CEO Glenn Engler, host of the Market Edge podcast, talks about Driving Customer and Employee Loyalty

with Fred Reichheld, a Fellow at Bain & Company (also the founder of Bains loyalty practice), the Creator of The Net Promoter System, and the author of The Ultimate Question 2.0. Transcription of Complete Interview: Please note: the below text is a transcript of a live feed so it may not be perfect word-for-word. As an alternative to the text, you can tune in to the audio version of Glenns discussion with Fred Reicheld! Glenn E: Hi and welcome to Market Edge. Im your host, Glenn Engler, CEO of Digital Influence Group. A full service digital marketing and social media agency that helps companies unlock the social potential of their brands and amplify its impact to drive business results.

Today Ill be talking about driving customer and employee loyalty with Fred Reichheld, a Bain and Company fellow and founder of Bains loyalty practice, which helps companies achieve results through customer and employee loyalty. He is also the creator of the Net Promoter Score and System of Management. Freds worked in the area of customer and employee retention has quantified the link between loyalty and profits. He has authored four bestselling books and eight Harvard Business Review articles on the subject of loyalty. As an aside,The Loyalty Effectis my personal favorite and is an absolute must read for all the listeners.In his latest book, The Ultimate question 2.0: How the Net Promoter Companies Thrive in a Customer Driven World, published by Harvard Business Review Press in September of 2011, Fred reveals how brands like Apple, Philips, American Express and more had use the Net Promoter system to become truly customer centric, unleashing profitable growth for systematically converting more customers into promoters and fewer into detractors. Fred is a frequent speaker at major business forums and his work on loyalty has been widely covered in the Wall Street Journal, New York Times, Financial Times, Fortune, Business Week and The Economist. According to the New York Times, he put loyalty economics on the map and The Economist calls Fred the high priest of loyalty. You can connect with Fred on Twitter @Twitter.com/fredreichheld. Its great to have you on Market Edge Fred, welcome.Fred R: Thank you, Glenn.

Glenn E: The high priest of loyalty. Wow, thats pretty impressive.

Fred R: It cant go much higher than that.

Glenn E: Thats pretty good, Im impressed. Tell us a little bit, if you will, about the role of as an author and seller at Bain, whats a day in the life of Fred Reichheld?

Fred R: Bain, where I actually joined Bain right out of the business school in 1977, have worked there my entire career. About 15 years ago, I recognized that I wanted to put a fair amount of my energy into this arena of loyalty and so Bain created a special position for me, a Bain fellow, that let me be a half time employee, but not have to do all the heavy lifting of a Bain partner, which is a great job, but its a hard job. It has allowed me to focus time on writing, lecturing, being on boards of companies who are serious about loyalty and using that time as creatively as I can.

The every day is different. To answer your question, sometimes Im helping Bain teams and Bain clients. Sometimes, I am spending time on boards; Im a board member at Rackspace, the leader of open cloud hosting and others. Im just on the phone talking with a startup venture thats trying to figure out how to turn customer promoters effective advocates and to activate them in the most profitable way.Glenn E: It sounds like a phenomenal opportunity and Im guessing never dull.

http://digitalinfluencegroup.com/under/market-edge-podcast-with-fred-reicheld-bain-company/

Fred R: Sometimes, its more work than I want, but its an area Ive got a lot of passion about. I actually think most business people dont understand what really drives a successful business. They think, you look at the accounting numbers and everything becomes clear, but in my view when you can start turning customers into promoters, all the economics fall into place. So the real key is to figure out how it is youre going to delight a customer profitably.

Glenn E: Talk a little more about that. Youve been talking and writing about loyalty for years as you said, but the whole premise around the Ultimate Question and Net Promoter System is so timely and so important. Talk a little bit more about what goes into that Net Promoter Score and System and how do companies think about it?

Fred R: We started out measuring the economics of loyalty, which would certainly take into account the advantages of retention, and persistency, and referrals, and expanded purchases. Loyal customers, it turns out, have lower bad debts. There are hundreds of advantages that are hard to track through traditional accounting systems.

When you do go to the trouble of figuring it out, you start to understand why certain companies have far outperformed the competition. Why theyre growing faster and that was a key insight. The trouble was we didnt have a way to measure loyalty that was practical, and timely, and predictive. Retention rates, for instance is backward looking. When a customer leaves, you know its bad, but was it the salesman that sold them on the wrong basis three years ago that should be held accountable? Was it a bad product or a bad service experience? Its very hard to make it practical and accountable.We came up with a single question that you could ask customers that, pretty well, got to the core issue, Have you treated me in a way thats worthy of my loyalty? The shorthand that we use is the recommend question, How likely would you recommend us to a friend or colleague? On a zero through ten scale.

People give you a 9 or a 10, youve really done something special. Youve earned their loyalty and you go through the math, you figure out wow these companies that have the most promoters and the fewest detractors we call a score of zero through six the detractor. They tend to be the people who are very disappointed with the service, the quality, the value. They feel like theyve been abused and theyd like you to fail.Promoters are those advocates that want you to succeed and are going to buy more stuff and bring their friends. To focus on one number, we developed a Net Promoter Score which takes the percentage of customers that you touch who are promoters, nines and tens, your assets, and subtract the detractors percent which are the zeros through sixes. Theyre the liabilities. Its classic take your assets subtract your liabilities. Voila, thats your Net Promoter Score. That one thing, that one metric provides a bottom line for measurement, for accountability, learning and progress.

Glenn E: Its so fascinating because theres obviously been tons of theory and perspectives in The Loyalty Effect, still one of my favorites. You certainly to your point, talked about recommendations, the ones that recommend and the ones that talk badly. In a way, the fact that this continues to connect to market value, and profitability, and it really is so simple, and so measurable, and aligned, it must be incredibly liberating for the C-suite. Give some examples, if you will, whos doing it right?

Fred R: A lot of people. Although, I should say even though it is a pretty simple idea, and intuitive idea, its much harder to put to work than we ever dreamed. When we created this Net Promoter Score and System, we took the path of making it an open source community so you dont have to pay Fred or ask Fred. Net Promoter is for the world to get better.

As a result, thousands of companies have adopted it and applied their own creative genius. Things I never dreamed of, people are applying it, not just to things like brand equity or customer segmentation, but some people are using it to invest in companies they would never have or as a good leading indicator of if a company is going to continue to grow or not. Others have applied it to employees and employee loyalty. Theres explosion of knowledge.In order to

http://digitalinfluencegroup.com/under/market-edge-podcast-with-fred-reicheld-bain-company/

try and stay at the hub of that learning, we developed a club of companies, Bain has sponsored, the Net Promoter Loyalty Forum. I think there are 30 or 40 members now. These companies tend to be the leading edge companies who I write about. Companies like Apple Retail, Intuit, Bain is a pioneer in applying this in a business to business space, JetBlue, Rackspace, American Express. All companies that have a lot to teach us at least in certain dimensions of applying the net promoter system.

Maybe the most important lesson I got was, I sit on the Board of Directors as I sat at Rackspace, and the chairman of that company, the founder, Graham Weston, drove me to the airport after a board meeting he says, Fred, we put you on the board because we believe in this so passionately. We think that creating an army of promoters is the real advantage in technology, as well as all other businesses. Weve given it our attention, we are committed to it. Its part of our culture and yet, the instant we turn our heads in another direction, slide backwards toward traditional business trade-off. Why is this so hard, is the question? Its a great question. I think everybody should be asking that because if you think youre doing this, youre probably achieving a tiny fraction of the potential because there are so many forces working against you.Glenn E: You mentioned a concept of good and bad profits, and the impact on a brand so where bad profits negatively impact a brand. Can you say more about that?

Fred R: Of course, a brand is your reputation. I find that when people live up to the Golden Rule and treat people the way theyd want to be treated themselves or the way theyd want a loved one treated, thats how you build your reputation. When you treat them poorly, and abuse their trust, or bully them, or cheat them, or lie to them, then you destroy your reputation.

In business, especially in a large business, people who fixate on profits, especially profit this quarter, can justify things that their customers and/or their employees that are unacceptable, theyre immoral, theyre unethical, but they get justified in the minds of these people and maybe their bosses, because they create more profits.

There are a lot of things that companies are now doing, that are not illegal, but they are certainly unethical and they dont meet the Golden Rule standard of excellence. Things like returning your rental car 30 minutes late and having them charge you for a half a day, or using the phone in your hotel room to make a long-distance call, and theyll charge you 200 times market rates. Cell phone companies are horrible this way, youre locked into contracts for two years and then give you horrible service. If you happen to be foolish enough to go to Europe and have your roaming still turned on, $300 in fees of what really should have been $.30 in fees worth of costs incurred.The world has adopted, has accepted these bad profit policies as okay because theyre just measuring short-term earnings impact. I charged you $300 for roaming, got you. Our investors should love that. But if I end up as a customer hating you and bad mouthing you on every website, at every dinner and every cocktail party, and in my case, Im talking to thousands and thousands of people a year on lectures, youve really destroyed value and yet, we call it profits. Those are bad profits.

Glenn E: That was a great example.

Fred R: Good profits, theyre the opposite. You have to earn good profits because thats when your customers love you. Then every profit you earn from that customer is a good profit.

Glenn E: Makes perfect sense. Did you see any industries that are better at adapting the loyalty programs and frameworks like Net Promoter or types of companies or patterns that youve observed?

Fred R: I used to think that this applied more in some industries than others. I dont believe that anymore. I think its more difficult in a monopoly, a true monopoly, but other than that this is a powerful set of ideas that has enormous

http://digitalinfluencegroup.com/under/market-edge-podcast-with-fred-reicheld-bain-company/

relevance. It started out in things like the insurance business or subscription businesses where you could see the economics of retention very easily. It works in our consulting business at Bain. It works in your business, as well. For the most part, this is a universal approach to thinking and measuring a business.

Glenn E: Ive got a couple of follow-on questions sparking, but right now were going to take a very short commercial break. Please stand by and Ill be right back with Fred Reichheld and more of the conversation.

[Commercial]

Glenn E: Welcome back to Market Edge. This is your host Glenn Engler and Im here today with Fred Reichheld, a Bain and Company fellow and creator of the Net Promoter System, talking about driving customer and employee loyalty. Its interesting that there are some natural, certainly being in the database marketing and loyalty worlds for many years to think about the easiest stuff to measure, even historically where theres a lot of data and you talked about insurance and financial services. Now, seeing the Net Promoter Score apply really everywhere. How do small companies think about this versus big companies? Is there any difference?

Fred R: In some ways its easier in a small company, I think, especially in an entrepreneurial venture this is so obvious. You cant afford to put on enormous marketing campaigns or hire very expensive salespeople to sell your product. You have to rely on turning your customers into your volunteer sales force and PR organization.

I suppose its clearer to a small business, but that doesnt mean that small business cant benefit enormously. A lot of entrepreneurs, one that comes to mind is 800-Got-Junk. The fellow who is the CEO of that company said, Adopting Net Promoter is probably the most important thing weve done since we decided to franchise. Its a strategic, powerful idea.

Now who they hire is based on who can turn people into promoters. Theyve developed the technology to know when the truck goes out and helps somebody pulled the stuff out of their attic or garage. They get a zero through 10 score and they know everything about their franchisees.Even big businesses like Apple, the biggest market app in the world. Apple retail stores have used net promoter brilliantly. If you have a relative who works there or if you could sneak in and listen, every shift, they have a daily download to start off every day. The primary thing that most of those store people are talking about are the Net Promoter results that they have gotten from their customers yesterday and what they need to do differently to improve.

Glenn E: Thats frighteningly impressive, given how impressive that place is and its staff. Its an unbelievable experience and you always leave spending money with a smile. As someone said, Its one of the rare stores where I go into and I know

I just spent a lot of money, but I feel great spending it.

Fred R: Theyre not measuring as carefully. They dont tell their people Im going to pay you a bonus the more stuff you sell. They get rid of the bonus and say, Were going to make you every proud when you earn a nine or a 10 from a customer. If you do that really well, youre the kind of person that would be eligible to get promoted to the store manager and above.

http://digitalinfluencegroup.com/under/market-edge-podcast-with-fred-reicheld-bain-company/

Glenn E: It shows. Over the years, the premise and I know youve been working on the idea of Net Promoter methodology, how has that change over a few years to meet broader market needs like activating employees, the time pressure of the short term? Have you seen that involve overtime or had it stayed pretty true?

Fred R: The pressures have all been, they havent changed. I think the creative solutions have been what has been so surprising and positive. Right now, I think the most impressive improvements that Im seeing are in the field of employee engagement and loyalty.

Everybody recognizes, youre not going to be able to light your customers from the CEOs office. You have to have your front line teams treating customers and one another very well. Theyre the ones who have to innovate, find ways to delight customers profitably. Measuring that, getting feedback, empowering those teams really, not just saying those words. When you think about what the old way of managing employee loyalty? You do these annual engagement surveys. Wait a minute, what? The thing that you think is the core of your future in engaging employees and motivating and inspiring them, you measure that once a year? Youre measuring your sales every hour.Companies have awakened and said, Of course, we have to have tools to get feedback from employees on a real-time basis and have teams talking about what they need to do differently, what the constraints are. How theyre going to experiment and innovate? Weve got to have those conversations take place every week. Its just part of the workflow.

Thats where Im actually developing a tool myself with a little business on my non-Bain half, of course its already being beta tested within Bain, and its essentially taking the Bain point of view on how you treat employees, and puts it in a little software tool. Bain, by the way, a lot of people havent heard of Bain, its been the best place to work in consulting and has been forever, ever since Consulting Magazine started measuring this carefully. Bain has been the number one place. I think one of the things that Bain does differently is we measure feedback from our teams. It focuses on what they need to do better if theyre going to delight customers. Thats our central mission.Glenn E: Given so much, certainly in an area that my agencies involved in is the whole world of social media. Thats a wonderful opportunity for those brands that use it appropriately. Its frightening for those that arent organizationally ready, or spiritually ready, or whatever your phrase is, how you want to think about it. How do you think about what the social media channels have done to enable brands to provide customers with a most immediate customer service and then impact on the promoters versus detractors?

Fred R: I think social media and its growth has turned Net Promoter into a nuclear device. Its powerful, its overwhelming. If people want to learn about this, go to the website Netpromotersystem.com. There are a number of videos there that you can see. One of them is with Brad Smith, the CEO of Intuit. Brad says, Gosh,I think of Intuit as a pretty sophisticated successful company in the social media space, if we didnt have Net Promoter, how would we even talk about this at management teams? Net Promoter is essentially the framework thats what social media is. Youre trying to understand who your promoters are, your detractors, take the right lessons and get better. He said, We are so much more serious about the social media feedback that we get because we understand the Net Promoter philosophy. As he said it makes it so powerful. Its not theoretical anymore, whether your customers are a promoter or not. You can see it out there on the web.

Glenn E: Have you seen differences or one of the things youre getting pulled into is how companies are organizing themselves internally to facilitate this feedback group?

Fred R: Yes, but I think its in its early stages. This notion of whos responsible for turning customers into promoters, thats the line management right? Marketing doesnt do that. Then whos responsible for activating those promoters, and making it easy for them to know all the up to minute stories, and results, and facts, that arm them and

http://digitalinfluencegroup.com/under/market-edge-podcast-with-fred-reicheld-bain-company/

make them a more effective volunteer sales force? Thats a marketing job. How you organize that. How you get communications.

Also, on the employee side. Employees are out there on the web. Theyre affecting social media, but whose job is it to make sure that a employee is a ten and recommend this as a great place to work? Thats the team leader. Some of the greatest organization challenges have to do with making these things clear, but then using the staff jobs in marketing or HR most effectively to provide the tools, and to help the line managers turn more people into promoters and fewer into detractors.

Glenn E: We get asked a lot to help organizations set up, and or activate or integrate the entire social media listening platform, engagement platforms, and the idea of content. A common theme of those that are probably embraced the best and activated the best is it does starts at the top, and its interesting to hear you talk about Brad Smith at Intuit, and your Rackspace CEO. I have to believe those that fully embrace top to bottom the Net Promoter Score or system are probably the same ones who are completely all over the idea of integrating in social media?

Fred R: Net Promoter started as a score that was NPS. It has quickly evolve to a system. People ask me how do you know if a company because thousands and thousands and thousands of people think theyre using net promoter.

I have a set of rules where I make my own determination. Theres three things that have to be true for me to believe someone when they say they are using NPS. Number one, this has to be a mission critical objective in the eyes of the CEO and the senior team. Its not just a measure of service quality or satisfaction. Its the ethics. Have I treated people right, so right that they want others to be part of this community? Its a measure, for most people of, are we achieving a level of greatness, a legacy, a reputation that the senior team is proud to be part of, thats one.

Number two, they have to measure it rigorously. Most people theyre using market research techniques for what should be a rigorous process, management statistic, theres a big difference there.

The third, maybe the most important, when you identify a detractor, you have to close the loop. The right person in the organization, usually the supervisor or above has to close the loop. Apologize, probe for the root cause, and try to figure out the solution. Not just for that customer, but for systematically throughout your organization, how do we have that happen less? That closed loop feedback has to be within 24 hours, nearly real-time. Its just not something you do when you get time to get around to it. Youve just destroyed your reputation. You have invited a customer in and in the customers eyes, youve abuse them and you cant have that happen if youre serious.

Glenn E: Its interesting on those three pieces because Im sure theres many that embrace it and say lets engage. Either dont measure it, or dont report it, or heaven forbid, we certainly run into this where employees that are actively engaged, then we have some organizations going No, we dont want you to be here or we dont know what to do with it. Its that whole, the three together make tons of sense.

Fred: Employee engagement is the most, I think, well whats the right word, confused for now. So many people think I want to engaged employees, whatever that means. Engaged in what? Its like loyaltyism is a nothing word until you say loyalty to what? Hitler I guess he had a lot of loyalty, but it was pretty evil.

Loyalty makes sense when its to this Golden Rule idea. Treating so people so well that they would want loved ones to be part of this community to have the experience. Loyalty for an employee that makes sense, engagement, its to the notion of treating customers so well that they want to come back for more and bring their friends. When

http://digitalinfluencegroup.com/under/market-edge-podcast-with-fred-reicheld-bain-company/

employees are enriching the lives of their customers, earning nines and tens, earning standing ovations, but it is inspiring.

That is what I think more people have to focus on is how do we get team leaders feeling accountable for putting their team members where they can profitably delight customers, earn nines and tens in a sustainable economic fashion? Thats a big change in the management.

Glenn E: Many other questions, weve unfortunately run out of time. I want to thank you, Fred, for being my guest today and for everybody you just heard the high priest of loyalty. Thanks to everyone in the audience for listening to todays conversation. If you have any questions or would like to talk further about the topic of todays show, feel free to connect with me on Twitter at Twitter.com/GlennEngler or on my blog at www.GlennEngler.com.

http://digitalinfluencegroup.com/under/market-edge-podcast-with-fred-reicheld-bain-company/