How does it feel to pay the check at the restaurant where you had terrible service and bad food?
Or how do you feel when you pay your cable bill each month?
And how about paying $150 to change your airline ticket reservation?
In all cases, the companies get your money. It’s revenue in their books. But if you’re like me, you aren’t happy about the experience and will remember it next time you have a choice. When companies profit from bad experiences they are considered bad profits.
Bad profits are a ticking time bomb. Customers who are dissatisfied with the service or quality of a product are not only less likely to repurchase it, they are also more likely to tell their friends about the bad experience.
Word of mouth is a powerful and organic force that can’t easily be controlled like an advertising campaign. This negative word of mouth can grow exponentially and have devastating effects. Customers can easily share bad experiences both in-person and via social media. There are a number of ways to measure word of mouth and one of the most popular is the Net Promoter Score.
The Net Promoter Score is meant to be a forward looking indicator. Customers are asked how likely they would be to recommend the product or service to a friend on an 11 point scale (0 = not at all likely and 10 = extremely likely). A detractor is a customer who responds with a 0 to 6 on the 11 point likelihood to recommend scale. These are dissatisfied customers. And it’s these dissatisfied customers that are more likely to say bad things about their experience to friends and colleagues and generate bad profits.
Measuring Bad Profits
Assessing the percentage of profits or revenue that come from detractors is a good place to start. Even if you don’t have access to financial data for you or a competitor, you can usually estimate the percentages. For example, when we measured customers of consumer software products a couple years ago, we found that about 17% of Photoshop users were detractors. If we assume that everyone pays around the same price for their Photoshop license (a big assumption, but one that can be verified with data), then around 17% of Photoshop’s revenue comes from detractors (Photoshop is one of many products owned by Adobe).
If a product is sold for one price, then it’s easier to estimate the percent of revenue that comes from detractors. When there are multiple products and prices, you’ll want to match up customers attitudes with their historical revenue. This isn’t as easy as it sounds. Customer revenue data is often tightly controlled by the finance department and other departments, usually marketing or customer experience, run the surveys. But even a sample of customers will give you some idea about revenue and how it relates to the customers’ experience.
As another example, I helped analyze the survey data from a large software company. It has dozens of products, different pricing models and sales channels. After merging the sales data for the prior year with the Net Promoter Scores from a recent survey, we found that around 17% of revenue came from detractors (a coincidence that it was the same as the Photoshop data).
Figure 1: Revenue breakdown by promoters, passives and detractors for a software company. For this company, 17% of revenue across dozens of product lines is generated from detractors–i.e. bad profits.
How Much is Too Much?
While it’s bad to generate revenue from dissatisfied customers, it’s worse if a large proportion of your revenue comes from detractors. With too much detractor revenue for a product or entire company, you are more susceptible to new competition, alternatives or abandonment.
With cable companies, government services or utilities, there often isn’t much of a choice. So even though these industries have among the lowest Net Promoter Scores, they can continue to survive. However, competition from satellite providers and now content delivered via the internet (called OTT) threatens the revenue models to cable providers.
So how much revenue is too much from detractors? While that will depend on the industry and the switching costs (more competition leaves less room for detractors), Fred Reicheld, the originator of the Net Promoter System, argues that best in class companies should obtain no more than 10% of their revenue from detractors.
So if you have more than 10% of your revenue from detractors, there are at least two things you can probably do.
- First, you can stop selling to these customers. While that may seem crazy, in some cases, getting rid of mismatched customers may better your reputation and increase your profits in the long run.
- Second, you can find out the reasons these customers are spreading negative word of mouth and attempt to fix it. Start with analyzing the comments of these detractors in surveys to identify the low hanging fruit. Next, conduct a key-driver analysis using multiple-regression to understand what factors in their experience are having the biggest effect on customers’ likelihood to recommend.
Understanding the reasons for detractors is the first step. Doing something about the information is usually a lot harder as it often involves adjusting the price, quality and features to meet the customers’ expectations. But that’s usually what separates the best in class companies from the rest–their ability to make changes based on data.