I’m often asked this question and fortunately for you people a lot smarter than me have already spent years researching the answer…!
Before I tell you what is, let’s just understand some truths about businesses achieving income grow first. All sustainable business growth is driven by the positive actions of your existing customers.
Research shows that happy customers (your advocates) tell about 5 of their social network in such a way their friends or colleagues are willing to try you. By this I mean, really recommend your product or services rather than simply pressing ‘Like’ on Facebook or LinkedIn or any social channel! Conversely, your unhappy customers, your detractors, will tell 9-15 people on average. So even if you have the same advocates as detractors your business will at best stall before going into terminal decline. So this one ‘killer’ question has to address that and not only help you understand where you are but also indicate in which direction you might be going too. Feedback to this one question from your existing customers will reliably help you predict the sustainability of your business and over time, help you drive sustainable organic business growth.
The good news is that it’s a really easy question to remember and it doesn’t matter what kind of business you run it is still valid. So with a little help from one of my favourite true business stories as you’ll see when you read on it doesn’t even matter if what you do, you don’t perceive as being unique this question will give you an advantage over your competitors…
Over 25 years ago a US-based management consultancy team set out to discover how two seemingly similar businesses could have wildly differing profitability. The profitable business in question was called Johnson & Higgins. On the surface J&H was just another Insurance broker. However, J&H consistently made a ‘whole lot’ more profit than anyone else. Now, insurance brokering is an industry where competitors have very similar price levels, products and services. All brokers get paid a standard commission rate on the insurance they place and the industry average at that time was around the 10% mark. Johnson & Higgins’ commission was no exception, so how did it consistently manage to outperform its competitors?
The management consultants started a detailed examination of several insurance brokers to track down the root cause of J & H’s superior profitability. Initial investigations drew a blank when they looked for differences in ‘the usual suspects’ …… J & H’s relative market share or market segmentation strategy. They also drew a blank when they looked at cost structures. Insurance Brokers’ major contributor to cost in is salaries but J&H were not only generating the highest profit margins, they were also paying the highest salaries. Furthermore, no differences in the various companies’ accounts pointed to J & H’s source of competitive advantage either. In fact, no amount of studying the accounts would have revealed the answer!
The breakthrough came when one of the consultants was interviewing samples of customers who had switched brokers. The spark came when he set out interview a minimum sample of 25 former customers (i.e. people who had defected to a rival) from each of the brokerage companies in the comparative survey. This was pretty easy for almost all of the companies, but then he noticed that after a hundred phone calls to J & H customers he had only identified 3 who had ever defected from J & H. The results of the next 100 phone calls to J & H customers proved no better – in fact, they only turned up only another 3 defectors. And this is where the penny suddenly dropped – because it subsequently transpired that this low turnover of customers completely explained J & H’s superior profitability and free cash.
Now, if you’re in a business like J&H where everyone seems to offer the same services at the same price then you’ll recognise that the total cost of acquiring a new customer (Year 0) can often be more than an entire year’s profit for that customer. For many industries, including insurance broking, it often takes almost an entire further year to wipe out the loss incurred in the original customer acquisition. In some industries – for example in the car insurance, credit card and life insurance industries, it can actually take several years to wipe out the initial acquisition costs. Traditional accounting practices do not capture customer retention rates … and yet, for most businesses, this is the key to improving a company’s overall profitability – and to increasing the amount of free cash generated.
… But that isn’t the end of the story. It also turns out, from the original study of J&H plus hundreds since, that loyal customers generate a lot of positive word of mouth for a company. This generates even more profit for the company attributable to that same acquisition investment (the Gold “Referrals” in the graph above). Conversely, the ranks of customers who leave early (i) not only fail to develop referrals, but (ii) also generate negative word of mouth. Extensive research has consistently revealed that, on average, it takes between 4 and 5 positive customer referral experiences to reverse the effect of a single negative piece of customer feedback. In other words, companies who are content to leave their retention rates as they are set themselves up for a double-whammy. Not only do they make little or no profit from their defecting customers in the first place … they also suffer considerably from the negative word of mouth that such customers generate.
So, what is that all important question that can help you determine if you are likely to be a ‘J&H’ or an industry also-ran? Well, here it is . “On a scale of zero to ten, how likely is it that you would recommend [insert business, product, or service name] to a friend or colleague?”. Where, “0 = Not at all likely. 10 = Extremely likely”. Sounds too easy right?, Well actually it is easy. The answers to this one question will tell you what your Net Customer Advocacy score is, and therefore what your future customer retention and defection rates are at any point. Now consider, the following questions:
1. What does it cost your company to acquire a customer?
2. What is the average life for one of your customers?
3. What is the lifetime profit for one of your customers?
4. What would be the impact on your profitability if you increased your Net Customer Advocacy Score by 5% (by the way, the answer is it’s likely to produce in the region of a 25% to a 100% increase)?
“On a scale of zero to ten, how likely are you to recommend [insert business, product, or service name] to a friend or colleague?”. Add “0 = Not at all likely. 10 = Extremely likely”, and try it out on your customers.