet Allocation Rule correlates customer loyalty to share of wallet, and the executives from IPSOS report that “the correlation between a brand’s Wallet Allocation Rule score and its share of wallet was greater than .9 – a perfect correlation score being 1.0″. The score takes the relative ranking of competitors into consideration and is proposed as a new way to tie customer loyalty scores to wallet share and ultimately profitability.

Let’s give the marketplace time to absorb the IPSOS article in HBR (they are said to have the cover) and the new book by Messrs. Markey and Reichheld. The ensuing debate over how best to predict customer loyalty through these two scoring metrics will be one to watch.

Fred Reichheld may have asked the Ultimate Question, but few seem to have “just one answer” to the question.

Napoleon Hill was quoted as saying that  ”Lack of loyalty is one of the major causes of failure in every walk of life.”

I tend to agree.

In business and in life, if you show sincere concern for another and if you frame your relationship in trust and transparency, the odds will be in your favor to win better results.

Just because I coined the term Loyalty Asterisk™, doesn’t mean that I want to see it perpetuated in business.

Customers are concerned with the privacy and protection of their personal data. They are increasingly skeptical about online targeting of advertisement and promotion.

Companies which make a commitment to using their data in a responsible manner, who deliver customer experience and product quality consistent with their brand promise, and who treat Loyalty Marketing as icing on the cake rather than the cake itself, will be the winners as the economy ramps up once again.

“While not every business needs a Loyalty Program, every business does need a well planned and executed Customer Strategy.” This is one of the loyalty mantras that I share on Hanifin Loyalty and the statement represents a guiding light on the path to innovation in the next wave of Loyalty Marketing.

For some businesses, building a brand so strong, so magnetic, so powerful is the foundation of its Customer Strategy. Achieving this summit is one of the most challenging tasks in business and, if done successfully, virtually precludes the need for a formal loyalty program, certainly one with points or other promotional currency involved.

The World Triathlon Corporation, owner and organizer of Ironman® and Ironman® 70.3 branded events, has climbed this summit, having turned a quirky and semi-dangerous undertaking in 1978 into a worldwide brand that attracts a brilliant demographic and brings tremendous economic impact to its host communities.

With the addition of the Ironman® 70.3 Series, WTC offers more than 50 events on the calendar each year and has the support of advertising partners including Ford Motor Company, PowerBar, Timex, Gatorade, Janus, and Philadephia Insurance Companies.

Ironman Lake Placid is the oldest of 7 US based events, and I was fortunate to be in town for the 10th anniversary race this past weekend. The compelling nature of the brand was on full display with over 2,500 registered athletes and their friends and families burning off nervous energy by shopping in the Ironman® store and patronizing local businesses.

Consider that the entry fee is $575 and that the average tri-bike sitting in the secured transition area is worth $4,000 (my estimate) and you can see that over $1.4 Million in entry fees alone were collected for the weekend and over $10 Million in two-wheeled treasure was waiting for a ride. Multiply these numbers by the 50+ events per year and you begin to understand the magnitude of the Ironman domain.

Ironman may still be a quirky and puzzling event for outsiders to grasp. Some of my friends have challenged the Ironman passion as nothing more than a mid-life crisis for over 40 types, suggesting that buying a new Corvette would be a heck of a lot easier. Others snipe that triathletes are narcissictic, type-A personalities preening their zero-body fat physiques in high-tech fabrics before the crowds. (OK, you’ve got the Type-A part correct).

Let me dispel some myths. As I volunteered at an aid station on the run course this weekend, I saw every size, shape, age, and ethnic origin of athlete pass me by. I would go so far as to say that, if seen in street clothes, many would never be mistaken for Ironman athletes.

I’ve also found that while some of the younger age brackets are the most competitive (30 -39 for instance), I have also noticed that as one moves up in age group, finish times don’t always increase, i.e. there is much more going on here than just signing up for the t-shirt.

Fred Reichheld, the Godfather of Loyalty Marketing, sketched out a continuum of business benefit resulting from adopting an enterprise approach to loyalty. At the end of the rainbow are price premiums. I would venture to say that Ironman, given the nature of the event and level of entry fee, is effective on all levels of lifecycle marketing, (acquisition, usage, retention, cross-sell) and delivers on price premiums across the board as U.S. based events generally sell out quickly after race day each year.

All the praise aside, there is always room for improvement. There is probably a limit on the number of events that WTC can stage each year in the U.S., and more emphasis on triathlon as a youth sport would help fill the funnel with future athletes. The fee structure could price out aspiring Iron-athletes from participating in the future, and the cost of Ironman branded merchandise is obscene at times, spawning a mild “love-hate” relationship with the brand. For instance, a fellow volunteer (himself a 9:44 IM finisher) commented as he pulled on a dollar-store poncho to thwart a rain shower that it would have been worth $70 if it had the IM logo on board.

There are other iron-distance events on the calendar, but WTC has created brand-swagger and is enjoying the price premiums created with its highly emotional participants. The fact that WTC backs up the current frenzy for its branded events with tremendous athlete experience adds glue that keeps people signing up for more. Even their finish line announcer, Mike Reilly, is part of the experience. Mr. Reilly has been the main announcer at the Ironman® World Championships in Kona since 1989, and it is his unmistakable voice that welcomes athletes to the finish line.

There may be some danger to IM that it becomes an elitist event, but then again, maybe that’s what it is all about. The Ironman® distance triathlon is still acknowledged to be the most challenging one day endurance event on the planet, and “if it was easy, everyone would do it!”

I think it’s safe to say that the same applies to WTC’s Customer Strategy.

In my opinion, The Loyalty Effect remains the definitive book written on Loyalty Marketing. Authored by Frederick Reichheld of Bain & Company in 1996, it was required reading for the team at Frequency Marketing as we completed our Loyalty Marketing “basic training”.

Reichheld postulated that in order for a business to create loyalty related shareholder value, it must tackle initiatives in three areas: customer loyalty, employee loyalty, and investor loyalty. Translated to consulting-speak, his mandate directed companies to embrace loyalty on an enterprise level.

By permeating the organization with a loyalty based culture, interactions with employees, suppliers, and  investors could be optimized. Results would be manifested in Improved employee retention, more favorable supplier relationships, and financial gain for investors. From the customer perspective, the loyalty driven enterprise would represent a value proposition that would hold attention and become the tie-breaker in commoditized industries. In short, the loyalty based business should be more profitable.

As the US recession marches on, I can’t help but notice the stark contrast between the key points of advice in Reichheld’s book and the manner in which companies have governed themselves over recent years. Events of the past 6 months provide good examples of how corporate America is flunking the enterprise loyalty test:

1. Numerous brokerage houses and banks fall prey to the real estate bubble and subprime lending practices to find themselves being recapitalized through mergers, acquisitions, and government bail-out. In nearly every case, executives prospered and select bondholders were protected while suppliers and holders of common stock were wiped out.
2. John Thain is forced out as Merrill Lynch CEO following perceived mismanagement of communications surrounding a $15.31 billion 2008 Q4 loss. Prior to his leaving, Mr. Thain had accelerated executive bonus payouts at the firm and had lobbied for his own enormous bonus until the embarrassing greed was exposed in the press. Shares of Merrill Lynch steadily declined to a near vanishing point during Mr. Thain’s 15 month reign as CEO.
3. Card issuers including Citigroup, American Express, and others have diluted the value of their card reward program benefits over recent weeks, citing the need to reduce expenses in the current economic downturn. In a Jan. 13 article, the Wall Street Journal documented how changes to program rules, additional fees, and adjusted reward values combine to impact the value proposition.

It is said that adversity reveals the true character of a man. It is not a stretch to apply this logic to corporations.  Investing in consumer loyalty programs when times are good and cash is flowing is viewed as smart strategy. When tough times cause these programs to unwind or be diluted, the intent and sincerity of the entire effort is put in question.

Companies invested in customer loyalty should stay the course in the down economic cycle if they hope to emerge on the other end with brand equity in tact. Those that use the down cycle as an excuse to cut costs and retreat from a customer-centric orientation are inviting consumer skepticism and damaging confidence in their business.

Sometime soon, the economic doldrums will be a memory and consumers will spend again. At that time, the companies aligning themselves with Reichheld’s business model will see their shareholder equity outpacing the competition.

In my opinion, The Loyalty Effect remains the definitive book written on Loyalty Marketing. Authored by Frederick Reichheld of Bain & Company in 1996, it was required reading for the team at Frequency Marketing as we completed our Loyalty Marketing “basic training”.

Reichheld postulated that in order for a business to create loyalty related shareholder value, it must tackle initiatives in three areas: customer loyalty, employee loyalty, and investor loyalty. Translated to consulting-speak, his mandate directed companies to embrace loyalty on an enterprise level.

By permeating the organization with a loyalty based culture, interactions with employees, suppliers, and  investors could be optimized. Results would be manifested in Improved employee retention, more favorable supplier relationships, and financial gain for investors. From the customer perspective, the loyalty driven enterprise would represent a value proposition that would hold attention and become the tie-breaker in commoditized industries. In short, the loyalty based business should be more profitable.

As the US recession marches on, I can’t help but notice the stark contrast between the key points of advice in Reichheld’s book and the manner in which companies have governed themselves over recent years. Events of the past 6 months provide good examples of how corporate America is flunking the enterprise loyalty test:

1. Numerous brokerage houses and banks fall prey to the real estate bubble and subprime lending practices to find themselves being recapitalized through mergers, acquisitions, and government bail-out. In nearly every case, executives prospered and select bondholders were protected while suppliers and holders of common stock were wiped out.
2. John Thain is forced out as Merrill Lynch CEO following perceived mismanagement of communications surrounding a $15.31 billion 2008 Q4 loss. Prior to his leaving, Mr. Thain had accelerated executive bonus payouts at the firm and had lobbied for his own enormous bonus until the embarrassing greed was exposed in the press. Shares of Merrill Lynch steadily declined to a near vanishing point during Mr. Thain’s 15 month reign as CEO.
3. Card issuers including Citigroup, American Express, and others have diluted the value of their card reward program benefits over recent weeks, citing the need to reduce expenses in the current economic downturn. In a Jan. 13 article, the Wall Street Journal documented how changes to program rules, additional fees, and adjusted reward values combine to impact the value proposition.

It is said that adversity reveals the true character of a man. It is not a stretch to apply this logic to corporations.  Investing in consumer loyalty programs when times are good and cash is flowing is viewed as smart strategy. When tough times cause these programs to unwind or be diluted, the intent and sincerity of the entire effort is put in question.

Companies invested in customer loyalty should stay the course in the down economic cycle if they hope to emerge on the other end with brand equity in tact. Those that use the down cycle as an excuse to cut costs and retreat from a customer-centric orientation are inviting consumer skepticism and damaging confidence in their business.

Sometime soon, the economic doldrums will be a memory and consumers will spend again. At that time, the companies aligning themselves with Reichheld’s business model will see their shareholder equity outpacing the competition.